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YouTube Shares the Wealth

Now you, too, can profit from an embarrassing pratfall or that adorable okapi footage from last week's trip to the zoo. If YouTube's co-founder is true to his word, revenue-sharing is coming to Google's (Nasdaq: GOOG  ) recently acquired video site.

At the World Economic Forum in Switzerland over the weekend, Chad Hurley indicated that in the coming months, the wildly popular site would introduce opportunities for contributors to grab a cut of the site's ad revenue.

"We are getting an audience large enough where we have an opportunity to support creativity, to foster creativity through sharing revenue with our users," he said, according to the Associated Press.

In a nutshell, it's about time. It's also not going to be easy.

It's about time
Ever since Revver launched its video-sharing site, where clip submitters receive a cut of the ads that appear at the end of every stream, sharing the wealth was something that YouTube would have to address eventually. I had suggested so over the summer.

"YouTube needs to do a better job of reaching out to its stars, possibly even taking on more mouths to feed with revenue-sharing deals, if they agree to keep their presence exclusive to the site," I wrote a month later. "If not, sooner or later, one of the major portals with billions in the bank is going to get it right."

That was when Lonelygirl15, the most subscribed-to channel on YouTube, turned to Revver as the source of the embedded videos for its standalone website. The competition hasn't gotten any less hungrier, now that YouTube has Google as a sugar daddy.

Last week, one of the site's most popular video bloggers accused upstart of offering financial rewards to recruit some of YouTube's biggest draws. Paul Robinett, who has built up a following of more than 20,000 subscribers as Renetto, took his peers to task for betraying YouTube. To be fair, he has admitted to getting paid for a pair of videos that were featured on the site last month.

Meanwhile, CNET (Nasdaq: CNET  ) launched its Project Spotlight program two months ago, helping to bankroll promising directors for its's new video offerings.

YouTube's revenue-sharing makeover later this year is bound to keep the YouTubers loyal, if only because no one monetizes a site like Google. If it's done right, will there really be a need for another video sharing site other than YouTube? (Save for those that specialize in a certain areas, have less restrictive content vigilance, or bring something truly unique to the video-sharing table?) The question is rhetorical. The implications are not.

It won't be easy
The challenges of rolling out a revenue-sharing deal are fairly obvious. On any given day, some of YouTube's more popular uploads are clips from network shows, Japanese anime, and broadcast sporting events. If Google cuts checks for the content pirates, it will only invite more legal fisticuffs from the original content providers.

YouTube has been striking revenue-sharing deals with music labels like Warner Music Group (NYSE: WMG  ) and movie production studios for months now. A broader arrangement with the entire community makes sense. In fact, it may even reduce the proliferation of illegal uploads by encouraging studios to upload their own short videos. That may diminish some of the site's indie flavor, but it won't be a new development; NBC and CBS (NYSE: CBS  ) have been filling YouTube with clips for months.

One particular challenge may leave a bitter aftertaste: Keeping folks from gaming the system. Some users do so already, just for the sake of exposure. Just wait until potential monetary windfalls are at stake. If Google's AdSense program has its own abundant click-fraud headaches to deal with, imagine how many more woes it'll get when the playing field widens beyond anyone who can slap together a website? Google needs to be careful here; if too many users begin cheating the system or creating click rings, cheated advertisers will respond with dirt cheap bids -- or walk away from Google entirely.

The likely gold rush on the site would normally require stricter quality control. However YouTube's democratization process usually finds a way to filter out junky streams and elevate the better flash videos to prominence. The potential for a cut of ad dollars may persuade someone to upload a shaky phonecam video of pointless chatter at an all-night diner, but unless it's sufficiently novel or entertaining the collective community won't make that particular clip a lucrative one.

This, of course, brings us to the most daunting challenge: How the money will be divvied up. Google's AdSense program is awfully generous to publishers. In its latest quarter, Google kept just 21% of the ad revenue generated from its third-party sites. Publishers got the "majority" -- though not all -- of the remaining 79%.

YouTube will be able to keep a bit more of its take. It's hosting the actual content, and folks understand that delivering video streams doesn't come cheap. Even if YouTube pays out less than the 50/50 split offered by Revver, webcam busybodies will likely make more through Google, thanks to its deeper bench of advertisers.

This is where it gets tricky, though. The beauty of paid-search programs through companies like Google, Yahoo!, (Nasdaq: YHOO  ) , and Microsoft (Nasdaq: MSFT  ) is that their text-based simplicity can have any marketer up and running in a matter of minutes. Aren't most video ads pretty elaborate productions? Won't that thin out the pool of potential advertisers?

I think Google won't go in that direction. Video ads may play a part in the YouTube monetization strategy, but I would be shocked if they weren't a logical extension of Google's existing paid-search text ads. Uploaders will likely be encouraged to provide more accurate keywords for their videos, to improve the accuracy of targeted ads, and Google text ads may pop up in some of the spaces now reserved for related videos.

The Google-ification of YouTube
You can already see YouTube taking on the role of a trusted Google foot soldier. Videos can now be placed in a dozen different categories. A section for college-specific videos adopts the Facebook slant, requiring users to register with an actual campus domain address.

Furthermore, Google has long kept a blog to ensure greater transparency in its operations. This past week, YouTube editors have been uploading video blogs as well, explaining the featured video selection process and promoting future interactive features.

Google and YouTube appear adamant about giving each other breathing space in this relationship, but it's clear that Google is advising YouTube's growth. YouTube, in turn, will need Google's skill to turn that growth into real money.

These are interesting times. Ladies and gentlemen, fire up your webcams.

Yahoo! is an active recommendation in the Motley Fool Stock Advisor newsletter service. Microsoft is an Inside Value pick. CNET is a Rule Breakers selection.

Longtime Fool contributor Rick Munarriz isn't a YouTube junkie, but he does find himself on the site more often than he would care to admit. 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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