YouTube: Still a $0 Billion Business

Popularity isn’t everything.

Lots of people enjoy watching, say, thunderstorms – but there’s no direct way to "monetize" that. (Weather Channel HD, to be sure, is trying to get a twister in high-def video, but I digress.)

A page-one update today from the Wall Street Journal on YouTube’s unattractive business model details one of the chief problems: The site is reluctant to sell ads against pirated material.

YouTube has "significantly" pulled back on the number of clips it sells advertising against, fearful that would be evidence of profiting from copyright infringement, the newspaper reported. Viacom, you will remember, is suing YouTube and Google (for one… billion… dollars!). Just 4% of all of YouTube’s clips are deemed kosher for advertising, according to the Journal.

The other kind of content on YouTube, of course, is "user-generated," a category Google has claimed is a far bigger draw.

The problem here is that this type of material is immensely advertiser unfriendly. 

New Line Cinema, for example, couldn’t find enough YouTube content that it found acceptable for plugging Hairspray, according to the Journal.

If Hairspray, a quirky film featuring John Travolta in drag, is turned off by YouTube’s lineup, there’s pretty much no hope for other mainstream advertisers.

User-generated content is a tough advertising sell because it’s very unpredictable, Jonathan Shambroom, co-president of Sony’s Crackle video site, told me last year. “You’re watching a wedding video, then the next clip might be somebody jumping off a bridge. Nike doesn’t want their brand associated with that.” 

So YouTube is between a rock and a hard place. It can’t sell ads against the professionally produced content uploaded by users for which it doesn’t own the distribution rights.

But neither can it sell ads against the potpourri of singing cats, air guitarists and parkour stunts.

Add those two things up, and you get this: Even though YouTube is the No. 1 Internet video destination by a country mile — the Journal story claims it serves more than 1 billion clips on most days — the site is going to clear about $200 million in advertising revenue for 2008, which is below expectations, according to thepaper. Doing the math, that’s an average of somewhere south of 55 cents per thousand views.

YouTube has had internal problems selling ads, too, according to the WSJ report. Google’s "Project Spaghetti" is designed to untangle the 105 problems identified in the ad-sales process.

But the bigger issue is that YouTube’s business model is fundamentally flawed.

The supposedly disruptive breakthrough of "UGC" was that it had zero content costs. The idea is embedded into the Google DNA: Look, the company has generated billions of dollars simply by linking to other people’s Web pages. 

With video content, though, YouTube is a vivid demonstration that you get what you pay for.