We Should Care About YouTube’s Core Business, Not Their Market Share

With all the back and forth on the blogs this week from those trying
to predict exactly how much money YouTube is losing, personally, I
think many are still missing the bigger picture when it comes to
YouTube and how we value companies in this space. Maybe some of us
simply want to see different things for the industry or judge the
success of the industry on different metrics. For me, I want to see
companies in the space last for ten years with a sustainable business
model that actually generates revenue. To me, that is the only real way
any company should be judged in any industry, Internet related or not.

But
these days, especially with YouTube, many simply want to only focus on
their "market share" or the number of videos being consumed as somehow
equaling success for the company. That seems to be the same metric that
was used in early 2000 when the vast majority of content portals said
that all they needed was a lot of eyeballs to be successful and that
the number of eyeballs was all that mattered. How well did that work
out?

I've seen a few blogs posts this week that say it really
does not matter how much money YouTube is losing since they maintain
such a dominant share of the number of hours of videos viewed each
month. While that's a nice stat, for me, it means nothing if you can't
generate revenue around it. Would you rather run a business that can't
sustain itself, but has a lot of market share, or run a company that is
profitable, but has less of a market share? The fact that it's so hard
to name a lot of companies that are still in business today, from just
five years ago, shows that this industry has to be more than just about
who has the most "market share" at any one given time. This has to be
about creating a sustainable business and that is all that should
matter. How many companies really care about their "market share"
anymore when their company goes out of business? So when people say
things like YouTube has "strategic value" to Google or is "part of the
bigger picture", that's all just marketing terms. Try defining them.

The
other problem with this whole "market share" idea is that in any other
segment of our industry, market share is usually determined by revenue
and not by some metric like number of streams. When you hear companies
talk about market share, even for something as simply as content
delivery, these companies are talking about revenue, not the number of
streams delivered. Most other segments of our industry define the
success of a company and base the market share percentage off of
revenue and not some other metric that is not tied directly to revenue.
The industry's metric for determining the success of YouTube should be
no different and should not be determined based on the number of hours
of video that are consumed.

The other argument I keep hearing is
who cares how much YouTube is losing, Google can afford it. As far as I
am concerned, anyone who says that is not a business person. They don't
get it and they have probably never run a business before. The point is
not whether or not a company can afford to lose the money; the point is
how the company is going to show a profit. Even Google needs to show
value to their shareholders and is not immune to the basic principles
of P&L that any business strives for. Yes, the fact Google has deep
pockets does buy them time and allows them to take a bigger chance in
the market since they can last longer trying to monetize YouTube. But
how many years is Google willing to lose money with YouTube before it's
deemed a success? It's been almost 3 years now. So what's acceptable?
Four years? Five years? No company has an open window of time to just
lose money forever. So for all the people who say, we're in the early
stages of this, Google has the money and is betting on the future, I
ask you when the future is? How many years of Google losing money on
YouTube is acceptable?

And what would have happened to YouTube if
Google had not acquire them? Three years later YouTube would be in so
much debt it would be silly. The amount of money they would of had to
raise by now to support the business three years later would have been
insane. For all the people who say it's YouTube's market share that
matters, would you be willing to work at YouTube if they didn't have
the backing of Google? Probably not. Because it would be very hard for
you to keep your job at a company that loses money year after year,
even with the "market share" that it has.

I know I am going to hear
from some who say why am I always down on the industry? Why do I come
across as being so negative about companies in the industry like
YouTube? Again, maybe we want different things for this industry. But
for the past fourteen years I have enjoyed working in this industry,
trying to help educate people, help the industry grow and the industry
has taken very good care of me. I love what I do and I don't know
anything else. I want to see companies in the industry be
self-sustaining, create real value and have longevity.

Like many,
I've seen when has happened in the past when we've had a false sense of
security, when we have valued companies incorrectly and when the
"industry" places more value on number of streams or eyeballs as
opposed to profitability. That's not the kind of flash in the pan
growth I want to see again and it's not good for any of us who work in
the Internet space, as it's not sustainable in the long run.

