Original URL: http://www.theregister.co.uk/2009/04/07/youtube_revenue_fail/

YouTube a 'half billion dollar failbucket'

What this means for musicians

By Andrew Orlowski

Posted in Media, 7th April 2009 18:27 GMT

A financial analyst has cast a new light on Google's ongoing battle with the music business. According to Credit Suisse's Spencer Wang, YouTube will lose parent Google $470m this year, because it can't generate worthwhile income from advertising.

This is interesting, because Google is no tuppeny startup. It's the world's biggest, most innovative and most successful online advertising powerhouse. Which means Google's failure to "monetize" YouTube is down to one of two things. Either there's potential ad revenue for online video, and Google can't capture it yet...or there isn't, and the economics of YouTube means it will always be a liability on the wrong half of the balance sheet.

It could well be the latter - but Wang plumps for the former. Against revenue of $240.9m this year, Wang estimates bandwidth costs are £360.4m and royalties $252.9m.

Wang points out that most ad inventory is unsold. But that's because most of it isn't really worth anything. For every Charlie bit my finger - again! - a royalty-free hit helpfully provided by a sharecropper which clocked up 90m views - there are hundreds of thousands of unwatched video snippets. Advertising on YouTube merely irritates, and the attention wanders between views.

So what's the knock-on for music?

Last year, the UK's performing rights society the PRS [*] was the first major collection society to strike a deal with YouTube, but the two have fallen out over payments, with Google unilaterally removing music videos as a bargaining ploy. Google said it couldn't afford to pay a rate of 0.22p per song. A similar standoff with GEMA, the German performing rights society, means German videos are also currently blocked.

(You may wonder how Spotify, which has a good reputation amongst rights holders thanks to its meticulous licensing, can afford to stream so much music while Google can't. Well that's because it hasn't burned through its venture capital yet. It also suggests that Google, like many billionaires, is extremely mean...)

Of course, there's a third option for YouTube. Its parent company - whoever that may be - may want to cross-subsidize the operation in the hope that will drive traffic elsewhere on the site. Don't laugh - that's exactly what Google's new music service in China does. Google China pays rightsholders much more than 0.22p per song - about ten times as much, according to industry estimates. As Baidu has shown, music drives enormous traffic to the rest of the operation.

If Google can afford to hand over that kind of money to the music business in order to build up market share in China, why can't it afford to do so to British artists and performers?

Answers on a paper model of a custom-fitted Boeing 767 please. ®

*Bootnote: The collection society formerly known as "The MCPS-PRS Alliance" became "PRS For Music" earlier this year.