Saturday, October 07, 2006

Will Google deflate the YouTube bubble?

The New York Times has run a (pretty well-written and balanced) story on a rumored buyout of YouTube by Google (free subscription required). Apparently, Google is offering 1.6 billion dollars for the clever little company. Wow. 1.6 billion.

I keep reading that YouTube is worth billions of dollars. And I keep getting furious about this silly statement. I tend to think that YouTube is nothing but a huge, company-shaped warning sign: unless we watch out, the internet bubble can come back with a vengenace. With all the hype surrounding the so-called Web 2.0 phenomenon, to which YouTube is a brilliant poster boy, people seem to start forgetting (again) that a company needs a business model, or at least a potential source of revenue in order to survive. Well, duh.

So what's wrong with YouTube? It's very popular. Very, very, very, popular. I love it too. If I want to show some video to a lot of friends, I will upload it to YouTube, and send the link. No e-mailing of huge files, no searching for storage space, it's all there, and it's free. The user interface is simple and easy to use. There are tags to search by, and they work. The quality is acceptable, though barely. And while there are some nuisances, like the lack of a legitimate download option, I'm more than compensated for these by the availability of a huge selection of videos that my fellow YouTubers keep uploading at an incredible rate.

If there's something interesting on just about any TV channel that I missed, chances are that it'll be on YouTube within a week. Somebody tapes it and uploads it. I may be looking for an excerpt from an old movie, a video clip, some famous moment in television: it has a higher chance of being on YouTube than on any other place on the web.

So it must be worth billions, right? Right?!

Not so fast. Let me summarize why YouTube is so popular. It's an easy way to upload, store and search video content. It's free. You can find lots of excerpts from television, cinema and video/DVD content up there.

In other words:

  1. Its software is cleverly written.
  2. It gives away storage space and bandwidth for free.
  3. It gives you access to illegaly distributed copyrighted material.
Number one is not such a big deal. I mean, kudos to the YouTube team, they really did an excellent job, despite the many unemployed developers claiming on message boards that they could have done it too. The software really is clever. Its developers have paid a lot of attention to detail, reaching Google or even Apple-like heights.

But then that alone wouldn't have cut it. Imagine if 2 and 3 weren't there. Imagine a paid YouTube. It definitely wouldn't be the household name it is today. Maybe "Twenty thousand users and counting." And imagine a YouTube with a careful monitoring process in place that would never allow television clips or other copyrighted content to be published. Well, I'm sure a lot of people would be interested in watching home videos or podcasts and the occasional trailer or teaser uploaded by its copyright holder, but not nearly as interested as in watching real, professional content for free as opposed to getting it through their intended channels, for which you would pay either directly, or by watching commercials. So all three of the above factors are crucial for the success of YouTube, which, in a way, is a market leader in providing free lunches – or, to be even nastier about it, free lunches stolen from restaurants and given away to any random guy walking by.

Handing out free lunches will, no doubt, get you vastly popular. But another thing it will get you is bankrupt. Throw in arrested, too, if you also traffic in stolen goods in the process.

So eventually, YouTube will need to figure out how to get paid (as bandwidth is really expensive, and storage space doesn't grow on trees either), and also how to legalize its content. Make no mistake about it: the lawsuits are written, signed, and are sitting in drawers, waiting for the day when someone rich buys YouTube and can be sued into submission. There would be not much point in suing YouTube now, when it has no money of its own.

How do you fix these major problems? Legality is the bigger one of the two. You either get rid of copyrighted materials altogether, and start offering only videos that are in the public domain, or you start to sign deals and control the delivery of copyrighted content. Apparently, YouTube is attempting the latter. One deal has been signed with Warner Music, and as Fox News reports (and other new sources enthuse the hell out of the deal), Warner will upload all its video clips to YouTube, and also let users share Warner-owned content on the website. Warner will get to veto the use of any of its stuff on a case-by-case basis, though. I don't know, but the sheer magnitude of this undertaking seems scary to me. And here's an interesting quote:

To make the deal happen, YouTube developed a royalty-tracking system that will detect when homemade videos are using copyrighted material.

YouTube says the technology will enable Warner Music to review the video and decide whether it wants to approve or reject it.
While a technology that detects if a video uses material owned by Warner Music seems a bit dubious, let's concede that YouTube has scored a victory here, it got Warner on board. At least one less lawsuit to worry about. But what is Warner getting out of this deal? The agreement is being widely described as a "revenue-sharing" deal, with few details. The Chicago Tribune seems to know that "Warner Music in return gets a portion of advertising revenue."

Advertising revenue seems to be YouTube's only hope for profitability, and somehow I don't believe that the large bandwidth costs of serving a 10-megabyte page can be offset by whatever clickthrough-rate any advertisement may generate on YouTube without angering and alienating visitors. People go there to watch a movie or ten, using up tens of megabytes of YouTube's bandwidth, and I really have to wonder if there would ever be a sufficient number of advertisers willing to pay at high enough rates to support this

And in order to keep Warner on board, YouTube now needs to share even this hard-earned revenue with the music giant. Warner's bottom line from the deal needs to be attractive enough to even justify the costs of uploading its catalog to YouTube, constantly monitor the uploaded contents, and offset any revenue lost from the free availability of their copyrighted materials.