The
mentality of how we judge success in this industry needs to change and YouTube is
just one example of many. Just look at the debates going on about the
"value" of Twitter simply due to their traffic growth. I don't know why, but
the Internet space seems to be the one industry where many don't care
about business rules that define whether or not a company makes it. In
other industries, it would not even be a debate. But in the Internet
space, the importance of the lack of profitability with companies like
YouTube seems to want to be debated. That is just bad business.

  • Drew Robertson

    If we only allowed companies with coherent business models in the online video space, we’d have to wipe out most perhaps all of the big names: YouTube, Hulu, Joost, Veoh, et al. It would be a very much smaller industry.
    That said if Overture hadn’t figured out how to stick ads next to search terms, the search business would be just about as lame as the VoD business is today.
    Frankly, no one knows how to make the model work. They don’t even know it will work. For sure, Google is hoping that lightning (Adwords) will strike twice and that being biggest they have the best chance to be hit (or the hit.) But as we know, hope is not a strategy.

  • http://www.marcellus.tv preetam mukherjee

    standing up and clapping: hear, hear!

  • Steve M.

    Dan, you and I don’t agree on everything, but you are dead on with this one. This is why I read your blog everyday. Most writers today simply want to repeat the same thing everyone else is saying without questioning anything about the BUSINESS side of this industry. Thanks for this, spot on.

  • Brian Lehon

    All YouTube has to do is charge $2 per month to have an account to upload content…chances are they become profitable right away. Simple…done. Thats why I get paid the BIG bucks ;)
    And here is a recent article backing up my statement:
    http://blogs.barrons.com/techtraderdaily/2009/05/29/should-youtube-charge-to-host-user-generated-video/

  • http://www.ramprate.com Steve Lerner

    Dan, would you apply the same judgement to CDNs? CDNs get analyzed to death, but as far as I’ve ever seen, only two USA based CDNs, including CDNs as divisions of parent companies, have ever been profitable…so why spend so much time analyzing them? Hype over video eyeballs means as much as hype of CDN “market share” when “market share” is gained by losing money faster than the next company…
    The answer?
    The reason that measuring market share and analyzing profitability are of interest is that MAY BE indicators of future profit. Would you have discounted amazon.com during their days of losing hundreds of millions of dollars? Look at them now- $177M in *net income* last reported quarter. YouTube is, far and away, the largest video broadcaster, by any measure, in the history of video… keeping an eye on what works, doesn’t work, and how it works is part of the job of anyone who participates in the market for video or the technology that surrounds it.

  • Rob Green

    Steve – there are more than two CDNs that are profitable, but not many.
    Dan – great post. The big problem is that UCG content has little value to advertisers and there’s no reason to assume this will change. One thing I’ve learned since I got involved in this space so many years ago is just how hard it is to make professionally produced content that people will pay for/watch with advertisments. It is very expensive to create and there aren’t very many people capable of doing so.
    Without the ability to monitize UCG content with premium advertising leaves user fees. Honestly I don’t want to pay another monthly fee for something I use sporatically. I would however pay a small upload fee. It is hardly an unreasonable thing to ask for and I think YouTube has the brand cache and mix of premium, UCG, and audience size to attempt this.
    It is hard to concieve of another option for them and I agree that endlessly losing money isn’t an option either.

