Google and YouTube Together

C as c St u d y
CASE
68:
STUDY
Google and You Tub e Together
The Next Advertising Platf or m ?
ver since Google boug ht YouThbe in Novemb er 2006, so m e have wond e red
just exac tly how Google was going to make the $1.65 billion purchase price
worthwhile. Wall Street, on the other h a nd, had no doubts th at Google wou ld
make a killi ng, and Google' s stoc k p rice quickly shot up from the unp rece­
dented $500 lev el for most of 2007 to th e su pe r-u n preced e nt ed leve l of $700 ill
November 2007 , be fore settling b ack down to around $630 in m id-November. This
gives Google a price /earning s rati o of 49, just shy of the moon, and a market cap ital­
ization of $200 billion, w h ich is over 10 times th e market capi talization of Ge neral
Motors, the largest ca r company on earth . Why does the Street value Google so highl y ,
and wh at po ssibl y could the ske ptics h av e b esides sour grapes?
The answer from Googl e is th a t it pl an s to turn the Web's largest repository of
video, and the la rgest vid eo au die nce share , into the next big , killer app for ad vertis­
in g, namely, th e largest adve rtis ing platform in history. Bigger than search, and bigge r
than tele vision. Just h ow much vide o does You'Iube have? To date, the estimat e is that
YouThbe has ab out 5 million videos, rep re se n ting abo ut 3 billion minutes of video
This is growing at th e rate of abo ut 1 million videos a year; and if the stars a re right
and m illion s of video cameras keep worki ng , in five years, by 2012, You'Iube will have
about 10 million vide os.
How m an y people are attracted to these videos and for how long? YouTube clai ms
about 130 million u nique visito rs per m onth , but several independent In tern e t
marketing firm s pu t it closer to 35 million m onth, with the average stay abo ut five
m inutes, vie wing on ave rage two vide os at a tim e. Only 2 % of these monthly visitors
view daily, compared to Yahoo, for in stan ce, wh ere 40% of visitors visit every day .
Yah oo really do es h ave arou n d 130 million uniqu e visitors a month, who stay 011
average about one hour a visit to view con ten t, generating a whopping 37 billio n
pages views a m onth! Each pa ge iew is an advertisin g opportunity. Google has about
112 million unique monthly visitors, who stay less than 24 minutes, generati ng 10
billion page views a m on th , on th eir way to their destination Web site. Over 30 % of
Google visitors visit daily. So while You'Tube has grown exp losively, it stil1 has a way
to go to ca tch Yahoo or Goo gle an d lacks th e re te n tion time (page views) and
frequency of visits found at th e m ajor portal s.
What You'Iub e n eed s is n ot just m ore co ntent but quality content, content that is
really inte re sting and th at dr aws millions of viewers back every day. Chances a re th is
do es n ot mean u ser-generated vide os, which typically have an average audience of
around 10 people, are top listed for one day , then fall into oblivion. Really popular
us er-generated videos that get passed aro u n d th e Web in a viral ne twork m ay top off
with a million viewe rs, but this is a rare e ven t and usually reserved for cel ebri ties
caught in com prom ising situations.
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No, what You'Iube needs is expertly crafted video Where can elI'S \ ideo"
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T he a nswer is to have unique visitors uploa d sn ip pe ts of Hollvv ood I
television shows such as T he Sopranos, T he Colbert Report, and J on S (\ , I
Show . As y u learned in Chapter 8, this situation does cau se heartburn a no . ( , I
owners like Viacom , which is suing Googl e for $1 billion, a fair ch u nl 0' (1
Many Go ogle/YouThbe skeptics think the relian ce f Yo u'Iul» o t e ,.
s tole n copy righ ted material is a critica weaknes s, as b ad as , say, the n 1 1 11
'
old Na pster, a bunch of P2P networks, and BitTorrent on stole n music ; \1 cl \ II
wh at videos are You'Tube's 35 mi llion visitors watching? Are th ey pi imanlx I I
to Yo uTub e b e cau se of the fun seeing their friends' and rel at ive s' goof) 11 '11" 1(1
or a re they wa tch ing p ro fession al copyrighted videos? Vidm e ter, ,I fllll l 11 t
online Video s, cla im s th at the clips wh ich have been removed fo r copyrioh
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request of th e copyrigh t ow ne rs comprise on ly 9% of all videos on the. sir, '1](1"1,'
6 % of tot al views . Cri tics point ou t thi s is a ast undercount of th e probl-n: tl( ( II
there is a n ocean of co pyrighted video on YouTube that copyrigh t ()\\ 111'1 S I I .
