If YouTube is to thrive, it has to help a micro-industry of professional web producers, the kind who create two- and three-minute webisodes like Barely Political's "Auto-Tune the News" have to thrive, too.
YouTube has known this for years, but is now taking a bigger role in cultivating that industry, acquiring Next New Networks, which has built a track record of building and promoting web series since it was founded in 2007. The terms of the deal were not disclosed, but the purchase price was less than $50 million, according to a person familiar with the terms.
YouTube execs stressed this doesn't mean the video-sharing site is becoming a media company; indeed Next New Networks hasn't produced or owned content in several years. Rather, it promotes, distributes and sells ads against web shows that are part of their "networks" like Barely Political, Indy Mogul and Hungry Nation.
"We are not good at creating content," said Tom Pickett, director of content at YouTube. "If we wanted to create content, we wouldn't buy Next New Networks. Over the past few years they've transformed their business model to help others create content."
Next New Networks has become very good at building audiences for web series and cross-promoting them. Its entire full-time staff of 17 will join YouTube as part of the deal, except for co-founder Fred Siebert, who will consult on a temporary basis. The startup will operate within YouTube as two separate units: YouTube Next Lab and Audience Development Group. Chairman Lance Podell will join YouTube Next Lab global director.
YouTube is focused on this segment of content because it does not involve paying rights fees to Hollywood studios, but it does have loyal audiences and is attractive to advertisers. It's a niche between studio-produced content, the domain of Hulu, Netflix and Apple TV, but above random user-generated video, which doesn't command premium ad rates. YouTube's biggest problem is that there simply isn't enough professional content to scale the business in the way Google hopes.
YouTube has been giving grants to content creators since last summer, in one case giving producers coupons to buy new video cameras. Mr. Pickett said YouTube would continue or even accelerate that program, offering advances against future ad sales for cash-strapped filmmakers.
"I would look at this again as helping our partners get the tools they need to build bigger audiences and more successful programming," Mr. Pickett said.
Citigroup analyst Mark Mahaney estimated YouTube revenue just shy of $1 billion in 2010, but a big percentage of that comes from big display campaigns on YouTube's home page. But video will be advertising's biggest category over at least the next few years. EMarketer estimates the market -- including in-video ads, prerolls and text overlays -- will be a little under $2 billion in 2011, up from $1.42 billion in 2010.
Founded in 2007, Next New Networks has raised $26 million from Spark Capital, Fuse Capital and Goldman Sachs. While it didn't scale the way its investors hoped, YouTube became dependent on the genre of content that it produced and later distributed, rather than high-priced TV and films.