How Google Will Finally Make YouTube Profitable

Google Motorola buyoutIn 2011, $1.65 billion is nothing to Google (NASDAQ:GOOG). The technology company dropped more than seven times that this year when it bought Motorola (NYSE:MMI) for $12.5 billion. Back in 2006, though, $1.65 billion still was a hefty price tag, and Google paid it just to control YouTube, the video website that changed the Web nearly as much as Google’s own search engine. The thinking was that YouTube would earn for Google like nothing else could.

But it never quite worked out that way. As recently as July, Google said it still hadn’t found a way to make YouTube a long-term revenue generator. Google CEO Larry Page said during the company’s second-quarter earnings conference call that YouTube was a service consumers supported but, five years after the acquisition, YouTube required more investment to be profitable.

And invest it has. Google has been working hard the past two years to transform YouTube into a video business for the post-Netflix (NASDAQ:NFLX), post-Facebook world. Google’s latest YouTube project is a new video editing service — and it’s precisely what’s been missing from the site in recent years. Announced on Wednesday, Google added simple editing tools so users can customize videos from within YouTube rather than through other apps before uploading.

Video editing might seem like a simple addition, but it creates a bridge for users enamored with simple tools like Apple‘s (NASDAQ:AAPL) iMovie, as well as social forums like Facebook. Unlike past video editing tools offered by Google, the new interface is clean and easy to use, unsurprisingly borrowing the aesthetics of the company’s recently opened social network, Google+.

By itself, this sort of project won’t be enough to revitalize the service — but it’s a start on the road to finally making YouTube worth the $1.65 billion investment. It is going to increase the number of ways YouTube can be used as a social tool and as an entertainment tool simultaneously. If users now can edit their own videos in YouTube instead of just uploading them, it’s more incentive to use YouTube rather than uploading those videos directly onto Facebook. If the tools are linked to and associated with Google+, it will draw users to use Google’s social network.

Should Google+ see more users flock its way, Google will be able to push its streaming movie/TV services through YouTube outside of the basic YouTube audience. This is where other recent YouTube projects finally will find their place. In April, Google started a pay-per-view on-demand movie service through YouTube with support from Time Warner (NYSE:TWX), Comcast (NASDAQ:CMCSA), Sony (NYSE:SNE) and Lions Gate (NYSE:LGF). Weeks before that, Google announced it was remodeling the entire service, building YouTube around channels for different content to make it more accessible on both living room televisions and mobile devices.

These changes were, on their own, counter moves to other businesses. Netflix is big, Amazon (NASDAQ:AMZN) is bulking up its streaming service and even Facebook is offering on-demand rentals. Google’s premium video options betrayed a company just trying to keep up. Coupled with Google+ and social features like video editing, however, premium video will transform YouTube into an ecosystem rather than a website, and advertisers will see more value in the business than they have in the past.

As of this writing, Anthony John Agnello did not own a position in any of the stocks named here. Follow him on Twitter at @ajohnagnello and become a fan of InvestorPlace on Facebook.

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