Amid the on-going shake-up in Google’s display advertising business, there’s a rising debate over the future of Google’s most disappointing display advertising property, YouTube.
Credit Suisse says YouTube is set to lose $470 million this year and it’s got people asking: Should Google spin-out YouTube? Or at least treat it like a separate business — the way a VC would handle a portfolio company?
One source familiar with these conversations, but unauthorised to discuss them, told us “If I were Eric [Schmidt, Google CEO] I would say one thing doesn’t look like the other thing and I would probably spin [YouTube] out.”
This person argues Google (GOOG) should give the video-sharing site a budget and let it sink or swim. His analogy: Google should play the role of a parent giving YouTube a weekly allowance.
“If you’ve got $10 bucks to spend you’re going to think pretty carefully about how you spend it.”
Another source — this one closer to YouTube itself, but likewise unauthorised to discuss its business — says the video-sharing site already runs fairly independent of Google.
“We’ve always intended to run YouTube as a separate culture,” says this source, who points out that YouTube is headquartered in San Bruno, not the Googleplex in Mountain View.
This source will admit one drawback to belonging to Google: “As long as you have senior stakeholders in the parent org that have opinions, the team needs to spend time thinking about those.” That time that could probably be better spent on actually improving the business, he says.
While we definitely do not expect Google to spin YouTube off any time soon, we think there are at least four reasons Google should set-up YouTube as an entirely independent subsidiary, responsible for keeping to a budget and hitting revenue goals:
Google doesn’t understand or want to understand the content business. Online video is a content business. From its very beginning, Google disavowed the content business, refusing to become a portal like Yahoo. It never hired columnists for Google Finance. There isn’t a paid journalist associated with Google News. There isn’t a Google Sports section. Google’s strategy has always been to help people find content made by other people as fast as possible.
When Google bought YouTube it thought it was getting a video-sharing site full of “user-generated content” that fit into this philosophy. But it didn’t. It bought a site that gained popularity on the back of professionally produced, pirated content like SNL’s “Lazy Sunday.”
Well, those clips — along with almost everything else from FOX, ABC and NBC — are elsewhere now: Hulu.
To the right, there’s a chart that shows Hulu’s traffic is quickly approaching YouTube’s. Looking at it, remember that unlike YouTube’s, Hulu’s traffic is 100% advertising-friendly.
YouTube, which is redesigning its site to be more friendly to professional content, tried and failed to sign Disney before it went to Hulu earlier this month. It’s hard not to wonder if YouTube could have gotten that deal done if it wasn’t run by a company that, at its core, doesn’t really want to be in the content business.
Google favours international growth at all costs. One of our sources who favours plans to establish YouTube as a more independent company within Google cited Miguel Helft’s story in the New York Times called “In Developing Countries, Web Grows Without Profit” to make his case. In the story, Miguel writes how popular Web 2.0 sites — YouTube, in particular — have seen much of their growth developing countries overseas, where bandwidth is expensive and advertisers aren’t interested in paying to reach users. In the face of this challenge, some startups turn away foreign traffic. YouTube, which Miguel says “hews to its vision of bringing online video to the entire globe,” does not. If it weren’t so closely run by Google, says our source, it probably would.
Google favours scientific, automated advertising products. Advertising around content is an art. Google’s growth has always been fuelled by search advertising, which is mostly sold through an automated auction process. Online video, it’s becoming increasingly clear, is a content business. Advertising around content is much less of a science than it is the art of convincing potential clients that the content you’re publishing will give viewers a feeling about the brands associated with it. Google never had to learn that skill growing to its current size. Under threat of blowing through a budget and getting shut down, an independent YouTube could.
Google doesn’t worry about design enough. The reason Google keeps losing talented Web designers is because it doesn’t really need them. Google search is just a text box on a white page. When it tweaks its design, it consults data, not Web designers. If Hulu’s shown anything it is that brilliant Web design goes a long way in attracting users to content-oriented sites. Google’s never had to worry about that before and doesn’t know how to now. Just compare what it looks like when you go to YouTube.com versus when you go to Hulu.com:
Photo: Spencer E Holtaway