Should Google dump YouTube?

Analyst Opinion – It’s been two-and-a-half years since Google bought YouTube for $1.65 billion. At the time, the 18-month-old online video sensation was struggling to figure out how to convert its immense popularity into sustainable revenue. It’s still struggling. Which begs the question: Will Google’s patience eventually wear out?

It’s a valid question. Figures just released by Credit Suisse project $711 million in YouTube-related operating costs through 2009. A relatively paltry $240 million in ad revenue leaves parent Google $471 million out of pocket. As the deepening recession continues to send advertisers scurrying for cover, it’s increasingly clear that these numbers won’t improve anytime soon. How much longer can Google keep footing the bill?

Storing and distributing all those videos of kids making fools of themselves in their backyards and pets destroying the house isn’t cheap. While some conventional media providers have toyed with charging subscriptions, I doubt anyone would pay to see teenagers falling off their skateboards. After four years of free YouTube, users feel entitled, and will quickly find other ways to share teen-skateboard videos if YouTube initiates subscriptions.

So that leaves advertising, and to its credit Google has thrown a bunch of different models at the wall in the hope that at least one of them will stick. But advertisers aren’t particularly enamoured of kids on skateboard, either. The typical YouTube fare is too unpredictable, too low-quality and too niche. No one outside the skateboarders’ immediate circle of friends cares, and even if they do they won’t pay for the privilege. Already-frightened advertisers won’t take a chance in this climate of fear. And they won’t buy in when the market improves, either, as there’s simply no monetizable value in homebrewed content.

The answer for YouTube and other properties like it lies in legitimacy. Deals with CBS, Disney/ABC and most recently Universal Media Group to distribute commercial content hold promise. Hulu, the hugely successful site that hosts NBC and Fox shows, among others, has emerged as the first seemingly workable model for legitimately distributed, commercial-grade content that appeals to studios, distributors, audiences and advertisers alike. To its credit, YouTube’s deals and channels point toward a more Hulu-esque future, but as long as they’re buried in a sea of self-produced, low-quality content, advertisers will continue to shun Google’s video subsidiary.

As hugely popular as it is, the YouTube brand remains tarnished by its roots in populist, difficult-to-navigate fare that very occasionally goes viral. And even when something does hit the popularity motherlode, there’s no way to cash in on the resulting traffic spike. Google has learned the hard way that monetizing video is infinitely more difficult than search-related services. It’ll take a lot more time and money – and even that may not be enough.

Google may not be ready to ditch YouTube just yet. But the clock is clearly ticking. As a publicly traded company, shareholders won’t forever accept dropping half-a-billion dollars annually without some potential for eventual profitability. At some point, YouTube either has to start paying for itself, or Google, vaunted champion of converting seemingly impossible properties into gold, will unthinkably admit defeat and move on.

Carmi Levy is a Canadian technology analyst and journalist covered with scars from his years leading IT help desks and managing software development projects for big bad insurance companies. He comments extensively in a wide range of media, and works closely with clients to help them leverage technology and social media tools and processes to drive their business.