YouTube Pins Profitability On Creative Advertising

YouTube has become such a part of the furniture that it’s astonishing to remember the site was only launched in May 2005. Forbes ran a YouTube special as its cover story last week and here’s some niblets:
— From the outset, YouTube has tiptoed around the advertising issue, acutely aware that its decision to avoid intrusive 15-second pre-roll ads has been a major draw for users. Although financially risky, that made the site far more popular with users and allowed it to build a far bigger audience than its rivals. Now exploring “complementary” advertising, Hurley said the site can help redefine the $74 billion TV ad industry by combining context, like Google’s text ads, with the sensory power of TV tfo present “a compelling brand image”. Hurley and Chen are open to anything apparently – ideas include user-generated ads, behind-the-scenes ad footage, sponsored vlogs and “event marketing” shoots at film festivals. The home page video ad, which NBC and ESPN use to plug new shows, generates around $175,000 and 400,000 viewers. (Update: that’s per day, according to this piece.)
— To get the site launched, Chad Hurley and Steve Chen paid or the site’s bandwidth on their credit cards. I sincerely hope they aren’t doing that anymore because the bandwidth costs are rumoured to be in the region of $1 million each month, according to this archive piece. The site streams around 40 million videos and 200 terabytes of data each day, though provider Limelight wouldn’t comment on the rates it charges YouTube, believed to be between a tenth and half of a cent per minute.
— One threat to YouTube, mighty Google aside, is Revver because it pays contributors a share of ad revenue. The Coke/Mentos guys got $35,000 and that’s a clear incentive for users.
NYTimes: Fox Digital Media president Peter Levinsohn questioned whether YouTube’s strategy of sharing ad revenue, as it is doing with Warner Music, is viable through banner and text ads. “If they get a relatively low CPM, and give us the majority, there won’t be enough left for them to sustain themselves.” But there are other ad formats in the pipeline – not least in the form of sponsored channels and what he described as “ways that advertisers can engage with the users and the audience with their brands”. Advertisers are becoming more comfortable with the nature of the web which might mean an ad would be shown next to some bizarre (or possibly unsavory) piece of UGC. That, says Hurley, is the nature of the internet, but advertisers are looking for new opportunities to get in front of an audience.
Hurley outlined some obvious features of YouTube but ones that help explain its success: not requiring the user to download software or choose between media formats, and making files easy to share and search. He used to work for PayPal, as did Roelof Botha as CFO. Botha is now a partner at Sequoia which has been YouTube’s sole funder so far. Hurley said the site won’t need any more funding, though he wouldn’t say if the site is in the black. And on a possible sale? “We’re not even thinking about being acquired or going public”. But he’s probably ordered the jet anyway, just in case…
Newsweek also jumped on the YouTube bus this week. It quotes an unnamed music exec at an unnamed music co currently negotiating a Warner-like deal with YouTube. He says the deal just doesn’t make sense because: “YouTube has no ad revenue to split”. Operating expenses are undoubtedly massive and growing, it is assumed, and this piece puts the site’s bandwidth costs at a even higher $2 million per month – according to an unnamed exec from a rival video site. Microsoft’s new Soapbox site, Google Video and Yahoo all have deeper pockets to support improved video quality and more established relationships with the content providers that are cautiously working out how to engage with YouTube’s huge audiences.
Related: MySpace Video Streams Outstrip YouTube; Or So They Say
Some YouTube Numbers Being Bandied Around
Music Labels To Take Stake in YouTube? UMG, SonyBMG, EMI Also Talking
Warner Music, YouTube In Ad Share Agreement; Template For Future Deals

This article originally appeared in MediaGuardian.