We’re not alone in this assessment, Google CEO Eric Schmidt refers to monetizing YouTube as the holy grail… time will tell how successful YouTube and Google shall be… but clearly: online video remains an untapped goldmine.

While Google paid $1.65B in stock for YouTube, hitherto, it’s failed to recoup any of that investment. In intangible terms, I think YouTube was a smart bet despite all of the drawbacks. After all, YouTube commands 70% market share in streams (with Google Video, Google commands a 75% share!) and 35% of users who consume video in the US. These are dizzying stats, and when you consider that online video is expected to clock in $7.1B by 2012 (According to Forrester), then even if YouTube is not the top grossing video site, it will prove to be a smart bet.

But, the fact remains, with Google doing $17B in revenues, YouTube’s $200M run rate is modest, at best. How can YouTube generate more revenue? Let’s look at some ways:

Sales:

- Create a Better Auction Interface so partners better understand rates Google is selling ads at - see more here.

- Allow for ad networks to sell across numerous content partners, or allow some partners who want to do this (ie. I’d welcome this, frankly). I am not this is worthwhile for ad networks, as a partner, I won’t comment on the terms of our deal, but for purposes of illustration, you can imagine that sharing the proceeds between Google/YouTube, the ad network and the content partner becomes less interesting… honestly, I doubt many content partners would welcome this either, but there is merit to it.

- Encourage partners to create “fake ads” for real products and companies… then feature the leading ones off the main page… Trust me, marketers will take notice and want to pay to carry those, or hire partners to create made for web ads… something that is lacking. If done right, and done in short format, some of these can become pre-rolls… as well.

Partner Content Discovery:

- Remove non partner videos from Related Videos - more here.
Google already allows users to restrict search queries on YouTube (technically the biggest video search engine, after all) to partner videos. This is smart… but why stop there?

- Tag cloud featuring only clips from partner archives.

- Featured partner thumbnail off the Main Page that rotates with every single partner they have.

- Related Provider - promote other Partners that have similar content, categories, metadata, etc. Some partners might not like this, but this is the quintessential link exchange program.

- Promote YouTube videos off Google Search Results page with no Paid Results. Google probably would have balked at this historically… but if online video is the holy grail, why not?

- Promote YouTube videos off Google Images pages. This is a natural fit… since image-based queries have a high correlation with video queries…

Programming and Editorial:

- Launch a Google Portal, heavily promote YouTube partner videos - where I see a major weakness is in lack of programming - see more here.

- Reducing UGC altogther (unlikely, I know) - see more here.

- I’d love to see YouTube commission content and what not, but don’t hold your breath, this is Google after all… though Google did get into content - sort of - with Knol.  Which takes us to the last point…

Corporate Structure:

- Spin off YouTube as a separate business (impossible). I don’t think Google will ever really push YouTube - your typical innovator’s dilemma.

Naturally, with flash being ubiquitous in online video, and the iPhone become a increasingly important piece of the wireless entertainment landscape, it was a matter of time before someone looked at converting flash for the iPhone.

Enter Episodic, who did just that. Thanks to their help, check out WatchMojo.com’s videos here, enjoy and send me feedback.  Note the URL http://iphone.episodic.com/watchmojo is available via iPhone only… in a web browser nothing will show up.  If getting WatchMojo.com on your wireless device isn’t a reason to swap your current phone for an iPhone, I don’t know what is.  Jokes aside, you have to wonder, is Jobs being wise by not enabling flash on the iPhone?

From SAI:

SAI: What has to happen in the next year or so for Web video to start producing profitable businesses?
Lee: Infrastructure, consumer behaviour and advertisers all have to catch up. Once they do, the economics will be more understandable, and more repeatable. Advertisers will learn what to buy and what not to buy. We are in the third or fourth inning of this thing. If in 5 years video advertising isn’t $3 billion business, I would be pretty surprised.

Canaan Partners‘ Warren Lee, who led the VC firm’s investments in Tremor Media, Motionbox and Associated Content, after previously leading video investments for Comcast Interactive Capital.

Maybe I am off, but Forrester pegged online video ads to be a $7.1B by 2012 - so 4 years from now.  If online video ads is a $3B business five years from now, or 2013, we’re in trouble people.  The video space has raised $6B after all in the past 2 years… and tack on YouTube’s $1.65B exit and a few smaller deals, that means $8B has gone into chasing the big elephant.

What’s wrong with this picture people?  Here’s my biased thought:

SAI: You’ve mentioned your company’s bias toward infrastructure and services over consumer-facing video and content investments. Are there sectors you see reaching profitability first?
Lee: Certain categories will have a shorter time to profitability. Companies like ThePlatform, FeedRoom, Brightcove and Maven Networks, which sell software to businesses and get paid a license fee. I suspect these kinds of companies will be profitable first.

