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.
"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!
"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
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:
More from The Motley Fool
Better Stock: Visa Inc. (V) vs. Mastercard (MA)
Which of the two biggest card-network giants has the better prospects?
Is Enterprise Products Partners LP (EPD) a Buy?
This giant, high-yield midstream oil and natural gas partnership is changing things, which is good for conservative income investors
These 2 Developments Could Accelerate Johnson & Johnson's Next Acquisition
A double-whammy of bad news just might help encourage J&J to go back into acquisition mode.