Instead, Yahoo! is launching a new video site to rival Google's YouTube, along with a higher-budget original programming initiative to compete against Netflix (NASDAQ:NFLX) and Amazon (NASDAQ: AMZN). This shouldn't come as a huge surprise to Yahoo! investors -- after all, CEO Marissa Mayer has steered Yahoo! on a very steep path of inorganic growth over the past two years through acquisitions of nearly 40 smaller companies.
All of those acquisitions, as I have discussed in the past, were aimed at constructing a Yahoo!-centered ecosystem to rival Google's much larger one, which ties together Chrome OS, Android, Google Drive, YouTube, Google+, GMail, and other services.
Yahoo! gained a fragmented presence in social media through Tumblr and Snip.it. It gained a foothold in online gaming with Loki Studios and Playerscale. It obtained better news summary and aggregation technologies with Summly and Rockmelt. It even bought Aviate, an Android homescreen launcher similar to Facebook Home, to possibly use as the foundations of a Yahoo!-based launcher.
However, the one missing piece of the puzzle was a video-sharing platform like YouTube, which Google acquired in 2006.
The missing piece of the puzzle
Yahoo! originally owned a YouTube-like platform known as Yahoo! Video in 2006, but the site eventually shifted the focus to Yahoo!-hosted video instead. In 2010, the site blocked users from uploading and sharing video, then deleted all user-generated content in 2011. Later that year, the site was re-branded as Yahoo! Screen.
YouTube was unprofitable for years before Google executives announced that the service had earned a profit in 2012, although it declined to provide exact numbers. Yet in terms of estimated revenue (from analysts, not Google), YouTube is still a monster in terms of revenue growth.
Market research firm eMarketer forecasts that YouTube will generate $5.6 billion in gross revenue worldwide this year, far above the respective estimates of $4.5 billion and $3.6 billion from Jefferies and Barclays. That would make YouTube bigger than Yahoo!, which reported $4.7 billion in revenue in fiscal 2013 -- not surprising considering that YouTube already surpassed Yahoo! as the world's second most-used search engine in 2008.
To catch up to YouTube, Yahoo! tried to acquire French video-sharing site DailyMotion for $300 million in 2013, but the bid was ultimately blocked by the French government.
Google vs. Yahoo!'s media models
Before we discuss Yahoo!'s sudden interest in tackling YouTube, investors should understand the fundamental differences between Yahoo! and Google.
Yahoo! already has a limited amount of original video content. Yahoo! Finance features Daily Ticker videos with hosts like Aaron Task and Jeff Macke. The content is shared with Comcast's (NASDAQ: CMCSA) CNBC, which shares its own content back with Yahoo! sites. Yahoo! uses similar reciprocal deals to draw content to sites like Yahoo! Screen and News.
Google, on the other hand, invested $100 million in approximately 160 ventures in 2011 to draw original content to YouTube. The initiative, known as the YouTube Original Channel Initiative, was intended to coincide with the launch of Google TV in 2010.
The effort attracted A-list stars like Tom Hanks, Madonna, Jay-Z, and Ashton Kutcher to exclusive YouTube channels. In exchange, YouTube gained exclusive rights to the original programming for one year with the option to insert ads. Producers needed to pay back YouTube's initial investment before reclaiming the rights to their own programming and earning a cut of the ad revenue.
Yahoo! tries to poach YouTube's top stars by offering better rates
Yahoo! doesn't plan to turn Yahoo! Screen back into Yahoo! Video and open the service up to user-created content. Instead, Yahoo! is going after YouTube's top stars by offering them better rates to create exclusive content.
Advertisers generally pay YouTube $20 to $25 for every thousand times that a pre-roll ad is watched. A participant in the Partner program generally gets a 45% cut of the ad revenue.
While that sounds like a good deal for individual YouTube stars, it's not a great one for bigger producers with higher budgets. For example, if a producer received $9 (45% of $20) for every 1,000 views, a million views would only be worth $9,000. For a producer who invests $1 million in a channel, 50 million views would be worth $450,000 -- not even halfway to breaking even.
According to a report at All Things D, that calculation might be too optimistic. Several publishers stated that after YouTube takes the 45% cut of the ads it sells, they only keep roughly $2.50 for every 1,000 views generated -- meaning that a million views would only be worth $2,500, or $125,000 per 50 million views. Google has never disclosed its official payout rates for original YouTube content.
Meanwhile, Yahoo! is promising top YouTube stars higher advertising revenue, guaranteed advertising rates for their videos, and better home page exposure for maximum traffic. Yahoo! is still working out the details, but those three promises could be very appealing for top YouTube stars like rapper and comedian Timothy DeLaGhetto, the highest paid YouTube star last year with estimated annual earnings of $1 million.
But YouTube stars might only be the beginning -- over the past year, Yahoo! signed exclusive deals with news journalist Katie Couric and New York Times tech columnist David Pogue to host original programs.
But that's not all -- poaching stars for premium channels is only a piece of Yahoo!'s video strategy.
Yahoo! is also reportedly looking to fund 10-episode, half-hour comedies with budgets starting from $700,000 per episode. These projects could take Yahoo! out of Google's backyard and drop it straight into Netflix and Amazon's territory, and that could be a costly game. Netflix's critically acclaimed House of Cards, for example, costs a whopping $3.8 to $4.5 million per episode to make. By comparison, Time Warner (NYSE: TWX)/HBO's Game of Thrones, one of the priciest shows on TV, costs $6 million per episode.
All of these new strategies indicate that Yahoo! is trying to distance itself from Google and reposition itself as a heavyweight streaming media portal. Can Marissa Mayer and team pull it off, or is it a bold, ambitious effort that's doomed to fail?