Online advertising isn’t as solid as it should be right now (total online ads in the US represented a $25B industry in 2007) yet videos only clocked in $750M in that year.  This year, that figure goes to $1.35B, according to eMarketer… but as I’ve outlined, I think most of that money is being generated by traditional media companies, not any of these new media players… at least not in meaningful ways.

The problem is simple: traditional media will see a cannibalization of total revenues as they get more aggressive with shifting content libraries online, so they won’t be doing that with as much ferociousness and velocity as advertisers would like to see.  What’s worst: as Canaan admits in the Q&A, they had a bias against content… so long term, there won’t be enough high quality video content to get advertisers excited about online video opportunities… which in turn means everyone loses, including companies like Brightcove et al. For this reason, I highly doubt Brightcove can see profitability at the end of the tunnel.  Brightcove’s clients, in theory, would gladly pay license fees, but if and only if advertising revenue was greater.  Right now, it’s just not.  That is why companies like Blip.tv are doing great (disclaimer: Blip is a partner of ours).

This all seems simple enough to me… but I’m not a VC, I’m a mortal executive, and in my humble opinion, this miscalculation will lead to the downfall and fatal blow of many of these VC-funded companies who ride the wave of UGC-driven growth in bandwidth but won’t see a corresponding spike in online video advertising revenues to make the growth sustainable.

Today’s average:
Professional long form video: $40 CPM
Professional short-form: $30 CPM
User-generated video: $15 CPM

Projected for 2013:
Long form: $46 CPM
Short form: $34 CPM
User-gen: $17 CPM

States SAI’s Michael Learmonth:

We’ve heard YouTube is having trouble getting even $15 for overlay ads on the few videos it can actually sell.

All this could change next year if advertisers embrace user-generated video or long form video ad rates go down a bit and become more comparable with TV. Still, these seem like reasonable benchmarks.

Michael is a smart guy, but he’s downright high if he believes that (in his defense, he says “if” and not “when”), and steadfast, Diffusion is plain wrong for basic economic reasons, mainly:

There is NO way that UGC will fetch rates anywhere near what Diffusion is projecting… for one, advertisers won’t go near it and won’t touch it with a ten-foot pole… Most importantly, the sheer supply of UGC is 100 times larger than that of short form professional content, so the price for that will be much higher than simply 2 times UGC.

Answer:

One year after launching our syndication network, we’ve become one of the largest syndicators of video content online (for more on this, read a press release we issued or check out one of many sources backing this up).  The focus now is on monetizing it, either via advertising or licensing deals… frankly, due to the lack of traction in the former (advertising) we’re now focusing on the latter (licensing).

As a result, on our end, we’ve stopped giving away our content for free (in the hope of speculative revenue share deals) and now demand minimum revenue commitments (so basically, ask for licensing fees). If I had plenty of money in the bank, I might be more willing to give it away… but even then, to be very honest with you, with YouTube commanding such a large market share, just because you sign a distribution deal with a new company does not mean it translates into incremental views, let alone revenues…  I won’t name any names… but I do wonder how most of the other sites competing with YouTube (be it directly or indirectly) will stick around and be relevant - let alone competitive.

So since we are financing the company with debt (money I am fronting the company, basically, since we launched) and revenue from operations, we demand minimum revenue commitments to keep the lights on, so to speak, though we’ve kept the costs low by being smart about things, ie. not raising VC so having to spend it on expensive fax machines and cutting edge coffee machines, along with the latest deflingers.

What does this mean practically?

For purposes of illustration, out of 10 leads for syndication partners that we talk to:

- probably 5 balk when I demand for minimum commitments because “it’s not in their budgets”, but with all due respect to them, they’re the ones who made a mistake not to allocate any funds for content acquisition and instead prefer to burn money on non-differentiating things like servers etc.  More f’n power to them… honestly.  If I could get content for free, I would too…

- 3 consider it but balk, saying the timing is not right… it’s their loss… because their sites remain hollow ghost towns while YouTube continues to gather audiences and content…  to see why these companies make a mistake, see this.

- yet 2 agree. But guess what, content is king and those 2 sites have something that differentiates them… unlike the 8 that sit on the sidelines with oodles of servers waiting to handle the load but have little to serve other than UGC or not-frequently-published video libraries of yesteryear, or content from our peers who publish a clip a week, maybe.  I won’t name any names… but you be the judge.

Honestly, I don’t mind losing out on the 8 because there is so little good content being produced that invariably they come back at one point or another… and the 2 that do pay make it worthwhile.  I can add up some of the revenue share checks from the smaller players and honestly, I can use some of those checks as coasters because the cost of coasters is greater than the amounts on those checks.  Yes, the initial analogy I was going to use was R-rated… I cleaned it up.

