YouTube’s ultimate untapped revenue stream

YouTube’s ultimate untapped revenue stream isn’t ads. Ads will bring in some money, but they are not the complete revenue solution YouTube is looking for. For a little perspective, start with a quick review of VC Fred’s post about YouTube’s potential revenue. Fred does some really rough calculations to show how much money YouTube could make if they sold 10 second pre-roll video ads before every video. First of all, I like Fred’s idea of sharing revenue with the person who uploaded the video. This sharing part is crucial for making YouTube a platform; if an amateur can upload a clever video that’s viewed half a million times, and pocket a nice chunk of change as a result, YouTube has just made itself indispensable. But for goodness sake, pre-roll ads aren’t the answer; they are annoying, plain and simple, and if YouTube adopted them, they would be opening themselves up to attack by a more user-friendly competitor. There’s a better way to do video ads, and an even more important revenue stream beyond that.

Post-roll video ads are the answer to the ad equation. YouTube may not be able to charge as much for them, but at least post-roll ads won’t alienate users. Just roll the ad smoothly onto the end of the video, and most people will watch it simply because there’s something still playing, even if it is just an ad. The cool part is, the ads can grab people’s attention by being clever. Then, the viewer can link to the associated website if they’re interested. It’s more engaging than regular TV ads at least, and since YouTube serves a huge amount of videos, the ad revenue would amount to a substantial pile of dough.

I said above that YouTube may not be able to charge as much for post-roll ads as they could for pre-rolled. Well, this is not necessarily true. YouTube can detect if a user watches at least half of an ad before clicking away, and they could use this knowledge to charge advertisers only for ads that are at least mostly viewed. Since the whole point is that the ad be viewed, YouTube could very well charge just as much for post-roll ads. Not everyone will stick around to watch the ad, but then again, pre-roll ads would annoy some people enough to have them click away, so I’m betting it balances out. If I’m right, post-roll is the logical choice simply because it’s less annoying to viewers.

Viewers know YouTube has to make money somehow to keep their valuable free service afloat, and they won’t mind the post-roll ads because at least they have a choice to watch or not. YouTube could even entice users to watch the post-roll ads by having an ongoing contest that places a “golden ticket frame” at the end of random ads. If the user sees this “golden ticket frame” and clicks, they win money. By setting aside a portion of their revenue for this fun contest, YouTube could actually increase the number of ads viewed and thus the overall size of their revenue pie.

The prospect of YouTube making money with ads is very attractive, but before they can introduce them, they must take steps to minimize their chances of being sued for making money off of content they haven’t licensed. YouTube has to form a mutually-beneficial relationship with the major content providers. Funny enough, the way to do this leads to their ultimate revenue stream and to their evolution into a super video platform and new media empire.

YouTube has to sell viewer-customized dvds. Viewers should be able to make playlists and then buy them from YouTube. YouTube would burn them on DVD and send them out in the mail. YouTube would keep high-quality versions of each video available for burning to DVDs. YouTube would work with all the major content providers to sell their content in these microchunks. So episodes of Lost and CSI would be available on YouTube right after they air. If the studios want to release a complete DVD later, they can do that, but they can also start making money right away via this YouTube DVD strategy. What is perhaps the coolest element is that small versions of all this content will always be available uncut and free on YouTube. This is free marketing for the higher-def versions of the content that viewers will want to buy, view on their TVs, and archive.

The sad truth is that we are a few years away from having broadband that is fast enough to stream DVD quality content in real time. Also, we are at least that far away from having trivially-cheap digital storage to archive our high-quality video content on. This YouTube DVD strategy offers a solution to both the broadband and storage problems. Plus, this strategy is more in tune with how internet users look at content. Microchunks is the key word nowadays. Apple’s selling single songs rather than only whole albums is perhaps the most salient example.

YouTube should hash out a licensing deal where all players make money. Their proposition to content makers will be that YouTube will rip and store high quality versions of their videos for free. And then, YouTube will market this content via their already established viral machine. Then, they will provide the custom dvd solution so the providers can make money without having to figure out a similar system themselves. This is a winning proposition all around because everyone makes money and the viewers get access to premium video content like never before. I just know YouTube would win my heart for allowing me to re-watch Lost the day after it airs. Then if I could burn that episode to DVD along with my favorite Ask a Ninja episodes, I would be in hog heaven.

I predict the viewers would respond to this model like nothing we’ve ever seen before, winning YouTube mass adoration along with the ultimate spot in the video distribution channel. It’s not like this idea is that outlandish either. Just a while back Slashdot reported that “Amazon.com and CBS have partnered to offer a la carte news clips on custom-made DVDs. Pay $24.95 and you’ll get 10 clips or 90 minutes, whichever comes first.”

I’m telling you, this is where video distribution is going. If YouTube can get there first, well, they could be one of the largest media empires ever by simply being the best aggregator of video content that the world has ever seen. YouTube is starting on this path by adding all the music videos ever made. Now they just have to add the DVD burning element and pitch it in the right way to the major content providers.

Of all possible competitors, Amazon is their closest foe since they are already hip to the DVD burning strategy and could implement this idea quickly. But Amazon doesn’t have the critical mass in online video that YouTube does, so the crown is YouTube’s for the taking. That is unless MySpace wakes up to this idea. MySpace has an online video option, plus a huge audience, plus the content from Fox, plus a hoard of cash to bank roll the DVD burning solution. MySpace, not Amazon, is YouTube’s primary competitor. In fact, if News Corp wanted to wipe the floor with YouTube, all they’d have to do is follow the YouTube DVD plan I’ve outlined here before YouTube does, and YouTube would be decimated.