To help boost ad revenue, the Google-owned video site is counting on new partnerships with media giants such as Sony Pictures and CBS
Google (GOOG) is setting up partnerships with big media companies that would help it generate more advertising dollars from the millions of videos hosted on YouTube. This month, YouTube added sections for movies and TV shows and announced deals to bring content from Sony Pictures (SNE), CBS (CBS), MGM (MGM), Lions Gate Entertainment (LGF), Starz (LMDIA), and others to the site. Almost three years after purchasing YouTube, Google is taking the boldest—and some say smartest—steps yet to wring profit from its $1.65 billion buy.
By growing its library of professionally produced content, Google aims to make YouTube a more attractive destination for advertisers. "As a repository of user-generated content, YouTube was not going to make it," says Youssef Squali, analyst with Jefferies & Co. "They're putting together the building blocks" for profitability, Squali says.
By many estimates, Google loses hundreds of millions of dollars on YouTube each year. Credit Suisse (CS) analysts believe Google makes about $240 million in annual revenue from the site but spends $711 million, partly for bandwidth from Internet service providers such as Cogent (CCOI) and partly to license content from providers such as Universal Music. Other analysts and people close to YouTube say the figure is too high, though Google doesn't disclose financial figures for the division. A YouTube spokesman says analysts often overestimate figures for such expenses as bandwidth and storage.
Marketers have largely balked at the unpredictable and sometimes racy quality of video clips on the site. "Advertisers were reluctant to show ads next to content they didn't really know," says Jean-Phillippe Maheu, chief digital officer for the North American arm of advertising agency Ogilvy & Mather Worldwide. Google also avoided placing ads next to content that may have been posted without the creator's permission. "We only run ads on partner videos, and not all partners choose to run ads on videos," says YouTube spokesman Aaron Zamost. Whatever the reason, ads show up on a small portion of its videos—from 3% to 9%, according to estimates by researcher eMarketer.
YouTube's Bold Move Toward Profitability