The reason why advertisers are staying on the sidelines with online video is not a lack of streams, but a lack of trustworthy content… what has not helped is the backwards investing targets of VCs who have plunked down $2-5B in more platforms, file sharing sites, CDNs etc., all things that become commoditized and don’t differentiate anything that advertisers look for. Coca-Cola does not care about your back end, they care about the content, demographics, reach etc.  That all starts with content…

We’re living in a very faddish, hype-driven world… and thanks to the souring US economy and abysmal VC investing in video (quick: name me a successful exit in video other than YouTube) the noise is going down, fast. Digg was fetching $300M last month… now it’s $200M.  Honestly, in 3 months, it will be $100M and in 1 year, $50M.

Why?  The US economy will make things change very quickly: growth will be less sexy because non-monetized growth will mean more costs and costs alone… and VCs will become more fickle about financing clunkers.  Companies will have to compete for every inch (especially with a US Greenback that is puny relative to global currencies) so money losing ventures become losers, quickly.

Of course, this weakening economy also means that companies won’t want to foot the bill for content creation…

But what won’t change is the rush of users and audiences online… with voracious appetites for content, particularly video content.

So day in and day out, our content is worth more and we have more pricing power and leverage… but the fact remains, until we’re breaking even and laughing all the way to the bank… yes, it’s a constant struggle because the Web has trained us that content does not pay, apparently, aggregation pays… frankly, I think that is nonsense and as the Web develops and matures, this will come back down to reflect the real world.

Distribution is easier to come by than good content, largely because aggregators and distributors have been over-funded, but content has been under-funded, but additional distribution is not valuable because it dilutes your product.  We’re awfully idealistic with online media… but ask yourself, if the Olympics really were on all networks (CBS, ABC and FOX in addition to NBC), the Olympics would win, but NBC would not.  But the reason why NBC agrees to foot the licensing fee is because the scarcity forces advertisers to pony up.  Right now, we don’t have any of that online.

So instead of following the institutional imperative, we’re going against the grain and now protect our greatest asset to make it worth something.

But distribution is meaningless if people are on YouTube and “the latest aggregation site that will reinvent everything” isn’t even being visited.  Look at the latest stats: it’s brutal if your URL is not YouTube.com, and if your URL is YouTube.com, you are monetizing 3% of your content because only 4% of it is monetizable to begin with - yikes.

Bottom line: if you give something away for free, it’s impossible to come back and price it at something other than zero.

From Tech Crunch’s Michael Arrington, on GigaOm’s acquisition of a wireless blog:

I’m sticking to my argument that blogs should get cash positive and then start to acquire others - raising a slug of money just gives people an incentive to spend it, and you lose control to a group of investors who may know little or nothing about how to build a blog.

Replace blog with any content site and I agree whole-heartedly.  It’s nothing against VCs, but let them stick to technology startups… they’re doing a helluva great job at that, after all.

I think Arrington at some point tried to raise VC and realized that it would be imprudent, and he’s now wiser for it.  Sort of like someone I know.

Congrats to Om and his team for the acquisition though.

- if you want to move more traffic from non-monetizable areas to monetizable ones,
- if you want more marketers to embrace advertising on YouTube

then I think one thing you should do is remove links under Related Videos to non-partner videos.  On YouTube, all videos are linked to two groups of videos:

- videos that are produced or uploaded by the same user (marked with an $ in the image below),
- related videos that are uploaded by others and the user whose page you are watching the video on (marked with an X in the image below).

(bear in mind, not all users are producers, many simply upload other content).

Anyway, one thing marketers tell me is that they hesitate advertising on YouTube not only because of the content on the page, but also because they fear what content is linked to off a page they might be running ads on.

This is not that revolutionary, frankly.  YouTube is already pushing “partner content” over non-partner content.  When you do a search for a given topic, you are given the option to search only from “partner pages”.

This is more than a tacit way to drive traffic to monetizable areas… so I wonder, why bother linking to UGC content (in the X above) which is either not monetizable and scares advertisers away.

After all, anyone selling ads will tell you, ensuring that the content on a given site/page is “sponge worthy” is not enough, you also have to ensure that the page is not linking to something seedy or nefarious.

Google does not care about having less users and less content if it’s monetizable content.  If you doubt me, consider this: Google forces advertisers to pay a minimum cost per click to advertise, willing to serve search queries without any ads instead of serving low CPC priced ads.  It will apply the same philosophy to YouTube, too, especially as it finds itself with less margin to play with to meet numbers.

Just another tip for our friends at YouTube.  More such tips:

- Memo to YouTube: Do This, You’ll Print Money
- 4% is Part of the Solution
- YouTube’s Nuclear Option to Monetize its Content

But judging by a couple of comments that my post on YouTube’s Nuclear Option on Monetizing YouTube got on Seeking Alpha, I wonder if that is even moot.  Judge for yourself:

Commentor Joyful Alternative: But user-generated crap is why I go to YouTube!

