When it comes to some famous web 2.0 sites and services, it seems as though certain sites rule the roost. With 70% of video downloads from the net, the popular video clip site YouTube, may seem to be sitting pretty. But it isn’t, for three reasons.
On the one hand, there are dozens of other video sharing sites. There’s Google video, Yahoo video, AOL video, Veoh, ClipShack, Videobomb and (probably) a hundred others — sorry, too exhausting to provide links. Everyone wants a piece of the action. This may not make things as difficult for YouTube as it might appear, though. While some of their competitors are big companies, they don’t have user share or “social capital”. YouTube is the clear market leader and this brings with it a considerable competitive advantage. It’s a virtuous circle. The majority of users go to YouTube, so they attract the largest number of fresh contributions, the lifeblood of any such system. Aspiring film makers will gravitate towards the networks that give them the largest amount of recognition. Being the biggest is likely to mean that you have the best material, as well as the worst, but the systems YouTube have in place (favourites, votes and groups) make it easy to find the most entertaining and popular clips. Where it does make things hard is in the costs — Google and Yahoo (and probably AOL, no confirmation?) have their own server farms. YouTube doesn’t.
So that introduces the second issue, which is making money. The cost of delivering 100mn videos a day remains unknown, but will clearly be substantial. In April 2006, Forbes estimated their costs at $1mn per month. They had around 50% of the traffic they have now at that point. The company has received funding from Sequoia Capital, which invested $3.5 million in November 2005, and another $8mn in May 2006. There may be other investors we don’t know about. At the same time, though, YouTube does not currently charge users for any part of its service, and it’s hard to see how they could. If they introduced a charge for uploading or watching videos, contributors would migrate to free services quickly. Uploading to YouTube is essentially anonymous and unmonitored; the volume of media being added to the service makes this impractical. Thus, it would be almost impossible to distinguish business uploaders from amateur film makers and therefore charge only those people using the service for marketing purposes. Currently, the main sources of revenue are advertising and special deals like the one they have struck with NBC. As with social networks, getting advertisers to risk their brands being tarnished by appearing alongside content that they have no control over is difficult. Jupiter Research analyst David Card is sceptical about the company’s chances: “There will be some advertisers who won’t mind sponsoring lots of crappy content cause they want to get in front the kids who go to these sites. But there are lots of advertisers who don’t want anything do with it…One thing I can guarantee you is there’s not enough advertising dollars to go around.”
The tide may be turning, however. The company was able to secure a deal to promote Pirates of the Caribbean 2. Creating protected areas, such as interstitials or monitored channels, in the same way that MySpace has created a comedy page free of user-generated content, may be one way the company could attract brand advertisers. In any case, the anxiety about consumer media sites is certain to lessen over time. Update: the company has now has started showing rich media banner ads from networks including AOL’s Advertising.com.
The third possible threat to YouTube’s dominance are the users themselves. Like Wikipedia and digg, contributors to the service do not receive any payment for their efforts. For professional marketeers, this is not a concern, of course. However, for amateur film-makers, the rewards may seem slim. There are some big success stories. Comedian Judson Laipply’s Evolution of Dance clip on YouTube has led to television appearances. A failed television pilot episode, Nobody’s Watching, was aired on the service and achieved such popularity that NBC decided to put the programme back into development. However, the number of amateur film-makers plucked from obscurity and shot into stardom remains disappointingly small.
For this reason, it’s understandable why some of the more popular film makers on YouTube have moved over to rival service Revver. Revver pays film-makers a 50% share of their advertising revenue every time their video is played on the site. Cult web video producers Ze Frank and Ask-A-Ninja, each of whom have audiences of around 10,000 per episode, have moved their content onto Revver, which carries regular advertising from Microsoft, Universal Pictures, Warner Brothers, and American Apparel. The clearest success story, though, is that of Steven Voltz and Fritz Grobe whose clip Extreme Diet Coke and Mentos Experiment had reputedly earned them $30,000 from their advertising share. Viewed more than 6mn times between its release on May 31 2006 and August 9th, the video features an elaborate Las Vegas Bellagio casino fountain created by dropping the mints into cola. However, the pair estimate that they have lost $30,000 through unauthorised uploads to services like YouTube and Google Video, where the advertising is unaccounted for.
YouTube is perhaps one of the sharpest examples of the challenges facing Web 2.0 startups. They are cheap to produce in many respects. The content comes from users, not journalists or film-makers. They don’t need to spend any money on marketing, since once again, the users are doing that for them. Once launched, the research and development costs are minimal. However, the pressure to make money quickly is also harder — the company is said to use up more than 100TB of bandwidth every day — and the difficulties in attracting advertising and sponsorship from mainstream brands are as hard as any other site hosting consumer media. At the same time, competitors mimicking their service from established brands and companies like Revver, who offer an incentive for users to move, makes their position unstable. Like many Web 2.0 businesses, YouTube is in a race against time. Can they overcome the resistance of potential advertisers and sponsors wary about risking their brands in a decentralised, user-edited environment before the capital runs out?
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Ian, I wonder whether YouTube’s lack of its own server farm increases its costs significantly, if at all. Yes, their supplier(s) do take a profit (I imagine!). But these suppliers are specialists in operating server farms and can probably do it more cheaply than YouTube could. Not *that* much more cheaply — but quite possibly enough to cover the supplier’s profit. In my experience IT companies that do only one thing and do it well always maintain a significant competence edge over companies that do the same thing “because they have to”. Not the least of the reasons is their greater ability to attract staff who really care about running server farms as well as humanly possible.
With respect to YouTube advertising, one factor I wonder about is the frequency with which YouTube videos are embedded in other sites — so that the viewer doesn’t need to go to YouTube’s own site. The higher this frequency, the greater the appeal of displaying advertising not on YouTube’s site but as additional video before or after the contributed video. Rocketboom and Ze Frank are examples of having advertising displayed at the end of the contributed video, a practice that as a user I don’t find particularly annoying. But admittedly these are quality videos — advertisers may not be so keen to be associated with unknown amateur content.
Thanks for the insight on buying bandwidth. Very interesting.
Julie Supin, the YouTube marketing director, said in July that the company won’t be embedding adverts. “We don’t think those things will be in line with our community.“
http://www.mercurynews.com/mld/mercurynews/business/15019525.htm
To my mind, that’s exactly what they should do. I don’t mind the Revver ads at the end of Ze Frank and so forth at all. In fact, I wouldn’t really mind them at the beginning as well. However, advertisers themselves will be anxious about the content they’re being associated with, as you say.