YouTube’s future (or lack thereof)

Some people marvel at YouTube’s amazing collection of videos, including hundreds of obscure music videos. Others marvel at the company’s bandwidth bill, given that it serves up to 200Tb of traffic on a daily basis. Still others ask hard questions about YouTube’s business model and long-term prospects for survival.

YouTube has received a hefty amount of press scrutiny in recent days, with cofounder Chad Hurley appearing on the cover of the October 16 issue of Forbes magazine. The questions on the lips of most people fall into three categories: how long the company will last, whether it will be sued out of existence, and whether someone is going to swoop in and buy it.

Making a buck

From an exploration of YouTube, a couple of things become clear. First is the relative lack and unobtrusiveness of the advertising. Unlike other sites which force users to sit through commercials or litter web pages with ads, YouTube typically has only one or two ads on a page. That’s great for users, but not so good for the balance sheet.

Hurley describes the site as being "financially stable" and says that its recently signed deal with Warner Music will hopefully be a model for its future dealings with the record industry. In exchange for a share of ad revenue, YouTube will be hosting Warner Music’s entire back catalog of music videos. YouTube uploaders will also be able to use Warner’s catalog in their self-made videos without fear of having the video removed by a takedown notice.

But how much advertising revenue is there for YouTube and the labels to share? Some analysts think there isn’t a lot of it. Speaking to the New York Times, Fox Digital Media president Peter Levinsohn said he believed that YouTube’s ad revenues were on the low side, and after all the partnerships are signed, there might not be enough left over for the company to survive on.

If YouTube started to insert ads at the beginning of videos or went to other, more intrusive forms of advertising, revenues would definitely increase. However, Hurley has ruled that option out, preferring to create "a revenue model that is a complement to the site, rather than being jarring," he told Forbes.

"Sued into oblivion"

Speaking to a group of advertisers in New York last week, Dallas Mavericks owner and dot-com billionaire Mark Cuban predicted that YouTube would be "sued into oblivion. "They are just breaking the law," said Cuban. "The only reason it hasn’t been sued yet is because there is nobody with big money to sue."

Cuban’s comments touch upon an important issue that many others have noticed: much of YouTube’s traffic comes from copyrighted content. Whether it’s clips from The Colbert Report, Saturday Night Live sketches, or Nate’s favorite music video, much of the YouTube catalog consists of video that neither it nor the poster owns the rights to.

YouTube may be shielded somewhat by the oft-reviled Digital Millennium Copyright Act, which has a Safe Harbor provision giving web sites a measure of protection against liability for posts made by their users. However, when a site’s business model is built on infringement, then the issue of liability takes on a different look.

In contrast to Warner Music, Universal Music Group has taken a rather dim view of YouTube’s activities. CEO Doug Morris has painted YouTube and MySpace with the copyright-infringer brush, saying that they "owe us millions of dollars" for infringement.

Despite attempts to position YouTube as an MTV for the Internet (thinking back to the time in the distant past when MTV actually showed music videos), a playground for advertisers, or a ready-made audience for independent film makers, questions about legal liability still surround the service. Hurley minimizes such concerns, telling the New York Times that "there’s going to be bumps along the way, but we’re trying to make an effort to make the new model work for everyone."

If those bumps include a multimillion-dollar infringement judgment against YouTube down the road, the "new model" may not have much of a chance.

Angling for a buyout?

Hurley says the company isn’t for sale. After putting early bandwidth bills on his credit card, YouTube has raised around $11.5 million in venture capital funding since November 2005. In addition to the costs of its 60 or so employees, YouTube’s monthly bandwidth bill is estimated to be around $2 million. Although Hurley claims that they’ve managed to get their bandwidth costs down, that’s still a big chunk of change every month. If their advertising revenues are as low as Levinsohn believes—and YouTube has shunned the more lucrative forms of advertising—YouTube’s creators may be hoping for an angel investor.

That may be a very slim hope. Mark Cuban advises Hurley and cofounder Steve Chen to "sell if you can," while predicting that the "minute the labels see even the hint of deep pockets, they are going to come after you for all you’re worth."

The looming question of legal liability is going to give any potential buyer second thoughts about buying YouTube, no matter how large the audience is. Right now, the buzz surrounding the service is positive. There’s the new deal with Warner Music, the Paris Hilton "brand channel," and a smattering of other video offerings that may turn into revenue generators for the company. However, just because one label has made peace with YouTube, it doesn’t mean that the others automatically will. The threat of lawsuits is still significant, and is likely enough to scare off many would-be suitors.

The future of YouTube

Does YouTube have much of a future in front of it? I, along with millions of other users, certainly hope so. Like it or not, its large audience and immense amount of traffic demonstrate that there’s a huge audience for a searchable, eclectic mishmash of video content on the Internet.