Down the Tube?

Richard Agnew reports on the future of video sharing website YouTube after its buyout by Google.

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By  Richard Agnew Published  February 24, 2007

No one at YouTube’s California offices will ever forget October 9, 2006 — the day the online video sharing site’s US$1.65bn sale to search giant Google was announced.

Not only did the move earn Chad Hurley and Steve Chen, two of YouTube’s co-founders, over US$300m each, it also instantly added several digits to all their employees’ bank balances. Appropriately, Hurley and Chen revealed the deal on the site — thanking everyone that had added their video clips since its launch 18 months previously, before cracking up at how their lives had just changed.

For many in what YouTube calls ‘the community’, however, the move was less of a joke, and raised questions about the site’s future direction. “It was great to see those two so happy, but a lot of people, including myself, felt that a part of YouTube died that day,” says Caspian Smith, a regular contributor.

Over the next few weeks, however, YouTube and its owners plan to restructure the site’s business model in a move that will not only see them give Google some payback, but also provide an opportunity for its huge base of users to share in that success.

Revealed by Hurley at the World Economic Forum in Davos, the plan will see ads placed alongside video clips stored on the site, and the revenues shared between the company and whoever uploads them.

Speaking at the event, Hurley said the system would “reward the creativity” of the 70 million people who use YouTube each month.

“We are getting an audience large enough where we have an opportunity to support creativity, to foster creativity through sharing revenue with our users. So in the coming months we are going to be opening that up.”

For YouTube as a business, the move is an obvious one. Like Google before it launched advertising alongside its search results, YouTube had built a huge base of users without finding a way to earn revenue from them.

Videos stored on the site, ranging from home-made movies to clips from films or TV programmes, are viewed over 100 million times a day. The rights to many of the most popular clips are not owned by its members, but YouTube says the scheme will not apply to those videos, and that it is currently working on technology that can identify copyrighted material to make sure it doesn’t.

“YouTube has already had a hard time keeping lawsuits at bay from the big studios and TV companies,” says Chris Lake, editor of UK-based internet research group E-consultancy. “If it starts earning money from its content without permission, things could get nasty, however, it also gives YouTube a business model to take to these big content owners and strike revenue sharing deals with them — while also increasing the reach of their programming.” Besides the issue of copyright, the move also poses an interesting challenge for traditional media companies that control the production and distribution of the movies and TV programmes we view every day, but are seeing users shift from scheduled to on-demand programming.

According to a Harris Interactive Poll in January, a third of YouTube members watch less TV because of their use of the popular site.

“Things like YouTube have proven that the traditional configuration, where large media companies are vertically integrated and take care of the entire production chain, is coming to an end,” says Matt Gertner, chief technology officer of AllPeers, another online video sharing service. “Those companies will continue to play a role, but the amount of time you spend consuming media that’s produced and distributed by smaller producers is increasing. I spend a lot of time reading blogs now, and a lot less time reading books.”

The main question on many people’s lips, however, is whether the move will turn into a money-spinner for YouTube’s contributors, and whether it can be seen as serious opportunity for anyone with a camcorder and a bit of creativity to make some cash.

Although the terms of the revenue sharing scheme are yet to emerge, two people who would say so are Miles Beckett and Greg Goodfried. They are two of the three creators of the infamous Lonelygirl15 videos — a series of diary entries by a pretend teenage girl who became incredibly popular on YouTube last year, before the creators behind the series were revealed.

Interviewed after YouTube’s announcement by The Daily Reel, an online video publication, they said they were optimistic about the potential to cash in: “There are also a lot of issues with background music and other copyrighted materials that appear in the videos.

“However, as professional content creators who clear our material, we are as eager as everyone to see their revenue-share model.”

They continued: “With the emerging popularity of digital video recorders and the difficult time advertisers have reaching teenagers and young adults, it only makes sense for advertisers to shift at least some portion of their advertising budgets to popular internet video shows.” YouTube is also not the first video sharing site on the web to start offering users a cut of its earnings. One, a venture called GreedTube, was set up last year with the idea to pay contributors a 50% share of the money it brings in from advertisements.

The makers of the infamous Diet Coke/Mentos videos also made US$25,000 after they were viewed 4.1 million times on a YouTube rival, Revver. As with Lonelygirl15’s creators, anyone uploading videos also stands a chance of being spotted by talent scouts at major TV or movie producers.

Perhaps a bigger question for YouTube’s management, however, is whether its users will be turned off by the adverts.

According to Hurley, the site plans to use a mix of formats, including pre-roll ads that are shown ahead of the actual videos. In the Harris poll, however, 73% of users said they would visit YouTube less often if that type of advertising was employed on the site.

In the Middle East, there are also obvious challenges for anyone wanting to make money out of the YouTube phenomenon. The site remains banned in some countries until it implements ‘tagging’ technology that can categorise videos — a problem not just for the censors but also for brands that want to make sure their adverts don’t appear alongside inappropriate content.

But once that happens, anyone with a touch of creativity will be able to tap into a market that’s far from its peak. “We know the size of the online digital content market, which in the US was US$2bn in 2005, is growing about 15% every year,” says Gertner.

“That’s minuscule when you think about it. It’s perhaps a leap of faith, but we believe there is enormous potential for it to grow, especially when you think that the mobile ringtone market alone did twice that in 2005. People haven’t yet put together all the pieces to do it right. When they do, it won’t be a US$2bn market — it’s going to be a US$100bn market or more.”

From rags to riches (.com)

YouTube founders Chad Hurley, Steve Chen and Jawed Karim got their start in the business world during the dotcom bubble and the bust that followed. They were among the first hires at online payment service PayPal, and got to know each other well during the lean years, becoming part of a tight-knit ‘PayPal mafia’ that remains close today.

Their venture money came in part through their connection to Roelof Botha, the South African former PayPal CFO. YouTube was born when the founders wanted to share some videos from a dinner party with friends in San Francisco. It was January 2005, and they couldn’t figure out a good solution. Sending the clips around by email was impossible. The emails kept getting rejected because they were so big. Posting the videos online was a headache too. So they got to work to design something simpler and in 11 months the site became one of the most popular on the internet. Members, who can comment on videos and set up their own sites on YouTube, add tens of thousands of new videos a day. Steve Chen points out: “From Day One we concentrated on building a service and community around video. That made us a lot different from the iTunes and the Googles out there.”

Some users, however, have been posting videos that are still under copyright, without any of the required legal approvals. YouTube normally does not screen out copyrighted works before they’re posted, but they do comply with all such requests. Although this raises potentially thorny problems, Sequoia Capital is betting on YouTube, having invested US$3.5m. But sceptics wonder if the start-up can balance its surging popularity with the looming legal risks. “I think YouTube is fantastic,” says Joanne Bradford, head of sales at MSN and other Microsoft properties. “But five years from now I don’t know how they will make their money. Their problem is all the pirated content.” On October 16, 2006, Chen and Hurley sold YouTube to Google, Inc. for US$1.65bn.

"As professional content creators, we are as eager as everyone to see youtube’s revenue-share model."

"We know that the size of the online digital market is growing about 15% every year."

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