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Squeezing Money Out of YouTube

If you're looking for a real challenge, Google's (Nasdaq: GOOG  ) YouTube may be hiring.

Shashi Seth, brought in last year to lead the video-sharing site's monetization efforts, is leaving the company. In the latest in a line of troubling executive defections at Google, Seth is moving on to become chief revenue officer at Internet eye-candy start-up Cooliris.

There are probably several reasons behind his departure, though I'm guessing that the tall order of turning the eyeballs on YouTube into dollar signs proved to be a daunting task.

YouTube's popularity is undeniable. It has launched viral celebrities. It served as the springboard for a pair of presidential primary debates. It is one of the most trafficked sites in the world, trailing only Yahoo! (Nasdaq: YHOO  ) and Google itself. Yes, YouTube is a more popular online destination, according to Web tracker, than News Corp.'s (NYSE: NWS  ) MySpace, Wikipedia, Facebook, and Microsoft (Nasdaq: MSFT  ) . 

What is all that worth? Not much, to a bean counter. Sources tell GigaOm's Om Malik that the site generated $80 million in revenue last year, with $125 million in its sights this year. Bear Stearns analyst Robert Peck isn't as generous, figuring YouTube's revenue will be $90.2 million this year.

We have to lean on third-party sources because Google hasn't felt any kind of urgency to spill the beans. Even when it had to give the reason for a rare fiscal shortcoming two quarters ago, Google blamed the monetization challenges of social networking. That pointed the finger at Google's relationship with MySpace and its own Orkut, rather than YouTube.

A video clip runs through it
Social networking and video sharing have the same problem. They both cater to young audiences with little interest in generating advertiser leads. The problem is compounded at YouTube, because serving up chunky video files doesn't come cheap.

YouTube has also relied mostly on display advertising, and revenue-sharing deals with its largest content creators through small graphic overlay ads that pop up during streams. That limits the sponsor pool to brand-awareness campaigns from companies that can bankroll graphically appealing marketing.

I don't get it. Google's monster product is AdSense, the paid search wunderkind that places contextually relevant text ads into search queries and third-party content pages. Why isn't there more AdSense on YouTube?

At the end of every YouTube clip, the site scrolls through several related videos. Wouldn't that be a perfect place to wedge in a little AdSense action? Why can't there be ads offering great deals to Vail after a clip of someone wiping out on the slopes? Shouldn't there be song-file vendors or ticket resellers making their pitches at the end of a popular music video?

Consumers have spoken. They don't want pre-roll, short ads that appear on sites before the selected clip. However, YouTube has already programmed viewers to wait for the end with its roll of related videos. Allocating half of that space to ads is a fair compromise, and could be a huge moneymaker.

YouTube should be so much easier to monetize than social networking. The wide variety of YouTube clips lends itself perfectly to distinctive advertisers, with an occasional local search angle to boot. Why is YouTube settling for video advertisers typically from whatever movie studio has a big movie opening this week or a consumer products company with a rollout to promote?

Beyond the box
CBS (NYSE: CBS  ) is pushing the envelope this week by testing a skinnable player. In other words, the marketing message of a sponsor can frame the actual image of the video player. Yes, it once again limits the pool of potential advertisers to the heavies with brands to etch into noggins, but at least it's yet another way to milk more out of a video-sharing site without physically disrupting the clip streaming process.

If you're a YouTube-consuming Aeron chair potato, all of this must sound terrible to you. There is no way that you would want sponsored player skins, in-video overlay ads, and text ads scrolling at the end of your clip.


But keep in mind that Google spent $1.65 billion to buy YouTube. Even if Google wants to simply break even in running the site, it has to find better ways to monetize it, short of erecting tolls to charge viewers for access and video creators for the bandwidth. No one would want to see that, right?

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Longtime Fool contributor Rick Munarriz is a "clip culture" fashion victim. He does not own shares in any of the companies mentioned in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.

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