In 2006, Google (GOOG) bought Internet video powerhouse YouTube for $1.65 billion. The search giant claims the deal was a financial success. Management says that YouTube's revenue rose to nearly $1 billion last year, and it hints that the site may be profitable. But Google doesn't have to break out YouTube as a unit in its quarterly financial statements, and profits within divisions of big firms always depend what expenses the parent assigns. For example, who pays for the video storage and bandwidth costs for YouTube -- the video site or Google?
Google's latest move to boost the site and raise revenues is to create premium video channels on YouTube, several media outlets are reporting. The premium zone would include as many as 20 sections of content, all streamed to TVs, PCs, and portable devices. That makes YouTube's new model sound just like those of nearly every challenger in the premium video market, from Netflix (NFLX) and Comcast (CMCSA) to Amazon (AMZN), Apple (AAPL) and Hulu.
Google has battled with content-creating companies in the past. Viacom (VIA) sued YouTube for copyright infringement to the tune of $1 billion. Some observers thought that the legal action would ruin YouTube, but a federal court ruled in favor of Google last year.
Google has one advantage over its competition in the online video race: viewers. According to Comscore, in February, Google video sites had 141 million unique U.S. visitors, and almost all of that traffic was to YouTube. Those visitors accounted for 1.8 billion viewing sessions. No other U.S. video site even came close. So if size matters, Google may be able to get a large share of the premium video content delivery market.
But size may not matter as much as consumers' mindsets. Many people think of YouTube as primarily the online home of grainy, amateur clips of laughing babies, dancing dogs, and music videos. It's a reasonable perception: YouTube has for the most part been a collection of an odd mix of home videos since it was founded. Google will have to change that image if it hopes to get large numbers of consumers to visit YouTube looking for premium video. And old images die hard -- especially on the Internet.
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