How Does Google Get a $1.65B Return?

With its $1.65 billion YouTube purchase, Google bought a site with user stats that marketers drool over, and a phenomenon at the epicenter of the video on the Web explosion.

Market research firm ComScore said the YouTube streamed 649 million videos in July. YouTube claims viewers watch over 100 million videos on its site daily. A Nielsen//NetRatings report from July said that YouTubers average almost 30 minutes per visit to the site.

So after Google’s news that it bought YouTube yesterday in a stock-for-stock transaction, the $1.65 billion figure begs the question: How is Google going to squeeze a return on its investment?

YouTube is popular, but analysts will tell you it’s not a cash cow, at least not yet.

But the eyeballs it attracts leads to the obvious for Google: advertising. It’s how Google’s come to be able to afford billion dollar acquisitions in the first place.

But Google made most those advertising dollars off the sponsored links you’ll find on Google search results pages. Can Google earn a full return on its investment with sponsored search results in YouTube’s video search engine?

It’s not likely, JupiterKagan Research analyst Emily Riley told

She said YouTube visitors don’t search so much for videos as much, so sponsored search results won’t be as relevant and clickable. For example, YouTubers aren’t looking for a candy site such as when they search for Mentos videos.

Riley said any site with as much traffic as YouTube has could earn reasonable search advertising revenue, but not enough to make back $1.65 billion.

But what about Google’s other moneymaker, its AdSense product?

AdSense advertisements are the banner ads you see on Web sites that are full of blue links to other advertiser Web sites. The links that show up in the banner are supposed to be contextually relevant to the content on that page.

CEO Eric Schmidt specifically pointed to AdSense partnerships as a big reason for Google’s success in its last quarter.

For AdSense to make money, users have to click on a lot of those links in those banners and that’s not likely to happen for at least two reasons, Riley said.

First, visitors to YouTube aren’t typically in research or purchase mode. They’re looking for entertainment, rather than, say, the best deal on high definition televisions.

Second, Riley said that even if users are in a buying mood, the text advertisement for what they might want to buy isn’t necessarily going to show up in that banner ad next to the video they are watching.

An AdSense banner displays certain text ads based on keywords on the page in which it is inserted. YouTube video pages are not “keyword-friendly,” Riley said. There isn’t much text on the page besides user- comments and video titles.

For most of its life, Google has stuck to one type of advertising: the transactional sort where a user clicks because the vendor who paid for the ad is selling something the user wants to buy and is in a search mode to find it.

On the other hand, large Internet companies such as Yahoo have made money selling brand advertising, the type that cements mind-share more than converting a purchase right then and there.

Google has largely ignored this aspect of the advertising business. But in May, it began selling video ads in which advertisers pay each time a user clicks to play videos contextually embedded on a Web site. Call it Google’s AdSense-without-the text — not transactional advertising but brand advertising.

And it might have a future on Google’s new property called YouTube, Riley said.

YouTubers who are not in the buying mood are almost certainly in the video watching mood.

If Google can use the YouTube technology that recommends videos based on the last video a user watched to display relevant advertisements, Google might get many clicks toward that $1.65 billion.

But first, Google has to guarantee brand advertisers that their videos will not be displayed next to copyright-infringing content.

That’s where the Sony BMG and Warner Music revenue-sharing deals Google signed yesterday come in, she said. Only if other publishers follow can the count toward $1.65 billion can start.

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