Deal Will Bring Network TV Shows to YouTube — Perhaps at a Price

Will YouTube users pay to watch mainstream entertainment on its wildly popular — and currently free — Internet video service? After it announced deals yesterday to add content produced by the likes of Sony, Lions Gate, MGM and others to its lineup, YouTube's owner, Google, said it hopes the premium content will attract more advertisers — and perhaps provide a category of video for which users would be willing to pay.

Ever since Google bought YouTube in November 2006 for $1.65 billion, investors and other observers have wondered when the video services would begin to generate revenue to justify the investment. At the time, traditional media companies — especially TV networks — were still trying to determine if YouTube and Google presented them with a threat or an opportunity. Just before the acquisition was announced, Wharton faculty and other online media observers told Knowledge at Wharton that YouTube would make money only if it could devise a revenue sharing model with mainstream content producers (see "Coming Attraction: YouTube's Business Model"). A few months after Google's YouTube deal, the business model was still awaited, and mainstream content producers remained wary — not only of YouTube, but also its big parent. "Google wants to be the center of the universe for all information and content," Wharton law and public policy professor Kevin Werbach told Knowledge at Wharton in March 2007 (see: "At Google, the Search Is On for a New Approach to Old Media"). "That's a scary thing for a lot of companies, including media companies. [But] the media companies want and need Google, because Google is extraordinarily good at the two things that underlie most media businesses: directing users to content, and matching advertisers to users."

YouTube has already started to sell advertising on its site, but The New York Times, citing a Credit Suisse analysis, said that the site "will lose approximately $470 million in 2009, as the costs of bandwidth and storage to stream more than 5 billion clips a month far exceed the revenue YouTube earns from advertising." Google said the analysis was inaccurate.

The newspaper also notes that YouTube is facing new competition from mainstream media companies that are offering their content on their own web sites. The biggest of those is Hulu, a joint venture of NBC and the News Corp. Last month it streamed close to 350 million videos to nearly 9 million unique visitors. YouTube still dominates the Internet's video delivery sites; last month it drew almost 90 million visitors who viewed just under 5.5 billion videos.

YouTube may be able to attract more advertisers to its site, but getting its users to pay may be a much bigger challenge. Consumers have developed a strong sense of entitlement to free online content, according to Wharton marketing professor  Stephen J. Hoch. For a recent article, "How About Free? The Price Point That Is Turning Industries on Their Heads," he told Knowledge at Wharton that the decision by media companies to offer their content for free online has led to a disaster. "It's had a yet unknown catastrophic effect on the news. It's had a catastrophic effect on music. Clearly the concept that you can make it up in volume is bogus, because you can't. Music CD sales have gone from $13 billion in the U.S. to about $7 billion since 2001 while legal digital downloads generated about $1.5 billion in sales recently."