Friday, April 28, 2006

 

Hottest Spot in the TV Industry: YouTube- the Video Social Network

The Popularity of YouTube

YouTube, founded in January 2005 by Chad Hurley and Steve Chen, both former employees of PayPal (among the first 20), has attracted 9.1 million users, generating 30 million video views and receiving 35,000 video uploads per day as of February of 2006 according to an article in the April 10 issue of Business Week. This site allows people to upload videos and to share and search contents with ease. This is due to growing broadband penetration and technological advancements, giving amateur video makers an opportunity to show their work. YouTube is designed to let anyone participate in the contribution of content, so in addition to the amateur home videos from around the world, people can also find clips from old and current TV shows and movies, essentially anything, on the YouTube site. This is why YouTube has become so successful within a very short time. (It allows customers to find the videos that can’t be found in stores or seen on traditional TV networks or cable channels). The most important element of YouTube is that this start-up knows what its customers want and it tries to avoid pounding its customers advertising.


Current Challenges and Competitors

Because anyone can freely upload videos onto its website, YouTube’s users can upload clips that are still under copyright, such as music and sport videos, current news, movies and TV shows, though this might put YouTube at risk of copyright infringement. In addition to this challenge, YouTube is also facing direct competition from other video-sharing social websites, especially Google Video and MySpace.com.

Google Video:
So far, YouTube has far better options for people to share videos than any other Web 2.0 video sites, including Google Video. However, taking advantage of its user-base of 80 million, Google Video can easily obtain partnerships with top-tier content providers, such as Sony, NBC, and CBS, and then provide more old/new and high quality TV shows to meet the long tail demands. In addition, Google always manages to improve its products to become slicker and more powerful. The company has recently posted a position hiring for "an Interactive TV Product Manager and Sofware Engineers with experience in 'emerging TV standards' and 'deploying robust, high-volume applications for consumer devices'", and revealed its vision: TV commercials contextually targeted to a program's content, and Interactive TV social network.

My Space:
MySpace Video is not nearly as robust in terms of content and functionality as YouTube - it appears to be mostly homemade videos, and searching for video content is not as easy. However, MySpace is aggressively promoting their video capabilities within the site. It has more than 73 million registered users, and this allows easy access to videos, and attracts independent video makers and advertisers. MySpace is the leading source of traffic for YouTube, accounting for 23% of its upstream visits for the week ending April 1, 2006 according to Hitwise data. It makes sense that MySpace would launch its own video service. Now that MySpace is owned by News Corp, it has the perfect distribution mechanism for Fox content, and could be testing out its video capability with viral videos, which have been so successful for YouTube.

Another challenge, and I think it’s the most significant challenge, is that YouTube, so far, doesn’t have a clear business model yet. They believe people don’t like advertisements while watching videos, so they are moving cautiously toward the ad-based business model. Only until recently did it rely exclusively on a few context-sensitive text ads powered by Google AdSense, and they are planning to bring in more relevant ads to the site.

Moving forward to 2010

Recently, YouTube scored an additional $8million from its backer VC, Sequoia Capital, after an initial $3.5 million last November. Sequoia Capital partner and YouTube board member Roelof Botha said:

“YouTube is at the forefront of a cultural shift in digital media entertainment and media distribution and we are delighted to continue our support. “

Based on our team’s analysis of the entire TV industry, the indexing (information aggregator) layer would catch the most revenue value. So, being such a successful video aggregator with a high expectation from its investor, how should YouTube move forward to 2010 and beyond to maintain its popularity and reach, as well as make money at the same time? Here are some potential scenarios of how the future will play out for YouTube:

1. Best Scenario:
Introduce a brand new business model, such as an innovative ads-supported revenue model and YouTube could get to stay as an individual company and keep its broad base of supporters, and strongly differentiate itself from other video-sharing sites, and lead the culture.

2. Worse Scenario:
Unable to leap the chasm and fail to generate sufficient revenue to keep the company going.

3.Likely Scenario:
It is very likely that YouTube gets bought by other company. In my opinion, companies that would buy YouTube are Yahoo! and MySpace. YouTube’s site capabilities and features are pretty much like flickr, the largest photo-share social network site. So, it is very likely that Yahoo! can integrate YouTube into its product lines. As far as MySpace is concerned, I think both YouTube and MySpace appeal to people from the same segment, that is, people who are more into independent brands, and the non-mainstream subculture. Again, MySpace is the leading source of traffic for YouTube, it is very possible for MySpace to buy YouTube to enhance its video-sharing capabilities.

Therefore, YouTube needs to do the following in order to turn popularity into profit:

1. Create an innovative and suitable business model:

According to Hitwise, the average session time for a visit to YouTube is 14 minutes. So, this site should be an ideal channel for businesses and agents to display their ads. However, one of the main reasons that YouTube is able to generate so much traffic is because there are limited ads bombarding the audiences. People don’t like to see ads when they are watching videos, because it is too distracting. Too many traditional banner ads would probably turn people away. Therefore, ad-placement and timing are important. It looks like video-based advertising is a potential approach, especially the ones done in a consumer-friendly way. Seeing YouTube’s customers are more into independent brands, the ads should be relevant, and tailored toward the preference in this targeted market.

2. Partnerships:

YouTube should build partnerships with TV and movie content providers in order to legally post their clips and trailers before or after they have been broadcasted. Again, YouTube needs to carefully choose the companies/brands they will partner with, and avoid content that is too main-stream in order to meet its customers’ taste and differentiate itself from competitors, particularly Google Video.

3. Merge with MySpace:

I think many companies are probably waiting to acquire YouTube, since it possesses huge money-making potential. If MySpace is on the list, it would be a great candidate. MySpace has a very similar target segment as YouTube, which is into independent brands and non-mainstream content. By integrating two companies on one platform . a strong business model may be created Furthermore, since News Corporate owns MySpace, it will be convenient and cost-saving for YouTune to obtain TV content.

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