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The three things Google can do to make YouTube worth billions

As you've probably heard, Google has bought Youtube.

There has been a lot of talk about this on the web over the past few days. Now that the deal is done, some people are just glad it's over. Om Malik still thinks it's not a good idea in the long run. others think that only Google has the advertising muscle to make Youtube profitable.

But I don't think it's just a matter of plastering YouTube with Adsense ads, at least I hope not for Google's sake.

Think about it this way: why didn't advertising on the Internet work before Google? Well, the banner ads were repetitive, uninteresting, and eventually became an animated, distracting annoyance. The popup ads were worse, and worse still were those disgusting Flash travesties that covered up what you were trying to read. I talk about these ads in the past tense as if they are gone, but they still lurk all over some sites.

The point is that Google took something that was a ubiquitous annoyance and turned it into something that created value for both users, site owners, and advertisers. They made ads that were:

  1. Not hideous—basically they don't detract from the browsing experience.
  2. Actually relevant to what a user is looking for. This is an important point, because it means that adding these ads to your site might actually provide value to your users. If they got to your page by searching for “how to get a good divorce lawyer,� they are in the market for a divorce lawyer and might find one through the ad.
  3. Measurably effective for advertisers, without all sorts of “mindshare� vagueness.

Now, lets look at television advertising—is this a similar situation? If the number of TiVos and DVRs sold is any indication, people are sick of commercials. People are willing to pay money for a device that lets them skip ads. Part of the reason DVD box sets of entire seasons of television shows are so popular is that they have no ads.

Why do people hate commercials so much? They are repetitive—if you watch two hours of prime time TV you're bound to see the exact same thing 6 or 7 times. They are annoying, employing tactics to try to grab your attention, or played at a higher volume than the shows. And despite marketers best efforts, most commercials do not directly interest you.

So here's what Google can do:

Make deals with networks, studios and content producers. Google is already doing this, and it must be done to make the fun steps below possible without thousands of lawsuits.

Now, imagine you want to watch the Colbert Report. You go to YouTube, find today's episode, and watch it. At the end, there are a few commercials. They are:

  1. Polite. The ads don't pop up over the video you want to see, they don't interrupt at inopportune moments of the plot, they don't jam up the volume, and they probably don't play before the video at all – most likely after, with a break or two in the middle of longer shows.

  2. Relevant. It's not just a matter of targeting video ads toward keywords – like text ads, Google weighs better ads that get more responses more than crappy ads by deeper pocketed advertisers. Google might use their knowledge of your search patterns, but I doubt they will, just because they won't need to. They'll be able to mine enough from user discussions to make very good guesses about what you might be interested in seeing next or buying.

  3. Measurable. Not only does YouTube have much better data on viewership than the Neilsen ratings could ever dream of, but the actual user response to the ads is trackable by clickthroughs and conversions.

If Google understands this, then they will make their 1.65 billion back and then some. If they don't understand this, I'd be more than happy to come explain it in person, just drop me a line.