Can YouTube make money or will it be the next Napster?

30-06-2006

by Silicon.com

As video-sharing site YouTube.com rides an enormous wave of popularity, a research firm has expressed doubts about the company's business prospects.

Josh Martin, an IDC research analyst, has issued a report asserting that YouTube will struggle to squeeze profits from its video-sharing business, primarily because its audience has grown accustomed to paying nothing for the service. YouTube fans are even likely to shun attempts to post ads on the site because YouTube has largely been ad-free since its official launch last December, according to the report.

"In order to begin addressing its issues, YouTube must implement myriad changes," Martin wrote in his report. "The truly difficult task for YouTube is to change the entire culture of the viewers that propelled it to overnight success."

YouTube spokeswoman Julie Supan declined to comment on the report but did say that company executives have offered Martin "no insight into our business".

YouTube, which was founded more than a year ago, owns more than 40 per cent of the burgeoning video-sharing market and more than 13 million people log on to watch homemade movies that are uploaded by fans of the site every month. But even while the company's profile mushrooms, executives have yet to roll out a business model.

YouTube representatives have said the company will sell ads, which will be introduced slowly in coming months.

According to Martin, YouTube has little choice but to take the advertising route. The site's audience is likely to be unwilling to pay for subscriptions or downloads of premium content. He adds that the advertising model is no sure bet.

Introducing ads may alienate viewers. In such a case, "how long until a [YouTube competitor], without advertising, emerges to siphon the YouTube defectors?" Martin asked in his report.

There's also the question of whether YouTube can persuade blue chip companies to advertise on the site. There's been much speculation in the media on whether some of the content on YouTube is too unseemly to attract big advertisers.

YouTube doesn't prescreen any content. The majority of the video clips involve budding musicians, comedians, filmmakers or just people looking for attention. Other clips are grittier. A viewer can often find clips of violent accidents and bloody shark attacks. Sometimes users post clips that include nudity and sexually graphic images.

And then there's the question of users uploading content that's owned by someone else, including television programmes.

Martin said in his report that he expects copyright issues to plague YouTube and its rivals well into the future.

He compares the challenges ahead of YouTube to those faced by Napster as it tried to transform itself from a free file-sharing system into a paid-subscription service.

"In the late 1990s Napster... achieved similar cult status [as YouTube] but was quickly abandoned when it attempted to become a legitimate business," Martin wrote.

For some entertainment sites, going mainstream has meant losing their core audience, who are attracted to more rebellious sites.

"Eventually, the paradigm will shift, where viewers accept watching advertisements to support their free video," said Martin in his report, "but not likely quickly enough for YouTube to reinvent itself in the short term."

Greg Sandoval writes for CNET News.com.

Reprinted with permission from Silicon.com