Google’s challenges in monetizing the world’s most popular online video service, YouTube, are well-known.

Earlier this year, Google CEO Eric Schmidt categorized monetizing YouTube as a priority.

Last week, Google announced what may be its most promising monetization product yet – YouTube Sponsored Videos.

Ironically, it’s one of those “duh” concepts that seems blatantly obvious after the fact.

Video creators bid on keywords related to their videos and the winners of these auctions will see the ad for their videos listed under “Sponsored Videos.”

Yes, YouTube Sponsored Videos is essentially Google AdWords for the YouTube platform.

Naturally, Google thinks YouTube Sponsored Videos is the best thing since sliced bread.

YouTube co-founder Chad Hurley stated in a video:

“This is a powerful way for users and advertisers to get discovered. And anyone will be able to promote and sponsor videos in a relevant and democratic way.”

YouTube product manager Matthew Liu added in a blog post:

“YouTube Sponsored Videos is our new advertising program that enables all video creators — from the everyday user to a Fortune 500 advertiser — to reach people who are interested in their content, products, or services, with relevant videos. Anyone can use Sponsored Videos to make sure their videos find a larger audience, whether you’re a startup band trying to break out with a new single, a film studio seeking to promote an exciting movie trailer, or even a first-time uploader trying to quickly build a following on the site.”

Sounds good, right?

To an extent, yes. YouTube Sponsored Videos is a no-brainer offering for YouTube and I do think it will be relatively ”successful.”

But at the same time, I doubt that it will do for YouTube what AdWords did for Google.

There are three primary reasons:

  • The market is far smaller. The beauty of AdWords is that anyone with some sort of website can advertise. This market for AdWords includes individuals, small businesses and large corporations. Essentially if you offer anything that someone might search for online, AdWords is a great means to try to advertise.

    The market for YouTube Sponsored Videos, however, is far more limited – it only serves entities that are producing videos. Obviously, most individuals, small businesses and large corporations are not producing videos for distribution on sites like YouTube (there’s no perceived value, there’s no budget, production resources are lacking, etc.).

    I don’t expect this to change anytime soon and therefore I can only conclude that the market for YouTube Sponsored Videos will be many orders of magnitude smaller than the AdWords market.

  • ROI is harder to calculate. One of AdWords’ strengths is the ability for advertisers to track their campaigns from click to sale.

    If I sell widgets, AdWords is instantly appealing. I create an AdWords campaign promoting my widgets to people who are searching for widgets, I track clicks to my website and can monitor how many of those clicks turn into sales.

    YouTube Sponsored Videos is a much more complicated proposition for advertisers. Before I can even create a campaign, I have to produce a video. The costs of production must be factored into my ROI formula.

    Once I have my YouTube Sponsored Videos campaign running, I can monitor how many views of my video are generated by the campaign but it’s far more difficult for me to directly track how many of those views result in the action I desire.

    But calculating ROI is not the biggest challenge – generating ROI is. As an entertainment platform, it stands to reason that getting a YouTube user to click on an ad to watch my “commercial” is going to be more challenging than getting a Google user searching for “widgets” to click on my AdWords ad.

    And if the goal of the video I’m advertising is to drive traffic to my website and to drive sales, I have to hope that my video is compelling enough to convince users to leave YouTube and head over to my website. If it isn’t as compelling as I hope it is, I will be stuck paying for viewers who never made it to my website in the first place.

    In short, for most advertisers, more steps are required to generate the desired action with YouTube Sponsored Videos.

  • There is some risk. Google will need to balance the desire to make money with the perceptions of the YouTube community.

    If YouTube Sponsored Videos is abused to promote “spam” videos that are of no interest to users, not only will it dilute the value of “sponsored videos,” driving perceived ROI for advertisers down, it could also drive some users away.

At the end of the day, YouTube Sponsored Videos demonstrates that Google is very serious about making money from YouTube. As it should be.

But YouTube Sponsored Videos doesn’t look to be the monetization miracle that I think Google is looking for.

Perhaps, however, it doesn’t need to be. If Google is able to build a “portfolio” of YouTube revenue streams (and to deal with outstanding issues), it may find that miracles aren’t all they’re cracked up to be.