Commentor Tom B: I think “joyful” has it right; let’s get MORE “seedier and undesirable content”. In fact, if you make it seedy enough, people might pay subscription fees…..I mean– people pay for cable TV, right? That’s at least 96% junk.

What if YouTube’s users just shun professional content in favor of falling cats and stumbling skateboarders?  I mean, our content does very well on YouTube, we’re one of the largest producers - both measured by videos and video streams - but the fact is, the most popular videos will always be random UGC clips of pirated content.

If that is the case, then I pity the fool who shelled out $1.65B for YouTube - well, no quite, I still see oodles of value in Google’s decision… they paid in stock people… stock!

Could Jerry Yang have gotten away with the white collar crime of the century?  Ripping off his investors to the tune of $45B to ensure he remains in charge of the Web’s crown jewel?

All possible.  All shameful.  Nothing to see here, please move on… you peasants.

The American financial system and the checks and balances supposedly in place = A joke.

After all, if you make money, you have to pay taxes… but if you lose money - and what self-respecting startup and entrepreneur doesn’t? - you don’t pay income taxes. It’s pretty simple: the government can’t be bothered with losers and doesn’t ask you to issue your financial statement - namely your income statement and balance sheet (the third financial statement being changes in cash flow) - so this gives you ample time to avoid closing your books.

However, if you ever want to set up a credit line or raise debt financing, then you need your financials to be up-to-date. “Who cares what you did in 2006… it’s 2008 already… so where are your 2007 financials?”, I was asked by our bank manager.

When I was studying finance and learning from Warren Buffett’s playbook, I thought debt was murder.

But on the operations front, it’s plain simple: we need more hardware, more software and more mindware (aka people). If I have to choose between staying debt-free and passing up opportunities or chasing opportunities and kicking ass, I’ll choose the latter. It’s really that simple.

Don’t get me wrong: It’s one thing to invest in a company with debt; it’s another for a CEO / CFO to raise debt.

Also, once you understand financial engineering, you can always restructure your capital structure and clean up your balance sheet according to an investor or buyer’s needs and preferences. But until either one of those things happen, you can’t be bothered.

Yes: debt is the devil’s currency, but selling equity is the fool’s currency of choice, if you ask me, especially with content companies, which most investors don’t get and aren’t comfortable with to begin with. If the founder of a tech company goes bonkers, starts doing lines of coke off a hooker’s ass, the investor can bring in a techie to run the ship. But if the founder of a content company goes yaya and starts doing jello shots with a stripper… who comes in to scream “action”? As you can see, it’s a different ball game…

But like anything else, you can turn a negative into a positive: debt helps you avoid the friction you are bound to have with outside investors. Don’t get me wrong, debt is uber dangerous as debtholders stand ahead of stockholders and don’t care about much other than getting repaid, and on time, but because the interest paid on debt is tax-deductible and you don’t dilute your holdings (if structured right), then debt is less painful and less of a waste of time than selling equity.

In some 30 months of managing WatchMojo.com, I will go on record to say that investor roadshows is the #1 biggest waste of time and money. I’ll gladly take half the blame for such waste of time… but trust me, do yourself a favor and don’t bother with would-be investors. When they bend over backwards to meet you, let alone invest in your company, consider returning their call… why?

Truth is few people can raise debt, and VCs play this card quite well to their advantage. More power to them, frankly! A sucker is born every day and usually, in the VC/Entrepreneur/Banker ecosystem, the sucker is the CEO for playing along the sham that is fundraising.

Anyway, with that off my chest, for whatever reason, I’m sharing some stats.

From 2006 to 2007 , as a debt-free company with no outside funding:

- our revenues grew 154%
- our costs grew 78%

While losses accounted for 213% of revenues in 2006, the next year; in 2007, they only accounted for 149% - yes, small consolation, I know.

Thankfully, in Canada, we get back a decent portion of R&D in tax credits… as a content producer, our R&D costs are lower than a pure tech firm… but let’s face it, most tech firms have $0 revenues early on, whereas a smart media firm always has revenues (how come? I’d tell you but I’d have to kill you). Since we still invest a good portion in technology and development, so we will get back some costs…

Which takes us to the moral of the day: it’s not enough to be a good marketer or a good techie, you do need to have a good sense of accounting principles and financial know-how. When I think of all of the money that has gone into WatchMojo.com, for what it’s worth, a part of it has come from re-invested proceeds (tax refunds, credits, etc).

As my father would say: if you’re going to owe the bank money, don’t owe them $1,000… owe the $1,000,000… then and only then will they care about anything else than being repaid, and repaid on time.

But that’s another post for another day.