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How YouTube 'Free' Killed Video, And What Comes Next

11/21/2017 10:21 EST | Updated 12/05/2017 10:52 EST

On Feb. 14, 2005, three partners gathered at a pizza parlor in San Mateo, Calif. Like most startups, they’d found a problem they wanted to solve. They were making videos with their friends of hanging out at social events, just what kids do — and they had no way to share them. YouTube was born, and user-generated video (UGC) took off like a rocket.

Massive user engagement uploads and views followed. People liked YouTube because it was easy, it was fun, and it was free.

YouTube
Jawed Karim: Youtube First famous Video "me at the zoo"

But behind the scenes, Chad Hurley, Steve Chen, and Jawed Karim had a problem. The server and traffic bills were growing exponentially. Sequoia Capital stemmed the bleeding with at first $3.5 million, and then $8 million.

Just a year and a half after its launch, YouTube was sold to Google for $1.65 billion in stock.

But the costs continued to mushroom, and the looming legal threats from copyright holders hung like a cloud over YouTube’s future. People were uploading movies, music, and all sorts of digital video that made the sharing site popular with copyright scofflaws. Perhaps not surprising, but YouTube would need deep pockets to address it. Viacom filed a billion-dollar lawsuit against Google for copyright infringement in 2007.

And YouTube’s problems have been growing worse by the day for 10 years, creating what is now a massive gap between what video was — television — and what it strives to be: useful, engaging, nichified, targeted motion media delivered by the internet.

So far it’s been an ocean of tears as companies have tried to meet audience demand for relevant video, and been crushed trying to compete with the powerful economics of “free.”

Angel.co lists 5,880 video startups, many more than I need to name here. But here’s just a few you may remember: Revver, Blip.TV, Joost, 5min, Motionbox, Ramp, Pluto TV, Vidyard, Airtime, Daily Motion, Tout, Metacafe and Frequency. 5,880 startups with an average valuation of $4.5 million equals $26.4 billion.

And so every day, when you read about another company “pivoting to video,” it’s worth noting that so far, with the benefit of hindsight, and BILLIONS of dollars spent, no one has made that work — not in technology, content, aggregation, or curation. There are many “at bats” — and so far, all strike-outs.

So what happened, and what’s next?

What Happened?

After Google purchased YouTube, the search giant set out to bring its powerful and successful AdSense offering to long-tail video. YouTube had the videos, it had the creators — now it just needed to get the AdWords economic engine to point its efforts at video.

Google tried with any number of products, but the model didn’t translate. Text ads were easy to make, low-cost to place, and understandable. Video ads, even with a number of self-serve tools, just didn’t catch fire. Google was a public company (since August 2004) and as such needed to find big opportunities that could generate big new sources of revenue.

Madison Avenue — with its coffers full of brand advertising spend — wasn’t about to buy into Google’s UGC YouTube offering.

“We are in the advertising business,” Eric Schmidt, Google’s CEO, told The New Yorker back in 2008. The purchase of DoubleClick for $3.1 billion made clear that Google was going to buy its way into the swank private clubhouse of brand advertising.

The company’s mission back in 2008 was “to organize the world’s information and make it universally accessible and useful.” Making information accessible takes on the established makers and publishers of media, whose raison d’être is to own and distribute content.

So today 300 hours of video are uploaded to YouTube every minute. But the vast majority of that video doesn’t meet the rather stringent requirements of big brand advertisers. And as long-tail video advertising hasn’t really showed up, YouTube is in the complicated spot of being both a disrupter of web video, and a net loser of revenue.

Statisticbrain.com reports that the annual cost of running and maintaining YouTube is $6.3 billion, while the annual revenue generated from YouTube is $4 billion. That’s a loss of more than $2 billion dollars. And before you think that Google partners are the big winners in this equation, Statisticbrain notes that the average YouTube partner earns just 32 cents per 5,000 views — or a CPM of .064. Those numbers sting.

Wondering how this works, I asked an insider at Google if the company ever considers abandoning the free YouTube upload business to start charging for users whose videos weren’t monetizable (which is most of them). The answer? “Sure, we talk about it, but then we realize our comScore numbers would plummet, and we leave things as they are.”

So, here we are. Video uploads are free. Anyone who charges for video services has to compete with Google. And even as video becomes the format of choice for both advertisers and consumers in the mobile web, finding business models for creators and networks seems like a distant mirage in the desert.

What’s Next?

We’re at the cusp of a next-generation video offering: YouTube, but with a modern mix of free, paid, and sponsored revenue elements. Video makers and uploaders are pushing at the edges of the one-size-fits-all thinking that has made YouTube the upload site of choice.

With strategic focus, Facebook has made uploads to its platform the preferential way for display video for its 2.07 billion monthly active users. LinkedIn has rolled out a somewhat limited video upload offering. Twitter, Snapchat, and Instagram all now invite uploads. And Amazon, with its massive AWS infrastructure, has taken a cautious step into video uploads with Amazon Video Direct, though ironically it requires an .srt subtitle file, and recommends using the YouTube automated transcription tool to create the lower third text.

Remember:

  • Video isn’t free to make.

  • Video isn’t free to store.

  • Video isn’t free to deliver.

As long as YouTube continues to rely on its big brother Google’s ad revenue to underwrite its video losses, the video space is stuck, unable to connect revenues, audiences and makers.

Just around the corner, there is a new generation online video platform that provides a flexible, fast, multi-platform solution to turns video’s many speed bumps into an economic SaaS solution. Upload once, publish to many platforms — and pay with either advertising avails or a service fee.

Consumers need more quality curated video. Advertisers need more targeted video opportunities. And publishers need more videos on their pages that come with an equitable shared economic benefit. Video 3.0 is on the horizon. Stay tuned!

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