Did Google Flush $1.6 Billion Down the YouTube?

One Flaw in Titan's Big Get: No Ad Model

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NEW YORK (AdAge.com) -- Will YouTube become a media staple like no other, with professionally created content happily coexisting with amateur clips in a

Bear Stearns estimates YouTube's annual revenue at a rather measly $15 million. That means Google paid over 100 times revenue for the company, a disturbing multiple if you take the estimate at face value. | ALSO: Vote in our poll on this issue. See right rail.

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combination marketers will be dying to buy? Or will it just be the place you go to see video of cats peeing, playing piano, dancing or performing "Hamlet"?

Murky future
Just six months ago, before the close of Google's $1.65 billion deal for the video-sharing site, these questions would have been unthinkable. But there have been continued stumbles in inking the deals that will get it enough legal content to support a robust ad model, and that's rendered the site's future surprisingly murky. The central question these days is whether a web version of "America's Funniest Home Videos" has anything advertisers actually want.

Right now, what YouTube has is eyeballs, many more than any other video website and many that you can't easily find watching TV. What it doesn't have a lot of is the kind of content that advertisers, being a cautious lot, are eager to be adjacent to. Bear Stearns analyst Robert Peck has divined from Google's filings, which don't break out YouTube's performance, that annual revenue for the site is a rather measly $15 million. That means Google paid over 100 times revenue for the company, a disturbing multiple if you take the estimate at face value.

No clear ad model
But video advertising online, to be fair, is a nascent business with no clear, dominant model, and Google CEO Eric Schmidt has repeatedly described YouTube as a work in progress, at least in terms of how it will contribute to the company's financial performance. Clearly in understatement mode, he recently described the monetization quest as "sort of the big project for this year."

YouTube has already made moves in that direction. In addition to selling banner and search ads, YouTube is doing custom campaigns for major brands that cost about $750,000 a pop; housing dedicated channels for marketers and, yes, some content players that can run up to $500,000; and front-and-center home-page positioning with its four "director's placement" spots, which cost about $50,000.

Little of this likely was included in Mr. Peck's estimate, and it's certainly not chump change. But solving the continuing copyright issues and getting past the scrapping with major players such as Viacom are still hurdles that need to be cleared if YouTube is ever going to totally shed the lingering perception of a Wild West-type rowdiness that appeals largely to edgier brands. Big corporations still, by and large, view YouTube as "a wait and see," as Forrester Research Senior Analyst Peter Kim put it.

All eyes on YouTube
"Marketers are watching this with an eagle eye," he said. "They're afraid of getting burned by all the negative feedback that appears on the site. Most marketers are waiting for the controls that will make it safe for their intellectual property." Asked whether the recent struggles have changed his initial perception of the deal, he said: "The jury's still out."

A YouTube spokesman said in an e-mail: "No one type of content is any more important than another."

Eric Bader, senior VP-managing director of MediaVest Digital, said that as an ad environment, YouTube suffers from a lack of tagging and other metadata, which makes it hard to use on a large scale.

"We've definitely invested there, but not as much as if it were better-organized," he said. "The problem is that that may not be what users want."

100 million streams a day
No one questions the popularity of YouTube and its 100 million or so streams per day. But some advertising executives are skeptical about the rather old-school, old-media-world assumption that YouTube's value to the ad world comes as a repository of content that it can buy ads against, which is sort of what Google is banking on. To many, it's much more attractive as a distribution channel, a cheap and credible way to spread marketing content to thousands or millions, even if you can't get the immediate click-through you get with paid ads online.

"We believe there's a shift from paid media to earned media," said Liz Ross, president of Tribal DDB West. "The question is whether an advertiser can create content that's compelling enough to get people to watch it. That doesn't necessarily help YouTube much, but they created the channel. We're just using it."

She points to DDB's campaign for Norelco shaver Bodygroom, which created a viral sensation on a minimal media buy, relying instead on pass-along and sites such as YouTube. Ms. Ross doesn't wholly discount YouTube as a place to buy ads in the old-fashioned sense, but she questions how interested advertisers are in being near user-generated stuff, a fact that puts the pressure on YouTube to get these licensing deals done.

Or as the quite obviously biased Viacom CEO Philippe Dauman said at the same investors' conference, "People aren't going to spend money for user-generated content like a cat going to the bathroom. We want to provide advertisers with a quality environment that they would pay more for."
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