Schmidt: YouTube + ads = 'holy grail'

Google CEO Eric Schmidt has spoken more than once this year about monetizing YouTube, but he showed some signs of patience on Thursday for finding a new, good way to sell ads on the video-sharing site. And when Google gets the mechanism right, Schmidt said he expects to hit the mother lode.

"There will be new monetization forms. That is what we are seeking. That is the holy grail," he said on a conference call after Google reported disappointing second-quarter earnings. "When we find it, it (monetization) is likely to be very large because of the scope and scale of YouTube."

YouTube has tried pre-roll and post-roll adds--those that show before and after a video plays--and "in-the-chrome ads" that are placed in the frame around the ad. So far, Schimdt said, the company is happiest with in-video ads that are embedded across the bottom of the video area itself.

"That looks like a winner. We've also had success with gadget video, and gadget video ads might be successful because they allow you to tell a story," Schmidt said. But don't expect it those to be the last of Google's YouTube ad formats. "We're working on revenue scenarios and newer product. I personally do not believe the perfect (YouTube) ad has been invented."

Google faces an expensive, high-profile lawsuit from Viacom regarding copyright video on YouTube. But Schmidt wants to turn such potential rivals into allies through a program that identifies infringing content then lets the copyright holder share in ad revenue from the video. Studio Lions Gate entertainment just signed such a partnership with Google.

"Lions Gate has good judgment that rather than sue those customers (they'll) show an ad," Schmidt said. "We think those kinds of models are sustainable."