Google says YouTube on track for first profit - Video site gets boost from online ads

Google says YouTube on track for first profit - Video site gets boost from online ads
By Richard Waters in San Francisco and Matthew Garrahan in Los Angeles
Copyright The Financial Times Limited 2009
Published: July 17 2009 20:06 | Last updated: July 17 2009 20:06
http://www.ft.com/cms/s/0/b4d81bde-72f8-11de-ad98-00144feabdc0.html


YouTube is finally on track to turn its first profit for parent Google, thanks mostly to two forms of online advertising that the popular online video site once largely scorned, according to executives at the internet search group.

The turnround in YouTube’s fortunes has become apparent in recent weeks, in spite of continued weakness in the broader online advertising market that depressed Google’s latest quarterly earnings, they added.

“We’ve been doing the business reviews and something fundamental has changed,” said Eric Schmidt, Google chief executive, in an interview with the Financial Times. “That is new, even compared to three months ago.”

Putting YouTube in the black would be an important turning point for Google. The $1.65bn it paid for the company two years ago was seen as a risky bet, particularly given accusations from media companies that YouTube turned a blind eye when their content appeared on the site.

Speculation about the scale of Google’s annual losses from YouTube has varied widely, due to the difficulty of estimating the cost of serving up its billions of video streams. One widely quoted estimate from Credit Suisse pointed to a loss this year of $470m, while a more recent one from RampRate, a consultancy specialising in bandwidth costs, put the loss at only $174m.

Ironically, the turnround is being driven by banner ads on the YouTube home page and “pre-rolls” that force visitors to watch an advert before a video.

These are forms of advertising that the company has largely played down in the past, in preference to more experimental ideas that it hoped would prove effective and less intrusive.

As a private company under founders Chad Hurley and Steve Chen, and recently under Google’s ownership, YouTube for a long time took a stand against pre-rolls, arguing that viewers disliked them.

Recent experiments indicate viewers do not find them so off-putting, according to Google.

“It’s a positive surprise,” said Mr Schmidt. “As professional content moves to the web, people are more willing” to watch an advert first.

While Mr Schmidt would not comment on when YouTube would turn a profit, Patrick Pichette, chief financial officer, said it would come “in the not too long-distance future.” One factor holding back YouTube’s profitability has been the relatively slow pace at which Google has been able to reach agreements with TV studios to carry their content.

Since it only places adverts alongside content covered by partnership agreements, it is limited by the amount of content to which it has access.

Walt Disney, for instance, has struck a deal to put the most popular shows from its ABC network on Hulu, a rival video site, while agreeing to give YouTube access only to a limited amount of short-form content.

“In terms of premium content, YouTube is not playing to its strengths,” said Arash Amel, a senior analyst with Screen Digest, the media research firm.

“It’s the rights holders that decide who gets the content and who doesn’t. YouTube doesn’t have access to premium content to anywhere near the scale of Hulu or ABC.com. And that’s where the advertising money is going.”

Despite that, the amount of content on YouTube covered by partnership agreements has risen steadily, and more than 10 per cent of the videos it serves up fall into this category, according to one person familiar with the matter.

As a result, the number of video streams carrying advertising number in the “billions” a month, and have tripled since a year ago, said Jonathan Rosenberg, Google’s senior product manager.