YouTube: An Unprofitable Giant?

YouTube is turning ten this year. Let’s look back on the rise of this giant who revolutionized the way we watch online videos. Even though it has cornered the market, many challenges still remain.

Before YouTube, there were no archives or storage banks for online videos. There were no search engines or databases where this information could be concentrated. YouTube is the immense library that made everything possible: searching, storing, integration and sharing.

To truly understand YouTube’s impact, just think back to 2005 and how internet users, bloggers and webmasters dealt with online videos. They were especially nightmarish for webmasters: they had to host them on their servers (that includes paying bandwidth fees) and encode them for one of the three video players dominating the market (Real Player, Apple QuickTime or Windows Media Player). Wait times were an integral part of the video experience, since it often took several minutes for the entire video to download (when it managed to download) before you could press "Play".

For casual users, videos were a precious commodity. There were no recommended videos or curated playlists. Instead, videos were shared by word-of-mouth, email and forums, as well as through peer-to-peer applications like LimeWire or Kazaa.

Chad Hurley, Steve Chen and Jawed Karim, three former PayPal employees, were hoping to solve these problems when they created YouTube. They claim that the idea first came to them in 2004, in the wake of the tsunami and "NippleGate" Super Bowl scandal. They could not believe that in the age of the internet, it was still impossible to find online footage of such memorable events.

YouTube gives its content the freedom it deserves, letting it go viral. As a social platform with simple but effective sharing capabilities, YouTube helps videos spread more quickly. Without it, there would be no Kony 2012, no Golden Eagle Snatches Kid.

Ten years after its creation, YouTube has become the largest story-telling space ever created: instead of just telling an anecdote, you can now share a moment directly. This platform’s audience is now gigantic:

  • YouTube has more than 1 billion users
  • 300 hours of video are uploaded to YouTube every minute
  • YouTube is localized in 75 countries and available in 61 languages

This daily flood of streamed videos almost overwhelmed the platform in its early months in action. From the outset, YouTube has been immensely and undeniably successful. By eliminating all video storage and sharing problems, the platform meets one of the internet’s primary needs. In just a few weeks, hundreds of thousands of hours of video were uploaded to the company’s servers. This influx forced YouTube to deal with its infrastructure problems: an exponential need for storage combined with monstrous bandwidth requirements (in 2007, YouTube consumed as much bandwidth as the entire internet had seven years earlier).

What’s more, it was very hard to monetize the site, much less make it profitable. In its early days, YouTube attracted few advertisers, as the platform was considered to be a site for sharing videos between friends – and it had far too much pirated content. YouTube also had to resolve legal issues and handle hundreds of complaints from copyright holders demanding the full deletion of content broadcast without their permission.

Chad Hurley, Steve Chen and Jawed Karim had created a platform that was fundamentally disruptive, but exorbitantly expensive to operate, and with no real business model. By selling YouTube to Google 20 months after its launch for 1.65 billion dollars, not only did the three founders become multimillionaires (334 million dollars in shares for Chad Hurley, 301 million for Steve Chen and 66 million for Jawed Karim), but they also freed themselves from a problem that they hadn’t had the means to solve.

Using Google’s Know-How

At the time, Google’s 2006 acquisition of YouTube was the largest acquisition made by a company operating on the internet. Note, however, that Google already had a fat bank account, as well as the tools needed to manage YouTube’s growth, ensure it could be monetized and settle legal disputes.

On one hand, Google had the technological infrastructure to meet storage and bandwidth demand while reducing its operating costs. The company also had an advertising ecosystem that was already quite effective, composed of its AdWords and AdSense networks, as well as a substantial list of contacts. On the other hand, Google had video experience, since the company had entered the game with its own Google Videos and was already testing its "pre-roll" advertising, meaning that the ad would play before the video content could be viewed.

Pre-roll advertising would not be introduced to YouTube for four more years, but it would be a resounding success. Advertisers would be lured in by the True View system, since they would only be charged when an internet user watched at least 15 seconds of the ad. The users themselves accepted this without too much fuss. The ads don’t feel that intrusive, and they can be skipped with a click of the mouse.

Google also managed to normalize its relationship with copyright holders, implementing its Content ID¹ technical solution, which identifies the owners of a video or soundtrack uploaded to the platform and notifies the copyright holders if the content was put online without their consent.

Under Google’s direction, YouTube has grown dramatically and has single-handedly dominated the continuous video streaming market for ten years. YouTube is a global brand: available in 75 countries and in 61 languages, with 70% of its views coming from outside the United States. During fiscal 2014, it generated a total of 4.7 billion dollars in revenue. This colossal figure can be explained by the fact that, among other things, YouTube has 19% of the video advertising market (down from 21.2% in 2013).

The Issues

Despite these impressive statistics, making YouTube profitable is still a challenge, as the company now faces increasingly fierce competition. While YouTube has never really been rattled by competing platforms like Dailymotion and Vimeo, Facebook‘s quest to become the go-to video platform has Google leaders worried.

Less than 18 months old, Facebook’s video function now boasts more than 3 billion views each day, a figure that YouTube did not reach until 2011, six years after it was launched.

Facebook vs YouTube on Desktop

Facebook can also rely on a more extensive social graph than YouTube. Unlike Facebook, Google has never managed to break into the social network universe. The social graph, meaning the map of relationships within a social network, is an undeniable advantage for video promotion. Videos uploaded to Facebook enter directly into users’ newsfeeds, where users on average spend more than 20 minutes each day.

The largest threat to YouTube may come from within, as concerns about the platform’s profitability have never dissipated, even after Google took over in 2006. In February, the Wall Street Journal confirmed that YouTube was not generating profits. Rolfe Winkler, who reported on Google for the WSJ, was very clear when he stated:

"But while YouTube accounted for about 6% of Google’s overall sales last year, it didn’t contribute to earnings. After paying for content, and the equipment to deliver speedy videos, YouTube’s bottom line is ‘roughly break-even,’ according to a person with knowledge of the figure. "

Even worse, according to Dan Rayburn, a consultant for Frost and Sullivan quoted in the Financial Express, "Google will not say if YouTube is profitable, but 90 percent of analysts say it is not profitable.”

YouTube’s weakness was originally its strength: a free storage space that must be maintained at high cost, with thousands of home videos that cannot be monetized. Just remember, 12 days’ worth of video are streamed each minute on YouTube, which is roughly 50 years’ worth of content each day. In one week, YouTube creates more content than the three largest American broadcasters have made since their creation.

According to Financial Express, YouTube’s advertising model is still flawed. A large proportion of the user-generated content, hosted for free, can’t be monetized because it isn’t high enough quality for brands. According to Rolfe Winkler, the other reason for brand skepticism is the limited audience of YouTube users. Despite its spectacular figures, YouTube reaches a much narrower spectrum of the population than television. In fact, just 9% of all YouTube users account for 85% of the videos watched...

And that is why a channel like Vice, even though it was created on the web, enters into agreements with Rogers, HBO and A&E to broadcast its programming on cable. Along these lines, Shane Smith also explains that television still represents 75% of the world’s advertising investment.

To become profitable, YouTube must diversify and reinvent its business model. In November 2014, YouTube announced an ad-free music subscription service, similar to Spotify. YouTube will also have to produce original content, like Netflix, to put upside pressure on its advertising rates and bring them closer to those for television.

 

¹Content ID is a tool that helps copyright holders identify and manage their content on YouTube. Each time a video is streamed, it is compared to reference files that the copyright holders have loaded into their content management system. If a match is established, YouTube intervenes in accordance with the rules and directives that the content owner has programmed into Content ID.

Posted in: Industry Transformations



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