The problem with YouTube monetization is the barrier to entry for video to small advertisers. YouTube loses a huge amount because there's no other site on the internet pushing as much bandwidth as they are. But they do this by having the online video market completely cornered and the only problem they have is that the advertising has not caught up yet.
Right now, small advertisers who wouldn't mind advertising on user generated content don't yet have the practice of using video ads, being limited to largely text and then graphical and flash ads. This barrier is easing slowly and two things can change the tide for YouTube.
First of all, next generation broadband might finally make IPTV a reality and Google, with YouTube, is perfectly poised to be one of the possible replacements for the entire cable television industry. That's what the whole "net neutrality" debate is really about. Cable companies and telcoms are fighting to hold on to their businesses and they want to be able to throttle stuff like YouTube so that they can crawl their way to IPTV themselves before beaten to it.
So right now, YouTube is mainly used for low quality video, but as broadband gets broader this will change, and YouTube is already getting ready with their "HD" videos (see the detail in this video for an example
) to be a legitimate competitor for the future of television. It's a gamble they may well not win at, but it's a huge gamble that would give them the advertising revenue that used to go to television. And remember, Google is not a search company, they are in advertising and their one medium that really works for them is search. Right now I can already put radio and television ads campaigns live using Google but this is a very very small part of their business and YouTube was a gamble to corner the future of video eyeballs. The payoff if it works is huge.
Ok, but what if YouTube doesn't become the next television? Other companies with the content portfolios lined up (e.g. Hulu, Netflix) might beat them to it by virtue of having the premium content. That's fine too, because YouTube scratches a big itch with online video anyway, the problem with monetizing it is two-fold:
1) Video is much more expensive to deliver than text. Many many orders of magnitude more.
2) The video advertising market is orders of magnitude smaller than the online video market.
Because of the former, they are taking a huge loss. But they can eliminate it though the maturation of the video advertising market. They had specialized in contextual advertising, and it's hard to get context from a video for computers. But they are launching "interest based" (behavioral is the more common term) advertising this month and all they need for YouTube to be a cash cow is enough advertisers in that medium.
And it will come, because advertising online is still the best deal out there in marketing for all but the largest of brands and ad dollars will continue to be shifted to Google. The ability to determine intent, and the ability to actually call to an action directly are game changing. On TV they know very little about who the ad is being served to. If I want to advertise to nurses on TV I have to waste a lot of money advertising to non-nurses. The only "targeting" I have is to pick nursing shows and that makes TV a useless medium for marketing to nurses (as just one example I am very familiar with).
Online, you can market to people who are looking for the very product you have at that moment. Instead of making an advertisement for TV I can bid on ads for users who search for "where to find a nursing job in Houston, Texas". Not only will that much more likely be a nurse, I can even try to only show ads to nurses who want the very specific thing I am offering. And instead of a TV ad telling them to go somewhere or call, or even get online I can have the product in front of them a click later. TV isn't like that. You can't interact on that medium, and that is what is going to change about Television.
The one knock on Google's ads, and the internet ads in general to a lesser extent, is that they aren't as useful for "branding" types of campaigns. Stuff like Coca Cola, where you aren't necessarily trying to sell something right then, and you are ubiquitous enough that such broad advertising is actually reaching potential customers because everyone is a potential customer. And YouTube and DoubleClick were the medium and the advertising agency to correct that.
The DoubleClick purchase netted them the biggest branding ad network (outside of Yahoo, which is not the same thing because they don't do well at selling branding ads anywhere other than on Yahoo itself) on the internet, and the YouTube purchase got them absolute domination of the video market. The cost of serving up the YouTube videos won't be a problem once the ad product for video is here, because unlike what the "Hulu lesson" teaches, the barrier to entry is just not that the content is user-generated, it's that it can't easily be targeted yet. It's too spread out.
That will change as the technology improves. And yes, Google does
have the resources to both wait out the losses as well as deliver the solution.