YouTube outlines how it plans to make money

Elise Ackerman
San Jose Mercury News (MCT)

SAN JOSE, Calif. -- It has been Google's $1.65 billion question: How to convert YouTube's whopping popularity into ad dollars without turning off the site's enthusiastic users?

Google's answer: semi-transparent ads that appear as strips across the bottom of videos.

For months, Google engineers and salespeople have brainstormed about how to make money off the freewheeling video-sharing site. They didn't want turn it into a corporate marketing vehicle. But advertisers were wary of where their ads showed up amid YouTube's mix of quirky, fascinating, bizarre and plain gross videos.

Google decided to offer marketers a new type of ad that will appear in select videos. Users can click on the ads, which pauses the video and launches the commercial.

Or they can ignore the ad, which will disappear in 10 seconds.

So far, Google said, more people are clicking. Eileen Naughton, Google's director of media platforms, said between five and ten times as many people are checking out the in-video ads compared to the number who view regular display ads -- banners or boxes on Web pages.

Advertisers who have tried YouTube's new program confirm Naughton's numbers.

"It was really engaging," said Erin Foxworthy, a spokeswoman for Palisades Mediagroup, a media-buying firm. Palisades tested the new format with an ad for "Who's Your Caddy?", a comedy about a rap star who tries to join a country club.

Foxworthy said the producers, the Weinstein Co., wanted to reach young, urban, African Americans interested in hip hop and rap. The YouTube ad played on music videos, which typically attract that audience.

Foxworthy said the ad worked great and that she would use the format in the future, provided the price was right.

Unlike Google's traditional text-based search ads, which are auctioned off, a traditional sales force will sell the video ads.

Google didn't disclose how much the ads would cost.

Current video ads cost nearly twice as much as display ads -- sometimes even exceeding the expense of traditional media, like cable television. According to a recent report by Lehman Brothers, video ads can cost as much as $40 for each 1000 viewers, compared to $25 for display advertising.

People who watch video on the Internet generally don't like advertising. In a survey by BurstMedia last year, 77.5 percent of respondents said the ads were intrusive.

Still, more than half said they continued watching after the advertisement -- and remembered what it said.

New York research group eMarketer believes video ad spending will grow to $4.3 billion in 2011, up from $775 million this year.

YouTube was collecting a bare fraction of video ad spending when Google acquired the startup in November 2006. Throughout the entire year of 2006 YouTube's revenues totaled $10.6 million -- less than what Google paid in licensing fees to a single copyright holder in order to close the deal.

The costs for Google have continued to mount. YouTube currently accounts for about 10 percent of all Internet traffic. According to company officials, it streams 1.9 billion minutes of video a month, a growing expense for Google.

In addition Google is fighting a billion-dollar lawsuit brought by Viacom, which accused YouTube of massive copyright infringement after the two companies failed to reach a licensing agreement.

If the new ad format is successful, it could represent a way of settling such disputes.

Google is sharing the revenue from advertising with content producers and is highly selective about the kinds of content it will match with advertising.

"We are not going to be placing a marketer's ad across YouTube at large," Naughton said.

Ford Models is the type of content producer Google is embracing. The modeling agency distributes videos showing its models giving beauty, exercise and fashion tips all over the Web.

Mitch Grossbach, general manager for digital content, said Ford was eager to try YouTube's ad format and has been delighted with the result. "It's a fantastic way to implement advertising," he said, noting, "the digital media business at Ford is a business and not a hobby."

Greg Sterling, an analyst with Sterling Market Intelligence, said it now seems likely that advertising sales from YouTube will justify the $1.65 billion price Google paid, though it could take some time.

"They will make some meaningful revenue off of it eventually," he said.





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