  • http://www.BusinessOfVideo.com Dan Rayburn

    Steve, I agree, CDNs get analyzed to death, but it’s how the companies are getting analyzed that is important. I don’t hear anyone in the CDN industry say things about CDN vendors like “who cares how much money they are losing, they have great clients”, or “they have a lot of market share”. In the CDN space, the first thing people ask, like you did, is who’s making money? How will you survive?
    But when it comes to YouTube almost no one seems to be asking who’s making money in that business. Instead they are focusing on their comScore numbers, how many hours of videos are uploaded each minute, how many streams they deliver each month etc… they look at all of those statistics as if that somehow guarantees YouTube will be profitable. If they were not back by Google, everyone would be questioning YouTube’s business model all the time. But most don’t simply because Google has deep pockets and “can afford to lose money”. What a bad excuse that is.
    The Amazon analogy I think is unfair as Amazon at the time was providing a service you could not get anywhere else online. So while many didn’t believe in it, they were not agreeing with the basic principle that people wanted to shop online. With YouTube, no one is questioning that people want to get video online, but I question what YouTube’s service really offers? There are plenty of competitors to YouTube who I think do a much better job service wise and have a better offering.

  • http://www.buydrm.com Christopher Levy
  • http://www.ramprate.com Steve Lerner

    “I don’t hear anyone in the CDN industry say things about CDN vendors like “who cares how much money they are losing, they have great clients”,”
    That has been the clarion call of CDNs since their inception…

  • http://www.market7.com Seth Kenvin

    YouTube shares the onus of every venture to prove its own path to profitability, but intangibles and brand power are elements of such a path. Iran dispatches making their way to the site are vivid examples of that right now. While there are alternatives, YouTube is the go-to destination for accessing video. And its scale + resources of company its within (ex: Google’s fiber assets & its advertising sophistication) provide additional key distinctions that should advance YouTube on its path.
    Considering Amazon, I do not recall their being a singular, unique player in the early e-commerce days. Barnes & Noble was a fast follower to the web, start-ups like CDNow & software.com jumped out in front of certain verticals, and Buy.com was an aggressive cross-category competitor. Amazon took its time, and slings and arrows from detractors of its early financial performance, but ultimately has leveraged its investments, brand, intelligence, and scale towards impressive profitability.
    YouTube has much work ahead of itself. Performance in some areas are notably unimpressive — not only financial but some tech & feature considerations like driving its content towards TV screens. But YouTube also continues progressing on a number of fronts, and has much favoring patience in its pursuite of profitability like brand, resources & commitment of Google, and trends such ongoing advances in broadband network economics and increasing comprehension of & capitalization on online (including long-tail) video by advertisers.
    Ads are in our searches, online emails, the most niche blogs we read — in a supply-demand world of currently cheap inventory, I am sure ads will advance further on ugc & all online video, and innovative ad successes will float a market. YouTube is financially well positioned to be patient and seize that promise when it manifests as reality.

  • http://www.farrellmedia.com John Farrell

    Excellent post, Dan, which I’m going to link to….

  • Roger Matthias

    Refreshing post amongst the din of mania.
    Youtube is constantly changing the vision of what and who they want to be, Vevo looks to be another avenue for them in persuite of a viable business model.
    China seem to have the video streaming gig at least earning allbeit by way of piracy/premium. I get the impression a lot of these web companies are waiting for someone to find monetization success, so they can jump on the me too gravy train,
    They could be waiting invain while wasting serious time, money and energy, this does not bode well for serious players who are trying to get into the space by way of a realistic business stratergy,
    Youtube have been good pioneers but the legacy so far is reporting the ill’s of the world, representing UGC, loosing a boat load of money, having a strangle hold on the market,
    Maybe Youtube is a free opensource give-away for googles other properties, every-time you hear Youtube the first thing that comes to mind is Google.
    Youtube is one hell of an advertisement and will be; on a screen near you.

  • Jason

    I thought the mark of a web business success was the percentage of employees that have Aeron Chairs. Is that metric outdated now?

  • Seh

    Or they could add more marketing features for monetization. I love youtube and I use several video uploading sites. I have to admit though I’ve started to fall in love with some less popular video sites that have better marketing. For instance http://www.Adwido.com they give you a Free account and help you target specific keywords to drive traffic back to your site. Just a thought for youtube.

  • Nice

    An excellent informative article. Thanks for sharing this post.