August 23, 2009

Google still clueless about how to make YouTube profitable

Returning to the theme of online content providers that are vs. are not profitable -- as with The Financial Times and Wall Street Journal, who charge, compared to the NYT, etc., who don't -- the WSJ recently ran an article about how YouTube has yet to generate profit. And given the kool-aid that everyone has drunk in Silicon Valley, what is Google trying to do about it? Why, push more ads.

A few quick numbers:

Some Wall Street analysts estimate YouTube's revenue will roughly double to about $500 million this year. [...]

YouTube has mostly been a distraction since Google bought it for $1.7 billion in 2006. The Internet giant hasn't been able to turn a profit from the video site even though YouTube has grown into a massive destination, with 428 million unique monthly visitors in June, according to comScore.

Here's a crazy idea: charge those 428 million monthly visitors just $1 for a year's access, and you nearly double the projected revenue of about $500 million. I know that everyone believes that no one will pay for anything anymore, but that's stupid. As the FT's CEO pointed out, online media providers are too fatalistic and think that asking fees would violate some fundamental law of economics -- they need to grow some balls and start charging. That'll wake everyone up from their delusion that they will have unlimited, quality content provided for free forever.

But won't you drive away a lot of people, and so lower your ad exposure rate, and so lower your ad revenues? Not if anyone involved thinks about it clearly. If someone is too poor or too stingy to send a single dollar YouTube's way for an entire year of access to a website that they're practically glued to, then guess what -- they either have no disposable income, or they do but won't spend it because they expect everything to be free. Either way, they weren't going to buy the product or service that you were advertising in the first place. Nothing lost by alienating them. Those who do pay for access, you're at least somewhat sure that they're willing to buy stuff -- isn't this a better audience to target ads at?

When did we all become so crazy that we thought that advertising to the money-less or cheapskates was the best way to sell your product?

Everyone laughs now in hindsight at what ridiculous business models people thought were rock-solid during the dot-com boom -- I mean, selling dog food over the internet? You're retarded. However, most of this awareness only pertains to the types of products that would be sold online, not to the entire business model. Just look at Facebook and YouTube. They seem like reasonable things to offer over the internet, but their owners are too cowardly to implement a business model that would score them a profit -- and you thought nothing could over-ride the profit motive in big business.

Are the teenagers and college students who spend 95% of their free time on Facebook or YouTube paying nothing for the texts they send on their cell phones? (Just ask their parents.) They would die if Facebook went away because it keeps them connected to their social circle just like cell phone access does. Charging them will not drive them away. Again, it could be a pitiful amount since they have about 200 million users -- a $5 annual membership generates $1 billion. Make that $50 a year, or just over $4 per month, and that turns into $10 billion. What are they so afraid of? "Alienating users" cannot be an answer since, to reiterate, such people are too cheap or broke to buy what the ads are selling to begin with, and are just freeloading. They are also boosting the overall network size, but only their close friends and family would care about them being in the Facebook network -- the rest of the world could give a shit whether they're in or out. And because birds of a feather flock together, the cheapskates' peers are also unlikely to send much money to Facebook's advertisers.

Stan Liebowitz wrote a great post-mortem of the dot-com boom and crash, Re-thinking the Network Economy (featured in the Amazon box above), and he devotes an entire chapter to whether and in which cases will advertising generate enough revenue. Just noting that network TV earns money with ads means nothing. Most internet ads don't block everything else out for 5 minutes every 15 minutes anyway. They're easily ignored, and you can typically close them out with a single click when they've scarcely begun. Liebowitz points out that for quality media content, some combination of ads plus subscription fees will be the way to go -- just as it was before.

The "ads will solve everything" notion that still spellbinds internet companies shows that all of the lessons of the dot-com crash have not been learned, no matter how simple they are to figure out. If YouTube truly wanted to imitate the TV model, they would allow free access to the videos that no one wants to see plus a tiny handful of quality videos, while subjecting them to five-minute screen-hijacking ads every 15 minutes -- a la network TV. It would then charge subscription fees to see the better stuff, as judged by view counts, ratings, blogger buzz, or whatever. It couldn't charge too much because, after all, it's just YouTube. These subscribers would see some ads, but nothing too annoying. Finally, there would be a counterpart to HBO and The Sopranos, which would require higher fees but have much better content and no ads.

Many would surely defect to some other YouTube clone site, but here's a newsflash: those sites aren't generating profit either. Ones that offer a small number of videos and don't have much bandwidth being burned up might be able to coast by without being profitable. But transplanting the bulk of YouTube to another site just postpones the inevitable. This new site would face the exact same problems with its business model as the old one. In the end, internet companies will have to deprogram themselves from the dogma of Free, and internet users will have to realize that they aren't entitled to free content.


  1. The reason why most websites don't charge is because the marginal cost of more people viewing the website is close to zero. Most of the money is spent on creating the website and providing content.

