Is Web 2.0 starting to see green?

YouTube and Facebook may not be implementing optimal monetization strategies...surprisingly many in the industry still believe the best of Web 2.0 should be free.

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Web 2.0 under monetized, free-to-the-consumer services are hoping to start seeing green at the end of the tunnel.

Today, Facebook bit the bullet and outsourced its ad sales to Microsoft (see Facebook outsources ad sales to Microsoft: Why can't it make money on its own? )

Facebook, same as YouTube, MySpace, Digg…has been unable to fully monetize the large usage its free services engender.

In “Facebook cedes equity stake to ad agency and gains advertising dollars” last June, I discuss the Web 2.0 property’s difficulties in gaining advertising revenues:

Advertising at Facebook is currently focused on low cost, local advertiser created ‘Facebook Flyers.’ Facebook says of its ‘Facebook Flyers’:

Your Flyer will be posted to the Facebook Flyer Board and advertised on other Facebook pages. For only $5, your Flyer will be displayed 2,500 times! At small schools, we will display your Flyer as many times as possible but cannot guarantee the number of views.

If the best Facebook can do on its own is $5 media placements, outsourcing ad sales to Microsoft is better than, literally nothing. Settling for perhaps 50-60 cents on the dollar, however, is not the best it could do.

Yesterday, YouTube “relaxed” its no “sellout to corporate interests” stance to launch a new, dedicated “YouTube Channel”: “The Official Paris Hilton YouTube Channel,” sponsored by Fox’s “Prison Break,” as I describe in “YouTube nod to MySpace: Paris Hilton is YouTube's newest friend”:

dedicated promo tool designed to both foster sales of Paris Hilton records and boost viewership of Fox’s PrisonBreak show. Accordingly, the “Channel” content is “commercials” for Paris Hilton records and the Fox PrisonBreak show. The clips are professionally produced, Hollywood style mainstream promos.

It is unclear, however, how lucrative YouTube’s corporate branded channel strategy is.

YouTube announced a somewhat similar deal with NBC last June, but it is a cross-promotional one where “little money changes hands,” according to Associated Press reports:

Under the deal, YouTube will create a separate channel for NBC video, so that visitors can easily pull up the half-dozen or more items that NBC plans to offer at any given time. It will be similar to channels that other companies, filmmakers and everyday users create.

NBC will sponsor a contest in which fans of ‘The Office’ can create their own 20-second promotional clip - as long as they don't use any copyright footage from the show. NBC will provide music, graphics and a ‘how-to’ video.

Little money will change hands, although NBC commits to buying an undisclosed amount of ads on YouTube. NBC will also run spots on television publicizing the contest.

NBC and YouTube officials acknowledged the possibility that fans will reject the clips if they appear simply as promotions, but YouTube co-founder Chad Hurley said fans would likely embrace the video if it is compelling and not available anywhere else.

YouTube and Facebook may not be implementing optimal monetization strategies, but at least they are beginning to realize that the best of Web 2.0 is not really free.

After all, for how long could YouTube ignore its estimated $1 million monthly bandwidth bill when it has “only” banked $11.5 million in VC money to fund its free-to-the-consumer video hosting Web site?

Surprisingly, however, many in the industry still believe the best of Web 2.0 can, and should be, free.

For example, my colleague, Dana Blankenhorn, says today in “The Internet Business Model”:

The way to success on the Internet is to get something out there, then convince people to try it, free…the idea that success is defined by users, not buyers, has become an accepted part of business life.

This is possible because on the Internet the nominal cost of serving new users is virtually zero until you scale to a point where profits are possible merely from the size of your audience.

ZDNet commenter Anton Philidor notes, succinctly, however:

The discovery of the dot bomb era...was You cannot give away your main product for free and survive.

Indeed. As the size of the free user base increases, total infrastructure costs increase as well, although per-user costs decrease. As for scaling “to a point where profits are possible merely from the size of your audience,” Web 2.0 properties may be generous, but they are not financial magicians.

As some have noted, however, my point of view is skewed by the rigorous financial analysis required of an Investment Banker, not "Web 2.0 dreaming” (see "Web 2.0 dreaming: get rich quick, or fail trying")

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