My YouTubeGoogleBlog (Because there’s always room for one more.)
Posted by Matt Lightner, October 14th, 2006
I love YouTube. Late at night, after a day of hard work, I often find myself browsing through a dozen or more videos before finally heading off to bed (YouTube videos, that is). But as a loyal visitor, I can’t help but feel that YouTube is losing more and more money with each video I watch. I’m not paying for anything, so how can they afford all that bandwidth?
Like almost all Internet sites, they run advertisements. But since their service is based entirely on streaming videos free of charge, it seems like it would be hard to make up for that cost. I, personally, have never clicked on an ad there, so I’m almost certainly a drain on their resources. I actually had to load up a YouTube video page just to verify that, yes, they have ads on them. Am I really the exception here?
Then I got to thinking about all of the other large, social networking sites that experience explosive growth. It seems that for most of these sites, making money is a total afterthought. People simply start up a site because they have a cool idea, and make the assumption that if it becomes “successful,” money will follow. The problem is that turning massive amounts of untargeted traffic into money is not as easy as it sounds.
Unless you’re Google.
The Google AdWords program has become a booming market that connects publishers to advertisers with impressive accuracy, especially when you consider that it’s almost completely automated. It’s like an online dating service for advertisers, except there are thousands of really smart engineers continuously perfecting the criteria used to find matches. Wherever you are, chances are Google’s advanced algorithms have already determined the text links that are most likely to pique your interest. This unique content-based targeting gives Google placements a significant advantage over traditional media advertisements. Because Google’s text ads are specific, relevant, consistent and unobtrusive, visitors are less likely to be on “ad defense” and are more likely to click (and ultimately buy).
The magic of Google is that they don’t need to do anything special to generate more profit other than serve more ads. Their system determines which ads best fit a page without any real human intervention. Sure, they need to screen text ads to make sure their advertisers aren’t making untrue claims, but that cost is inconsequential when you consider that some of the more popular keywords (”web hosting” for example) sell for almost $40 per click. These ads probably require less than a minute to review. That’s a pretty good business model if you ask me.
So it seems like buying high traffic websites is Google’s winning strategy. Fortunately for them, they’re already well aware of this fact–as is evidenced by YouTube’s jaw-dropping price tag of $1.65 billion. Rather than splitting the advertising revenue that YouTube generates, why not just buy the site and keep all the money? And when you account for the fact that Google already has one of (if not *the*) largest content delivery network on the Internet, you have to figure that they’re getting some cool deals on bandwidth pricing (and by “cool” I mean “totally sweet“). Now I may have forgotten some of the material, but while getting my expensive finance degree, I think I remember one of the professors saying something along the lines of “as long as it brings in more money than it cost, it’s a good investment.” (I also learned some other things in college, but applying them to business problems would almost certainly result in the wrong decision, unless the answer really is “more beer.”)
Websites with visitors that can be segmented, such as Digg and Craigslist, also seem to be great matches (although eBay already has 25% of Craigslist). Other popular sites like Friendster and Facebook (MySpace, of course, but they were recently purchased) and pretty much any other website that generates a lot of traffic could be potential candidates for “Googilation” (a term which is a combination of “Google” and “assimilation” and has no x-rated connotations, to the best of my knowledge). As for whether or not these sites match Google’s brand and master plan, I guess we’ll just have to wait and find out.
In the meantime, I’ll continue my late night YouTube constitutionals. If videos like this don’t make you more “happy and relaxed” before bed, I don’t know what will.
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