Whether you like Mark Cuban or not, you have to give him credit for not only selling Broadcast.com to Yahoo for $5.9bn in Yahoo stock at the height of Bubble 1.0, but for recognizing that the fun wouldn’t last and positioning himself to retain his billion-dollar fortune once the party was over.
An outspoken critic of YouTube and a staunch believer that 5t should be held liable for copyright infringement, Cuban was not shy in expressing his opinion that Google was foolish for shelling out $1.65bn for the popular online video startup.
A year and a half later, he has provided an interesting perspective on YouTube vis-à-vis one of its strongest new competitors, Hulu.
Hulu, of course, is the NBC Universal-News Corp. joint venture that provides users with free, legal high-quality streaming video content from rights holders such as NBC, FOX and Comedy Central.
Venerable favorites such as The Daily Show and The Colbert Report are amongst the more than 400 television shows available for viewing on Hulu. Hulu is advertising-supported.
While YouTube still maintains a vastly-larger audience than Hulu, in Cuban’s latest post, “Hulu is kicking Youtube’s Ass,” he predicts that by next year…
…”not only will Hulu have more monetizable traffic than Youtube, but it will have more total revenues than Youtube as well. It wouldn’t suprise me if they are already at a higher annual run rate than Youtube.“
It’s quite a prediction when one considers that that many observers questioned Hulu’s viability the minute it was announced.
But even Big Media haters have been forced to change their tune, and for good reason – Hulu is doing quite well.
While it doesn’t have the audience YouTube does, it’s offering the quality content visitors want and major brand advertisers have lined up to buy up Hulu’s advertising inventory. Indeed, Hulu has actually been forced to create more inventory after selling out what it initially made available.
Because Hulu only offers legal, professional video content, theoretically all of the video content it offers is the type that can be easily monetized. Thus, it has no burden to incur costs serving up video content that is not monetizable.
Compare that to YouTube’s situation.
Nearly two years after acquiring YouTube, Google still hasn’t “figured out the perfect solution of how to make money.“
Google CEO Eric Schmidt has stated that monetizing YouTube is “our highest priority this year” and while he expresses confidence, he admitted that in a meeting earlier in the year, he delivered a “come on, guys” message to the YouTube team.
But monetization has been a tough riddle for good reason.
Much of YouTube’s video content is user-generated and advertisers are not keen on having little to no control over the videos their ads appear with.
Cuban observes that YouTube has to walk a fine line – if it gets too good at figuring out what videos are (for ad-targeting purposes), it will make it difficult to continue hiding behind the Digital Millennium Copyright Act Safe Harbor provisions, which it argues shield it from copyright infringement claims.
Coupled with the fact that an analysis by TubeMogul has revealed that “viewership peaks early” in the life of a popular video, it’s clear that YouTube will have to solve some significant challenges before it can even attempt to make monetizing user-generated video content a viable proposition.
Unfortunately, monetization alone isn’t YouTube’s only challenge.
As Cuban points out, Google is essentially in the unenviable position where “the more traffic Youtube generates, the more money it loses.“
This is, of course, because YouTube is currently little more than a free-for-all video hosting service. The vast majority of its content currently does not monetize and even if we assume that it will develop better monetization strategies in the future, it’s unlikely that ads on YouTube user-generated videos will deliver CPM rates anywhere near the rates seen for professional content.
While naive idealism still exists about the potential for monetary gain with user-generated video content, YouTube’s foray into long-form, higher-quality video content is an admission that YouTube’s current strategy needs adjustment.
After all, under this strategy the more popular YouTube gets, the bigger the gap between revenues and costs grows.
While Google’s infrastructure is arguably second-to-none, it’s worth noting that YouTube bandwidth usage is so substantial that it “is now the majority of outbound bandwidth” for Google and Schmidt admitted that Google had to “retool the network” for YouTube.
Logically, all of this appears to create a situation in which it’s possible that YouTube’s revenues may never catch up with its costs.
Most importantly, even if they do, it’s difficult at this juncture to see much upside potential for the type of significant profits that would justify a $1.65bn acquisition.
In Cuban’s words, “the YouTube business model is broken and there is no light at the end of the tunnel.“
While I won’t go so far as to say that there’s no hope for YouTube, the rise of Hulu highlights the fact that being the biggest doesn’t always make you the best.
Hulu has demonstrated that Big Media can successfully “catch up” to upstarts like YouTube because content is still king. When you own the content, you can take your time trying to get things right.
YouTube, on the other hand, has demonstrated that popularity doesn’t always translate into profits, let alone revenues. And now that it is looking to cozy up to the owners of more appealing content, it finds that it no longer occupies the position of leverage.
Given the difficulties Google has experienced with YouTube, plus the possible liabilities it faces if unsuccessful in defending against Viacom’s billion-dollar copyright infringement lawsuit, I think it’s safe to say that paying $1.65bn for YouTube looks even more expensive (and risky) today than it did in October 2006.
Coupled with Google’s
on social network advertising, perhaps the biggest lesson Google is learning the hard way is that it’s worth paying a premium for profits – not potential.
It’s ironic that when NBC Universal and News Corp. announced their joint venture, Google reportedly called it “Clown Co.”
Little more than a year later, it looks like it’s the clowns who are laughing all the way to the bank.