Making money off of user generated content is hard

Farhad Manjoo blogs for slate.com on technology issues, and he appears to focus on social media quite a bit. He wrote 2 recent posts that are interesting:

The first post was on the high costs of  hosting user generated video at YouTube titled "Do You Think Bandwidth Grows On Tress?" This post highlighted an analysis by Credit Suisse that concluded that Google lost $470 million running YouTube in the last year alone. Some of the statistics are amazing! According to Credit Suisse's estimates:

• 375 million people around the world will play about 75 billion YouTube videos this year
• YouTube feeds 30 million megabits-per-second into the internet for all of those videos. That's 30 Gbits/second!
• YouTube spends about $250 million a year to acquire licenses to broadcast professionally produced videos.
• The cost of running YouTube for one year exceeds $700 million.
  
• Advertising brings in about $240 million in revenues for 2009, according to the report.

The problem for Google and YouTube is that advertisers are hesitant to show their adds on the site. Nobody wants their brand associated with some of the wierder and more inappropriate content that ends up on YouTube, so they sell adds on fewer than 10% of the videos viewed. If they could increase click-thjrough rates by better targetting adds, or increase the percentage of videos with adds they may actually reach break-even or even run a profit. This leads me to Manjoo's second post.

Today (April 30) he posted an interesting bit of speculation that makes a lot of sense titled "Google's Trojan Horse" with a sub-title of "Did the search giant just sneakily launch a Facebook killer?" He notes that last week Google modified it's personal search feature, adding a link to your Google profile, if you have one, to the results. While this may seem like a small detail, he notes that there may be quite a bit more to it.

Manjoo quotes a Google engineer who blogged that Google is adding profiles to search results in order to "give you greater control over what people find when they search for your name." Manjoo speculates that Google is aiming to take on Facebook, and do it better than Facebook can. He may be on to something.

Google is by far the pre-eminent search engine, so the opportunity to add your own content to Google's people search results for you is pretty compelling. Manjoo went ahead and put references to his Facebook, Twitter and Friendfeed onto his Google profile. Now Google can mine that data and find out all kinds of interesting things about Manjoo - who his friends are, what keywords he uses frequently and so on, without any further action from Manjoo.

Facebook and the other social networks can go that far as well, but Facebook can only use that data when you are on Facebook's site. Google's reach is much larger than that. They can use the infromation to target adds on Google and all of their other sites like YouTube and Gmail. They can integrate your profile information, and your friends profile information, with your Google search information (at least in theory, anyway) and the Gmail info, if you have a Gmail account, and deliver even more carefully targetted adds. Google can also probably spin this into a larger business, allowing other sites to use more carefully targetted adds for you, earning the other sites more click-through revenue for a small fee to Google. It's not clear to me that anyone else has the needed combination of top internet sites, technology  and advertising chops to pull this off, so competing with Google here will be tough.

It remains to be seen if Google really will compete directly with Facebook - as Manjoo notes they already tried once with Orkut, which mostly failed (unless you're in Brazil or India, it took off there). Still, you've got to expect Google to take advantage of this leverage and work furiously at making advertising more relevant and appealing, and Google is probably the only company in a position to make a gargantuan scheme like YouTube turn a profit. Let's hope they make enough that they can start moving more heavily into HD video - evn more network bandwidth required, which drives even more Cisco HW sales.