User Generated Web Video: FAIL

I never thought buying YouTube was a good idea for Google. First of all there’s all that legal liability for all that pirated content that I believe has a good chance of coming home to roost. But that is not really the biggest issue.

The problem is it can't make money.

The economics of user generated video will not work for the foreseeable future. There are numerous reasons for this. I have outlined them below.

• Hosting is expensive because, unlike TV, every incremental viewer costs money, so you have to generate a lot in advertising to support it. Right now the actual user generated video revenue number is just a whisker above zero.
• Producing a video ad is expensive which leaves out search advertisers who would prefer to buy keywords and to spend the *zero* dollars it costs to produce a keyword ad.
• Mainstream advertisers that actually can afford to create good video ads won’t advertise on user generated video because they don’t want their ads stuck in front of some sad looking kid swinging a broom stick around and pretending to be Darth Vader – or worse.
• It’s not clear that pre or post roll advertising works anyway – either for the viewer or the advertiser.
• The real moneymaker for Internet advertising is keyword based search advertising. At no time in the near future will keyword advertising work for web video because there is no accessible text.

And so, for all you startups that have as a business model becoming the next YouTube, look out. Because YouTube, by any measure other than having found a gluttonous money-is-no-object benefactor, was a FAIL.

Unlike traditional business, getting profitable and then selling does not appear to be an option. Your only exit will be, after having lost a boatload of investor money, to sell your sinking ship to a big web player who is not Google, since they already have their own video fail. The key acquisition criteria will be that the acquirer is in desperate need of help flushing its money down the toilet.