Ads as a Barrel of Monkeys: More on YouTube’s Revenue Potential

barrellmonkeysFred Wilson has a post today with some more thoughts about YouTube’s revenue potential. Recall that he previously posted that YouTube could generate as much as $150M in annual net revenue. I had some tongue in cheek comments to his ensuing conversation with Jason Calacanis- all of which were ignored since no one could respond with a straight face to my assertion that people aren’t really fired up about the ability to spend their free time tagging ads.

Fred’s latest post begins with a back and fill that would make Kinky Friedman proud: “Most people got the fact that I was trying to stimulate a conversation more than project revenues for a specific company,” and then goes on to talk more about the revenue issue.

First, about that 10 second ad at the beginning of each video clip. Fred seems to agree now that such an ad would reduce views, but argues that the degree would depend on the video content. SNL clips would be less affected. Home videos would be more affected. I think that’s right. Getting that content would be the hurdle. You could try to turn YouTube into a de facto TV highlight station- at least until the networks sue it into the stone age (or, as Fred points out later in the post, demand the right to embed their own pre-clip ads). Regardless, ads at the beginning of clips will reduce the views, as well as the good karma surrounding YouTube. Not to mention the fact that the networks are going to want to draw people to their web sites, not YouTube, to see their content.

Fred seems to have abandoned, at least for the moment, the position that the ability to tag ads would mitigate the reduced views. Fred won’t engage me on any of this stuff, so I have to deduce his overall philosophy about Web 2.0, ads, etc. It seems to me that he begins with a basic assumption that people will accept ads in exchange for certain content (YouTube, HD radio, etc.). Maybe, but I believe the threshold for that content is a lot higher than Fred thinks. While only anecdotal evidence, I have heard a lot of complaints lately about the increasing number of ads that roll before movies at the theater.

What is less anecdotal is that people will clearly go out of their way to avoid ads presented by TV networks, who have more experience than anyone else in producing what is supposed to be interesting content. Showtime, HBO, XM, TIVO and many other businesses are based, at least in large part, on the desire for an ad-free experience. YouTube would be better off adding ads solely as a way to force people to pay for premium memberships just to avoid those ads. In sum, I am convinced that the public’s aversion to ads is much greater than Fred admits.

Next, Fred says that the whole purpose of a service like YouTube is to blur the lines between content and advertising. He says content and advertising should be one and the same. Look, people have been trying to blur that distinction for tens of years. The beers make funny commercials that people will watch- once or twice. After that, it’s back to this fast forward button. Do you really think ads on YouTube are going to fool people into believing they’re something they’re not? Of course not. And unless you do a new ad for every clip, people are going to be asked to sit through the same ads over and over.

After thinking about it some and considering the comments of the worthies, Fred says maybe post-clip ads are the way to go. I think exactly nobody will watch them, but I like that idea better because it means the advertisers are the ones betting on the post-clip ads being a barrel of monkeys- and not just saying that while forcing up-front ads on people who just want to watch a 30 second clip of a cat in a jar. I suspect, however, that the people who buy ads would value post-clip ads a whole lot less than pre-clip ones.

There’s a lot of discussion about having paid video links and organic ones at the end of each clip, much like the ad configuration Google has bet all of its shareholders’ money on. I agree that Google’s sponsored links was a good idea- and I will admit that on those instances in which I am looking for something I need to buy, I have followed them. But no matter how hard you try to feather up the dog to look like a chicken, people will always know what’s intended to entertain them and what’s intended to separate them from their money. Another distinction is that when people search via Google, they are often looking for something they need- be it a product or some information. So they are pre-conditioned to buy. When looking at YouTube, people are generally looking for entertainment- free, immediate entertainment.

Fred’s basic assumption is set forth in the following sentence, describing a theoretical Nike ad: “If your video is great and the audience loves it, passes it around, etc….” That’s just it- an ad can only be so great. Sure, Terry Tate is sort of funny. But for every Terry Tate there are hundreds of boring ads no one cares about. One Terry Tate cannot turn the ad industry into a thousand Terry Gilliams.

But I have an even bigger question.

Why is it so important that YouTube make $150M a year? Why can’t it be like the corner market, serving its customers well and making a nice living along the way? My biggest problem with the VC/Web 2.0 combination is that scale is completely out of whack. Hitting singles and doubles doesn’t seem to cut it anymore. Everyone is wildly swinging for the fences.

And mostly missing the ball- and the point.