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request ed b e re move d b e cau se th ey don't know its there, nd it is too cosux to ~I , I
You 'Tube every ay for all the illegal material. Arguably, 25% of all (IU I tl" . Il
invol ves co py right film clips and/or copyrighted music, and possibly mo: ,]" I'
of to tal views . H ow large the number really is remains unknown But i I
enough to give skeptics of the Gc ogle/ You'Iu be venture a reason W cro '
Setting as ide where the page views are com ing from, what is Coogle ' II)'
making a profit from this in vestm e n t? The thinking n th e St reet is that t 11/ pl' (
p rice of $1.65 b illion ind ica tes that Google expe ct to generate profits 0 ('\
m illion a year (assuming a 10% discount rate, an unending s tre am at re vc 1 I'
that pe ople don 't get tired of videos and turn elsewhere). Th e formula (]Ol.',:
come u p with is advertising to the 35 million unique visitors. One problr » . I "
is that most u ser on the In ternet expect video to b e fre e and witho u t ad. ' I I r c
response rat e to vid e os used in displ ay ad vertis ing is still nothing to II rite h(J!lj,· 'II)))
- j us t .4 %, altho ugh twi ce as good as a regular banner ad. The sta nd ard p i «-rol
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that you ge t every time you want to watch something interesting h as lUI ne-d () , I
a big audience kill er. Half the vie we rs just hit the retu rn button a nd skip t11i \ ill'
they wanted to see rathe r than sit through the video ad, or hit the "Skip this " butt )
To compensate for user ad video ind iffere n ce anel dislike , Goo gle has ( 1'1 ( l I
with a n ew formul a for success : a Flash animation overlaid on th e bot tom of tl« , ti, (
w in dow, starting 10 se conds afte r the real video ro lls, and disappearin g in 111 ~el (II u···
u nl ess the use r clicks on th e animation, in which case they are take n t1J h, I h I
riser's site. Coogle research clai ms that 10 times more people cli ck on th. s, (, t II ~
than standard banner ads (no great achievement given the low ra te of ba: I "I .«
clic ks ) suggesting a 1 % clickthrough rat e, and th at fewer th an 10 900 closr tit' 1 1
w indow. T he video is pause d wh ile th e ad runs its ten seconds. Ho w annoy in . I I
Set as ide use r di ssa tis faction with video interruption, rernindin« t l» I (I
broad cast tel e vision ("We in terru p t th is program to bring you an im porta n t rue ::, 1
Co n sid er that b ra n d ad vertisers for the most part do not wan t their 1 1 I ~ ( r II'
messages alongsid e controversial user-ge n rated videos, and a lso clo not v, d t I
m arketi ng m essages alo ng side content that has been lifted from b roadcast r f)\ r)
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and CDs for soundtracks. Recognizing this, Google plans to run its ads only on th e
videos posted b y content ow n e rs or partners like Warner Mu si c Gro up (V\'MG) .
Warner is the on ly big conten t owner to cu t a de al with You 'Iub e. WMG will offer up
its library of m usic vid eos and other pro gramming, su ch as behind-th e-scen es clips
and intervie ws, for viewing on You'Iube, as well as for integrati on in to use rs' own
creations. T ho ugh financial term s of th e deal were no t re vealed, WMG will receive a
portion of dollars derived from ad s se rved in conjunction wi th its m us ic videos and
user-ge n erated videos featuring it s content. The You'Ibbe/Wa rne r partnership
extends th e ir recent agre ement to cr eat e a dedicat ed chann el to Pa ris Hilton to
promote h er new Warner Bros . album. You'Iube has also struck alli an ces with NBC for
telev ision sh ows like The Office and The Tonight Show with Jay Lena on the video site.
T he res ult is th a t Google will h ave to make its $150 million a year in ad re venues
from the legitim ate, hi gh-quality content only , Really popular user-generated onlin e
stars such as Lon elygirll15 have left YouTube in a huff because h er vid eos will not
rece ive any ad revenue . In other words, if You'Iube con tin u es on the bran ded, legal
content path, it cou ld alienate the very users who have made it popular, accord ing to
J upiterResearch Analyst Em ily Riley . "If people come to th e front page of the site and
it becomes commercializ ed," sh e said, "it's goin g to be like going to th e mall or grocery
store rath e r th an talking to your friends." The You'Iub e audience is n ot the fan ba se
for commercial advertising and capitalism run amok online, In a recen t episode, a
commercial video clip posted for ESPN's Monday Nigh t Football t el e vision show was
prominently featured on You'Iube 's homepage. In a few h ours, colorful commen ts
posted b y YouThbe users spiked with four-letter words, an d denigrating Ame rican
footb all in favor of the footie game played worldwide , were po st ed to the video page.
ESPN qu ickly with drew th e ad and h as not been heard from sinc e on YouTub e
Maybe Wall Street has it all wrong?
Case Study Questions
1. In your view, and experience on YouTube, will typica l You Tube viewers accept
advertising while watching the videos?
2, What responsibility doesYouTube have in removing copyrighted material from its
site?YouTube claims it isin compliance with the Digital Millenium Copyright Act,
which requires owners of content to notifyWeb siteswhen their copyrightsare
infringed,Why is this a good sol ution forYouTube buta poor solution forcopyright
own ers?
3 Assu me you were a manufacturer of sporting goods, and wanted to use
YouTube videos as a marketing tool to esta blish your brand .What concern s
would you have about using YouTube?
4. Google claims that users are 10 times more likely to cl ick on its Flash
animations at the bottom of the video screen than a standard banner ad .
Do you believe this response rate is reasonable, and do you believe it could be
sustained over the long term of, say, five years?
s eSt u c: \'
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68.'
SO URCES: "Gocq!eAimsto ~, I k
YouTube Profitable With MI '
by Miguel Helh, New York Time,
August 22, 2007; ..YouTube
Launches VideoAds," by Rob Hoi
Busi nessWeek.com, August 21,
2007; "YouTube's Favorite Clip'
byDanMitchell, New York Tir'1 0
April 7, 2007; "Portal Marketlnc
The Big Four: by David Hallerm
eMatketer, Inc.,March 2007'
"Gooqle Will Face Chall"ng~s n
Wake of YouTube AcquIsition,"
GartnerResearch, Octobe' 12
2006; " DoesYouTube Make
Google a BigTarget for Copynqnt
Suits, ' wensuee:Journal, Octob
11,2006; "Youfube Deal with
Warner Pays Pros, not Little
People: by Kate Kaye, The CI,c,
Network, Septem ber 19, 2006