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Chris Anderson on "Free" and YouTube

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Chris Anderson recently spoke at Fool HQ, and we’d like to hear your thoughts on his presentation. Please share your comments in the box following the story.

Google (Nasdaq: GOOG  ) made its name and its fortune through targeted Internet advertising. The hot-button question facing the world's No. 1 ad network now: How does it monetize YouTube? Does the Internet ad titan have what it takes to make it a profitable niche in the ever-popular online video arena? On a recent visit to Fool HQ, Chris Anderson of Wired said Google did -- but it could take as long as five years.

"YouTube's value has not been captured," he said. "If they invest in an ad format that works for YouTube, there is a huge amount of upside there. It's going to take at least five years to [figure out how to] do that."

Anderson offers the business model "freemium," based on the underlying assumption that the most effective price is free. Following Anderson's advice, Google, or any other online video outlet, would use the powerful marketing tool of "free" to gather the largest possible audience, and then convert a portion of its content to additional premium services for which companies would charge a fee.

Still figuring it out
Google appears to be in the process of solving the video-monetizing conundrum. The company said in a second-quarter earnings call last week that display advertising, the sort popularized by sites like Yahoo! (Nasdaq: YHOO  ) , performed well during the quarter, and that more "brand advertising" is appearing on YouTube. Apparently, advertisers have also shown interest in mastheads on YouTube's home page. When asked on the call whether YouTube was profitable yet, Google didn't directly answer the question, but instead said it sees YouTube as a "profitable and good business."

"YouTube is a waste of space for Google"
Some critics argue that YouTube was an experiment that hasn't paid off, and doubts have surfaced about whether profitability is even in the cards for YouTube. However, Anderson says that the economics of YouTube enable us to "embrace [its] waste." He says one could argue that it's a wasteful use of medium, unless the medium costs almost nothing -- in which case it is the right piece of medium because you've explored the potential space.

Through YouTube, Anderson argues that we're exploring the future of television. Millions upon millions of videos are posted on YouTube, most of which viewers would likely call subpar. And yet, as Anderson notes, the site, its imitators, and its amateur contributors are almost reinventing the concept of television. "We're realizing now that we have this sort of topped out, one-sided perception of quality -- acting, screenwriting, sound, lighting, -- and it turns out quality is relative. What people want is what they want."

"Every video that can be made will be made," he said. "Collectively, we'll figure out what the future of television is by making lots and lots of bad television." Maybe CBS (NYSE: CBS  ) , News Corp. (Nasdaq: NWS-A  ) , and Disney's (NYSE: DIS  ) ABC can learn from this. (And not just by making lots and lots of bad television themselves.)

But maybe YouTube's losses aren't Google’s fault …
Anderson believes that YouTube isn't a failure of Google or its model, but rather of the ad agencies. He says they haven't found a form of video advertising that works in that context. "Advertising is always slow to follow the audience," he said. "I have confidence that if the audience watches that much video, then advertising will find a way."

In online text ads, advertisers can match an infinite number of narrowly targeted ads to content. They haven't been able to duplicate that narrow-to-narrow match via the video medium. "We don't yet know how to create customized, targeted video advertising for mediums like YouTube," Anderson said. "We don't know how to make 500 variations of a Coke commercial, each appropriate for a different domain. Until we figure out how to create that narrow-to-narrow video, we're not going to figure out how to monetize YouTube."

Perhaps the ball has finally gotten off to a slow roll. Google says there are now greater opportunities for advertising partner promotions, which could further propel demand for premium content. Company executives also said users are accepting pre-roll advertising, advertising that users must watch before a specific video begins.

What do you think? Do you think this model will work? Will Google be able to solve the Internet video profitability problem? Weigh in below.

For Related Foolishness:

Jennifer Schonberger owns shares of Disney, but does not own shares of any of the other companies mentioned in this article. The Motley Fool has a disclosure policy.

Read/Post Comments (1) | Recommend This Article (5)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 22, 2009, at 11:51 PM, prginww wrote:

    This debate has been on for a long time now. I am sure Google will find some way to monetize content on Youtube. I believe in building great products and giving great experiences for users and they have done that through Youtube. Now that Youtube has a limit of 2 GB and can support HD, it has become even more popular and video quality has increased. It will certainly become easier. Formats like pre roll and overlay have become things of the past. Need to research on new formats.


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