And Warner is just one company. If YouTube wants to stay afloat, similar deals would need to be signed with just about every single copyright holder in the world. And make no mistake about it: some videos on YouTube are the exact replication of subscription-only content from paid websites whose owners would never agree to getting their lunches eaten by everyone's favorite takeover target.

YouTube wants to change the way companies view copyright itself. And not every copyright holder is as happy about it as Warner. Universal, for instance, thinks YouTube and MySpace are "copyright infringers and owe [Universal] tens of millions of dollars." And something tells me there may be more Universals than Warners out there.

In summary, I think YouTube will have a hard time ever turning a profit, and an even harder time dealing with angry copyright holders breathing down its neck. Unless it can be the David that slays the Goliath of copyright, it will soon need to reinvent itself as a much smaller, more modest, more limited shop that no longer allows the nearly-unlimited distribution of illegal content. As a consequence, its viewership will also dwindle. Basically, I expect YouTube 2.0 to be the next Napster, going from a massively popular cult phenomenon to a small, struggling, boring business.

But wait, isn't Google buying it for $1.6 billion? So I'm all wrong, right? YouTube is worth billions! Right?

Absolutely not, unless you're Google. If there's one company that could integrate YouTube 2.0, a smaller, less popular, less blatantly copyright-breaking version of this website into its services and overall business model, then it's Google. Google Video is not as sexy or popular as YouTube, and it would make a lot of sense for Google to replace it with a better-established, more popular brand. Google is one company in the constant process of developing, exploring and acquiring new, exciting technologies, and building them into their vast portfolio, somehow making sure that they eventually start contributing to Google's bottom line.

Google today offers a free and totally phenomenal e-mail solution with non-intrusive ads, an unrealistically generous helping of storage space, and a webmail user interface so well-designed that it drives users away from desktop mail clients. Google also lets you publish your blog, and it goes by a separate brand name (OK, full disclosure: of course Mac Thought Crime is hosted by Google's Blogger, so I'm sure I should be totally biased), though it's tied in with Google's other services very nicely. Now, another solution to complement Google's myriad offerings could be the ability to easily publish and share your videos online, embed them into your blog, search them via Google, and integrate it into the AdSense network. Note that most of these features are already available, in one way or another, in YouTube. The integration could go very smoothly.

It would be up to Google to decide what to do with copyrighted content. If it would all be weeded out (save for the Warner stuff, of course), then of course, YouTube would lose a lot of its appeal. But as part of the whole Google widget, it may win back a lot of that. The chances of survival for a YouTube that strongly enforces copyright would be much higher under the Google umbrella than anywhere else, in my opinion.

And if the original strategy of reinventing copyright itself is to be pursued, then wouldn't Google, with all of its resources and experience and goodwill, be much better suited to spearhead such a revolution than an independent little just-out-of-the-garage outfit?

It shouldn't be inferred from Google's interest in YouTube that anyone else would or should ever extend a similar offer. And that's why I think YouTube should ask but one question: "Where do I sign?"

But wait, how can I still call YouTube a bubble if companies like Google offer billions for it? Doesn't Google's offer validate YouTube as a viable business entity? It depends. It may seem that the real plan for YouTube has been, right from the start, to build and hype a popular service and position it as a takeover target, then get bought out at the right moment. The founders would laugh all the way to the bank, and the buyer would inherit a whole world of trouble, including a huge helping of copyright infringement lawsuits, and maybe also devising a plan on eventually somehow turning a profit.

This is, of course, a rather cynical theory. However, to me, honestly, this seems to be the only viable one. And this, too, requires a lot of luck: YouTube needs a very brave, very gullible buyer... Or Google. (By the way, doesn't YouTube even look like Google? Maybe it was intended, right from the start, to be bought out by the search engine giant? OK, too far.)
The following NY Times quote, however, contradicts this notion.

If YouTube agrees to a deal, it would be a sudden change of heart. Chad Hurley, a founder of the company, has said that he prefers to stay independent. “We’re not even thinking about being acquired or going public,” he said in a meeting with New York Times editors and reporters last month.
Not that corporate comments, especially forward-looking statements, are always 100% truthful, but if this statement was made in earnest, then, well, good luck, Copyright Slayer! You'll need it.

The bubble could inflate some more, and while they currently adopt a wait-and-see approach, some more impatient and trigger-happy corporate lawyers could just simply burst it one day by firing off some of those nasty lawsuits.

If YouTube tries to go it alone, I fear that in two years' time, its name will tend to be preceded by the word "remember" in most editorials, as well as blog and forum posts.

"Remember YouTube? The company I used to hype the hell out of when they were the shit? Now that they're gone, let me poke some fun at their expense to keep up with current trend."

That's just my two cents, of course. Add it to Google's offer. Hmmmmm, $1,600,000,000.02.

1 comment:

Anonymous said...

Youtube have started to hand deatails to film and companies of it's users, I think youtube is over.

Dead gone looks bad if you ask me, People will go away from it.

Never mind try