YouTube “stars” raking in millions while site remains in the red

It is ironic that while YouTube struggles to turn a profit in its third year after being purchased by Google, some of its stars are pulling in millions in earnings.

The creators of lonelygirl15 serve as one example. Originally thought to be the work of a real teenage girl video blogger with a massive following, the effort turned out to be a well-orchestrated hoax. But the creators went on to receive $5 million in venture funding to create other fictitious Web shows and TV. Talk about turning a profit.

While it may have been the launching pad for some flash-in-the-pan success, YouTube itself is still running into the red.

In a report released earlier this month, CreditSuisse analyst Spencer Wang estimates the video sharing Web site will lose a whopping $470 million this year.

Google says it’s not quite that bad, but hasn’t revealed any numbers.

“If Google hadn’t bought YouTube, it probably wouldn’t be around today,” says Mark McKay, a producer in the digital media group at CTV Inc. “Lately the suspicion has been that it will become just another version of Hulu. The You will be removed from YouTube.”

McKay is a Web video personality in his own right. While no lonelygirl15, he has produced video blogs for MTV, and won a couple of video contests. He now produces sponsored video content for various clients including Molson.

YouTube’s pains in making money demonstrate that finding a successful model for monetizing online video hasn’t quite been perfected yet, McKay told his audience at the Mesh Conference held in Toronto recently.

Google purchased YouTube for $1.76 billion in 2006, though the site had never made a penny. On Friday, YouTube announced on its blog that it would be partnering with Crackle, CBS, MGM, Lionsgate, and Starz to bring premium content to the site. Thousands of TV episodes and hundreds of movies are now available to Americans only, complete with in-stream advertisements.

“The industry as a whole is still trying to figure out the right levers to pull for online video,” says Sabrina Geremia, head of agency relations, Google Canada. “Google’s general approach is to try a lot of different things and then wait and see what sticks.”

Ad varieties at YouTube include graphic overlays on videos, contests, promoted videos, and traditional banner and ad displays alongside videos. The in-stream ads began testing at Google last October, and will now be more widely rolled out to support movies and TV shows.

Similar to TV ads, the clips are inserted in the same program breaks meant for advertising when the programs first aired on TV. Advertisers can target specific programs and select their cost-per-thousand bid. Then, Google crunches the numbers and inserts the ads accordingly.

The TV-style approach to inserting video ads before or after clips is also CTV’s bread-and-butter, McKay says. But there are a couple of problems with this style of advertising – it’s disruptive and often too general.

“The worst thing in the world is if you’re watching the Bachelor and an ad for a herpes medication comes up,” he says. “So we’re seeing a real move to contextual ads.”

Sponsored video or “branded entertainment” may be the way of the future, McKay says. Find an advertiser who will sponsor your Web video that’s based around a certain product or brand. The key is to do it in a non-intrusive, but organic way.

“If it’s done well, people will find it clever.” But if it too obviously pushes a specific product, then it will be rejected, he said.

McKay recently produced a series of sponsored videos for Molson, focusing on “shinny” or casual, pick-up hockey. The only mention of Molson was a sponsorship message at the beginning, and Molson promoted the videos and created a Web community around them.

The videos have a light-hearted tone to them and discuss the rules and rituals associated with shinny.

Stefan Lialias is another proponent of the sponsored video model, but in a different way. The executive producer of Toronto-based Direct Engagement Inc., Lialias puts together sponsored Webcasts that bring together government and industry leaders before an on-location and Web audience.

The Webcasts are free for all to see and target business people in specific industries, he says. Lialias intentionally avoided any sort of subscription or paid-content model for his videos.

“It would be easy to charge people, but not many will pay,” he says. “My strategy was to form partnerships to increase our distribution reach, and then I started looking for sponsors.”

Rogers Communications tapped Direct Engagement to reach out to the healthcare industry, he adds. It sponsored one show a month from 2004 to 2007 that featured a panel discussion among industry leaders, and provided interactive opportunities for the audience.

“They would get the key stakeholders around their target and they’re willing to pay money for that,” Lialias says. “They saw it as cost effective and a way to talk to that community but not be too self-serving about it.”

YouTube has also seen recent success using the sponsored video model. Doritos encouraged uploads of user-made commercials in its Doritos Guru contest, awarding the winner $25,000 and one per cent of sales on the new chips flavour launched as a result of the campaign.

“One of the most popular things for advertisers on YouTube is to aggregate spending around a big idea,” Geremia says. “Advertisers can either host a branded channel or have a contest.”

Those who don’t want to produce sponsored videos still have an option to try and make some money, McKay says. There are revenue sharing sites such as MetaCafe and Revver that will pay you per click on your videos. Build up an audience and use these services to tap into that revenue. A service like Tubemogul helps to distribute a video to multiple sites painlessly.

But it won’t bring in the type of money lonelygirl15 made. Not even YouTube knows how to do that reliably.

“There isn’t a magic formula, I wish there was,” Geremia says. “If you know what it is, give us a call.”

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