The Monetization of YouTube Begins

Fact: People love watching YouTube videos.

Fact: People don’t like advertising when watching videos, especially if it happens before the clip begins.

Challenge: How does Google monetize YouTube so it can get an ROI on its $1.65-billion investment.

Solution: Something called an overlay that appears on the bottom fifth of the frame about 15 seconds after someone starts watching a video. If the ad is interesting enough that someone clicks on it, the ad will start and the video will stop. The New York Times has all the details.

First take: Interesting proposition that the entire video industry will be watching with great interest to see if consumers actually like the format and, most important, click on the ad videos; and whether it’s something advertisers will find appealing. So far, pre-roll ads have seen modest success while post-roll ads only works if they’re compelling – Rocketboom, for example, has used this tool often.

Clearly, there’s a lot at stake for Google, which desperately needs to find a way to squeeze more revenue out of YouTube to justify the acquisition and attract more content owners who have been sitting on the sidelines before getting into any kind of partnerships.

The other challenge facing Google is coming up with a revenue-share formula that’s enough of a win-win for everyone involved. For all the success of the AdSense program, content owners only make a small portion of the revenue generated. Google is talking about a revenue split, which, in theory, sounds far more appealing than AdSense.

The bottom line is online video has to be monetized so content producers will start distributing their best material, which will attract more consumers, which will attract more advertisers, which will generate more revenue for video service providers such as Google.

More: Deep Jive Interests said Google’s announcement is a “big deal” because YouTube sitting on an “absolute gold mine” of videos that people spending hours watching. Scott Karp makes a great point that the video ads not only need to be unobtrusive but relevant, while Andy Beal calls it “an innovative step in the right direction”.