June 29, 2006 5:56 PM PDT

Is YouTube a flash in the pan?

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

Josh Martin, an IDC research analyst, issued a report Thursday 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. Fans of San Mateo, Calif.-based YouTube are even likely to buck 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 owns more than 40 percent 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, and more than a year since YouTube was founded, 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 clamoring 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.

In February, NBC requested that YouTube remove a clip from "Saturday Night Live" called "Lazy Sunday," that was widely viewed on YouTube, and the company complied. Since then, YouTube's relationship with NBC has vastly improved. This week, the two companies announced a cross-marketing deal that calls for NBC to post promotional clips from shows, such as "Saturday Night Live" and "The Tonight Show with Jay Leno," on YouTube.

But this isn't what YouTube fans want, says Martin. They don't want promotional clips that the network chooses, writes Martin, they want the funniest, edgiest skits SNL has to offer, or at least some of them. The problem, said John Miller, NBC's chief marketing officer, is that such SNL snippets are already offered on iTunes for a fee. Cable station E Entertainment also owns the broadcast rights to SNL segments. Making them available for free on YouTube isn't in anyone's best interest, said Miller.

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."

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7 comments

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The entire premise of this article is wrong from the bottom up
The same article could be written about Google and Craigslist frankly and were many times.

Youtube is selling vlogging social networking. Its users are not about to switch because there are ads on the pages they browse through.

Beyond the ads, which will be forthcoming with a sweet audience of teens and 20 somethings for advertisers to feast on, youtube can sell content just like google video can. Mixing in episodes of tv shows will be a nice cash bonus, though the pay content is hardly going to take over the site. It's easy enough to set up a running tab of popular content for youtube to market.
Posted by gubbord (171 comments )
Reply Link Flag
Fear of the New
YouTube has essentially the same architecture as MySpace, and
the last time I checked the latter was doing just fine with their
ads, despite the continued free membership.

According to <a href="#">CNET News</a> (sorry if
that comes out like a bunch of code): Click fraud is perpetrated
in both automated and human ways. The most common method
is the use of online robots, or "bots," programmed to click on
advertisers' links that are displayed on Web sites or listed in
search queries. A growing alternative employs low-cost workers
who are hired in China, India and other countries to click on text
links and other ads. A third form of fraud takes place when
employees of companies click on rivals' ads to deplete their
marketing budgets and skew search results.

Advertisers gaining money from Google Adwords from a
Metallica search on YouTube isnt click-fraud. If that were click-
fraud, then every instance, every mention of somebodys
trademarked and copyrighted name would have to be
considered for some compensation.

The fact that the "channel" being watched is pirated does not
mean that the ad revenue potentially earned from that same
search is illegitimate.

Besides, YouTube is fun. They'll have to be stealthy with their
ads though. Maybe cleverly placed videos that are actually ads.
Posted by Bellinger (3 comments )
Reply Link Flag
Video piracy in google
There's a human need to communicate with each other and we use every medium available to us, from talking to the phone, chatting using an im program, listening to the same music, or even watching the same video clips. In the end, young people don't know that it's wrong and old people simply don't care.

The price of a pirate free youtube is eternal maintenance. They would have to constantly be searching and removing any content that's copyrighted, leaving only the amateur videos. It's not an impossible task, just very time consuming and in the end, expensive. After all, they'll have to hire someone to sit there 9-5 and flag videos for deletion.

Another solution would be a screening process that must be finished by human eyes. Someone would have to watch the video and ok the contents. It would slow the addition of videos to the website, but they would be able to screen out pirated content as it comes into the system.
Posted by thedreaming (573 comments )
Reply Link Flag
36 million dollars
...is the amount that youtube has reportedly raised in funding. how did they do this without a business model?
Posted by emehrkay (13 comments )
Reply Link Flag
Amazing
That was one of the funniest paranoid conspiratorial rants I have read in awhile. Thanks for the laugh. Oh and by the way, the amateur videos are the most popular clips by far on the video sharing sites, not the pirated ones you go went ape about. The most paranoid and judgemental people are usually the ones who have never seen or know about the people/places/things that they are complaining about.
Posted by tsm26 (81 comments )
Reply Link Flag
Whoops
Meant to put my comment under the "thousands of google ads" comment. I really wish they would allow the writers to edit or at least move their comments.....oh well.
Posted by tsm26 (81 comments )
Link Flag
Comparing it to Napster's demise is plain RETARDED
There is no such thing as bad publicity. They own 40% of the market, the name is sinonimous (did I spell that right?) with video-on-the-web.
Napster was not abandoned because it was trying to go legit. It was KILLED first then it was attempted to be resurrected from the ashes, however by the time they got their sh*t togeter there were already too many sharing services and the iTunes took the crown.
Posted by Montevale (31 comments )
Reply Link Flag
 

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