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YouTube’s Best Days Lie Ahead

All it has to figure out is how to make its 'stars' happier


A few years ago, I posted a video of my then-toddler son dancing to “Eye of the Tiger” because I thought it would bring a smile to my friends and relatives. Little did I know that Google’s (GOOG) site would view my innocuous video as a moneymaking opportunity.

Soon after my video was posted, a small ad from Sony (SNE) appeared at the bottom encouraging people to buy the song, which gained notoriety as the theme for Rocky II. At the time, I was puzzled why such as big company would care about a video that attracted little attention from the outside world.

Now, the issue is pretty clear.

Monetization is what YouTube is all about. If I was posting the video today, I would be able to attract the attention of sponsors solely by clicking on the “monetize” button that was put in earlier this year as part of a new revenue-sharing program. That should warm the hearts of investors, who are eager for Mountain View, Calif.-based Google to squeeze every nickel it can from YouTube. (Though I doubt I would try to cash in on my son’s talents. He certainly is no threat to Justin Timberlake.)

If analysts’ estimates are to be believed, the video-sharing site — which Google acquired for $1.65 billion in 2006 — will sell about $5 billion in advertisements this year, up from about $4 billion last year. By 2020, that number might hit $20 billion. Its monthly audience is roughly equal to 10 Super Bowls, and earlier this year, YouTube reached 1 billion registered users — a number that’s bound to grow by leaps and bounds in the coming years.

There are several reasons for my optimism. First, the numbers of fixed broadband global subscribers will reach 859 million by the end of 2018, compared with 642 million at the end of last year, resulting in household penetration rates increasing from 34% to 45%, according to broadband trends. As their Internet service gets better, users are going to consume more video online rather than through the traditional television networks. Viewing videos online used to be a hit-or-miss affair; now, thanks to improved Internet speeds, the experience often is as good as conventional television.

Also, data released by Nielsen shows that the numbers of households with at least one cable, satellite or antennae connection is falling, although most people haven’t parted ways with their “idiot boxes” quite yet. Still, young people are increasingly turning on their smartphones to watch video content, and older folks are doing it too — YouTube is trying to lure the lot of them to its site.

YouTube also is trying to encourage people to post “professional videos” because it might have to shut its doors if all people could see was cute kids dancing or kittens chasing their tails. Bloomberg Businessweek recently noted that YouTube has given more than $300 million to its top video makers and opened new studios in Los Angeles, London and Tokyo. It also has launched more than 100 new channels.

For those lucky enough to achieve YouTube greatness, the rewards can be sweet. Ad agency MDG estimates that the top 1,000 YouTube sites earn $23,000 per month on average in ad revenue. But as Businessweek noted, many of YouTube’s biggest “stars” are complaining that they aren’t getting the big money that they expected.

The reason is simple: volume.

“The surge in new content — about 72 hours of which is uploaded each minute today vs. every 48 hours in 2011 — makes it harder for any one content channel on the site to get noticed,” Businessweek says. “Even worse for creators: Rates that advertisers pay to be on popular videos have fallen by about one-third since last June, according to research firm TubeMogul, which bases its figures on rates for several video sites, including YouTube.”

So, YouTube will have to figure a way to make the people who drive the traffic to its site happier, or they might begin posting their work elsewhere. Still, this seems to be a solvable problem.

There is no shortage of people who dream of being a star — even one on YouTube.

As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities. Follow him on Twitter at @jdberr.

Article printed from InvestorPlace Media,

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