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YouTube and Monetizing Social Networking

My buddy Eric Mattson asks my opinion on YouTube:

Do you really view things like YouTube as sustainable businesses?
Bandwidth is cheap. Storage is cheap. Why do people need YouTube?

Good question. (BTW, visit his blog at marketingmonger.com)

For now, it’s too early to tell whether or not YouTube is a sustainable business. They face all the normal problems related to monetizing user-generated content:

  1. Low clickthrough rates
  2. Brand-unfriendly content
  3. Lack of contextual relevance

The first point is driven by the incredibly high frequency of social sites. According to sources like Nielsen, the daily pageviews per user for social sites can be 100+, which is astronomical. This makes it difficult for social sites to easily monetize their content through direct-response advertising like AdSense or "spank the money"-type lead generation businesses.

If not direct response, then what about brand? Well, that can work if YouTube is able to carefully isolate "good" versus "bad" parts of their sites. For example, if they took the top 1000 videos and editorially filtered them, they might have some inventory to work with. Otherwise, it’s obviously a bad idea for Ford to potentially show their ads next to Jackass-like car crash antics. And unfortunately for sites like YouTube, one "bad" impression (and subsequent screenshot) is enough to turn off brand advertisers, no matter how many good ads they can show.

And finally, the lack of contextual relevance is a killer. Most social sites end up with a largely homogeneous set of "profile views" or "video views" or "picture views." The problem there is that it becomes very difficult to tie this vague grouping of pageviews to advertisers where they might perform on either a direct response or branding basis. The easiest sites to monetize are generic sites with categories like "Automotive" or "Finance." There, artificial scarcity is created around those categories and high CPMs are charged. If you have a undifferentiated pool, it’s much harder to capture the big dollars.

There are ways to address all the problems above, but let’s really not kid ourselves – this is all irrelevant because somewhere out there, a company is preparing a $1B bid for YouTube.

Why is that? Well, the idea of a secular market cap for a distruptive site like YouTube is pretty misleading. Now, it would surely be stupid for fundamentals-driven investor like Warren Buffett to buy YouTube, because the company isn’t profitable and probably won’t be for a while.

That said, if you were a giant media company fearing obsolescence, would you trade 0.5% of your market cap to hedge by buying a huge Internet company? That starts to make a lot more sense. In fact, you might even do it relatively defensively – a not-so-friendly giant in Redmond has been known to do this. You can call this "stupid money" or guys driven by fear rather than greed, but either way, it’s logical for them.

So the short of it is, maybe not a sustainable business, but the founders will still get rich.

As for Eric’s final point about whether or not people need YouTube because of storage and bandwidth becoming cheap – I think people mostly use YouTube because it has aggregated millions of eyeballs and people like to be seen. That’s something that can be kept and sustained over multiple years. I’m sure plenty of competitors will emerge over time, and some will even grow to be as popular as YouTube, but the technology product is not what drives its popularity – it’s the overall experience, the community, and the content.

This reminds me of a broader conversation about thinking about products as "user experiences," rather than the bits and bytes of the code – but that’s a blog entry for another time.

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