Matt Yglesias wonders how YouTube is going to turn a profit:
To actually turn all those viewers into money, you need to sell ads. But it’s hard to sell ads on YouTube. For one thing, lots of YouTube streams don’t even come through the YouTube site. For another thing, there are lots of other sites that also do video hosting, so if YouTube gets all ad-heavy, people may switch away to other services… To me, at least, this is the real moral of the story. Peer-production of digital media probably will produce a fair quantity of awesome popular stuff lurking amidst the vast pool of dreck. And well-designed services will let the awesome stuff rise to the top and the dreck fade to the background, rendering those services awesome and popular. But–and here’s the rub–having something awesome and popular just may not prove to be especially lucrative. In the past, a popular television show or a popular album or a popular film or a popular distribution channel guaranteed you vast sums of money. In the future, that just may not be the case. The very most popular things will generate some income, enough to live off of and continue financing new projects, but not the sort of gigantic windfalls associated with 20th century media hits. And lots of other things–including reasonably popular ones–will only generate trivial levels of income. And they’ll continue to be made. Made by people who think its fun, or who derive some benefit from their work other than direct monetary income.
To some extent this is clearly true: it’s harder to monetize your content when there’s more competition. But I think Matt underestimates the profit-making potential of category-leading websites. Matt’s commenters correctly point out that you could have made the same argument about Google itself, which in 2000 was a fantastic search engine without a business model to speak of. Then they figured out how to make money on ads, and now they’re a publicly traded company worth a hundred billion dollars. This is quite correct, but I think there’s more to be said about why Google’s ads have been so lucrative.
And here I’ll just quote Mike Masnick, who’s been making the essential point since at least 2003:
Part of the economic [point] we make here is that the nature of content as a digital good means that it’s going to move towards free in an open marketplace. However, that isn’t a bad thing, because “free” content can be used in good ways – as promotional material for something else. The argument goes both ways – promotional materials should be looked at as content, too. Unfortunately, too many people seem to think they’re different – that somehow content that is produced for promotional purposes is somehow “less” than other content. That sort of thinking leads to (a) people trying to lock up their “good” content and (b) people producing really bad promotional content that tends to annoy people more than make them interested in whatever is being promoted. We’ve argued this before in reference to TV commercials. It seemed like too many executives (such as those who claimed that not watching commercials was “stealing”) seemed to think that forcing people to watch bad content was the only way to produce good content. This is, of course, not true – which has been shown by the likes of Honda and BMW with the advertising they created that people actively seek out (not to mention the whole damn Super Bowl commercial watching phenomenon). It appears that finally some advertising and broadcasting execs are understanding this message. NBC is going to start airing mini-movies during commercial breaks. Some of these really are still commercials – but they’re actually designed (what a concept!) to be entertaining. Others, though, are more traditional programming content – but designed to fill 30 second spots, and use cliff-hanger endings to get you to want to see the next one. Basically, they’re hoping to provide content that is worth watching, so you don’t just TiVo through all the commercials (or worse, change channels). Should be interesting to see how this experiment goes.
What makes Google’s ads different from the annoying pop-under ads that dominated lesser sites is that they were actually useful to the user. If I search for “airline tickets,” I want information about companies wanting to sell me airline tickets. Therefore, having “too many ads” on Google isn’t a problem: as long as most of them are relevant, the ads actually enhance, rather than reduce, the value of the site. These ads are far more effective from the advertiser’s point of view. The average TV commercial hits a dozen people who aren’t remotely interested in the product for every person who is a potential customer. That, in turn, means that Google can earn the same amount of revenue with far fewer ads.
It’s worth keeping in mind that what advertisers are ultimately paying for is eyeball-hours, and the supply of eyeball-hours is roughly fixed–we each spend a few hours each day looking at some kind of content, be it the newspaper, the television, or the Web. Companies will always be willing to pay to get some of their content in front of those eyeballs. If consumers become more adept at avoiding ads, the few ads that do get to them will have a bigger impact, and advertisers will be willing to pay more money for them.
So there’s every reason to think that there will continue to be a substantial market for advertising space. YouTube will likely be well-positioned to capture a chunk of it. YouTube’s challenge is to find ways to sell ads that enhance, rather than diminish, the value of its service. I don’t yet know what they’ll come up with, because online video is still a very young medium, but there’s every reason to think they’ll come up with something.