    If Facebook started charging, then another copycat company would just get everyone to cross over. If youtube started charging, then Dailymotion would take over almost immediately (or perhaps people would just put videos on their own websites).

    A better plan would be for youtube to charge its top channels a small fee for all of the bandwidth that they consume. It would be very inconvenient for content providers to get all of their content off of youtube, so they would likely be willing to pay for their channel.

  2. One problem that you don't take into account is the logistics of charging. Your idea would be obviously correct (and implemented long ago) if you could somehow charge visitors seamlessly, without introducing any major hassles and obstacles in the process. However, if you want to charge for website access, even if the sum is trifling, you expose your visitors to the tedious hassle of signing up and then having to log in each time they visit. It's obvious that a lot (possibly most) of these billions of YouTube hits are from people who just casually click on a link from elsewhere or decide to search for some clip for fun in the spur of the moment, and who wouldn't bother logging in each time. (I never bother visiting anything that hassles me with signup and login, except for email and other things where it's critical for security.) Not to mention that by charging, you limit yourself to visitors that have credit cards, so you can forget about many (most?) of those teenagers and college students.

    Regardless of whether your overall conclusion is correct, your numbers would need adjustment for this effect to make any sense.

  3. The reason why most websites don't charge is because the marginal cost of more people viewing the website is close to zero.

    This is the mindset of someone who lets everyone throw parties at his house for free -- hey, it doesn't cost me anything, so I won't charge. Swell -- but unprofitable. That's why nightclub and bar owners charge admission.

    If Facebook started charging, then another copycat company would just get everyone to cross over.

    Think about what you just said -- *everyone*? Utter nonsense. Nightclubs and bars charge and profit, even though there are free house parties or other places where you can hang out. The FT and WSJ charge and profit, even though you can read CNN for free.

    With the rise of the young entrepreneurs during the dot-com boom, we suddenly forgot all the accumulated wisdom of how a money economy works. Now we have reverted to our innate, primitive economic intuition that evolved before money was around.

    What I mean is that popularity and reputation do not count -- profit does. Unless you can convert popularity (market share) and reputation (brand awareness) into profit, they do nothing for the business.

    In a small hunter-gatherer tribe, popularity can get you lots of things. In a money economy, popularity will not pay the rent for your headquarters, the salaries of your employees, etc. Money does. If you aren't making money, your popularity is irrelevant.

    Certainly the highest quality content providers on YouTube would not defect -- they'd love to continue making money through YouTube. They'd make even more if YouTube were actually profitable. Like hell they'd cross over to some loser site just to please a fanbase of bratty geeks.

    One problem that you don't take into account is the logistics of charging.

    I'm proposing a one-time annual payment, so it isn't hard. Even if you were to price discriminate and charge each time you watched a video, that's no different from iTunes charging you per song downloaded -- and people are perfectly fine with doing that.

    You don't have to log in each time you visit a site that you've paid for. Most have a "remember me" or "keep me signed in" feature. The shortest interval is for Ebay, which just keeps you signed in for the day, but if you're on YouTube a lot, one sign-in when you wake up isn't going to be a hassle.

    As for requiring credit cards, that would do the opposite of driving away teenagers -- it would go onto their parents' credit cards, along with their cell phone bills and everything else their parents pay for. Compared to the eye-popping cell phone bills, a once-a-year payment of $1 or $2 to use Facebook, YouTube, or Wikipedia, wouldn't faze them at all.

    Or they could set up a PayPal account and transfer funds that way. It wouldn't be hard.

  4. I think Agnostic is probably right here. A couple of bucks, or a one-time ten dollar fee.

    Ive really enjoyed YouTube. If they had a "donate" button, I'd have sent them a ten by now via my debit card. Ive gotten to watch many free documenturaries via YouTube, and have enjoyed many musical performances (jazz guitarists mostly) for nada.

    I had no idea YouTube was having financial difficulty. Its so popular, that one just doesn't entertain the possibility that they might be in arrears.

  5. Google is making the same mistake that a lot of successful entrepreneurs make: thinking that their original business model works for everything. In this case, they're applying the advertising strategy that worked on a search engine to more in-depth content.

  6. Steve Johnson8/24/09, 11:22 PM

    Payments can work for facebook pretty easily but there are other problems for youtube.

    People won't share facebook logins because the point is to have your friends and your wall. People will share logins to youtube. They'll probably even use facebook to do it.

    Still better than nothing.

    -Steve Johnson

  7. The FT and WSJ charge and profit, even though you can read CNN for free.

    Perhaps not the best analogy ... FT and WSJ have comprehensive, in-depth coverage while CNN is increasingly just a collection of fluff.

    BTW, you already have to sign in to You Tube (though at no charge) to view videos that have been flagged as "adult oriented," which includes many things that aren't even remotely vulgar.


  8. Douglas Knight8/27/09, 7:18 PM

    Opportunity cost.

    If you charge money, you get some cash and you get rid of riff-raff who aren't worth advertising to, but you risk missing the next big thing that could be built on your service.


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