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Video-sharing phenomenon YouTube has built up its online business in classic dot-com fashion: Get the eyeballs first, then figure out how to make money. You can say “Web 2.0” all you want, but this is classic Web 1.0 thinking. So now that Google has sunk $1.65 billion into buying YouTube, those banner ads aren’t going to pay the mushrooming bandwidth costs of so many video views. The question remains: How will YouTube make money?

It’s possible the site might charge people a monthly “premium membership” fee, but there would also have to be revenues related to advertising. Recently, a Google exec openly talked about the desire of professional content partners to put 30-second video ads before their YouTube videos — what’s known as “pre-roll” ads in the business. Even more recently, YouTube announced it would elevate some of the amateur video producers on its site to partners, including a way to split ad revenues. “Once they’ve selected a video to be monetized, we’ll place advertising adjacent to their content so participating user-partners can reap the rewards from their work,” the notice said.

What’s less clear is how those “adjacent” ads would work. Does that mean ads before the videos or after them? Or are they ads that run alongside the video player? And what’s the ad split? So far, details are sketchy. I’ve put in a query to YouTube and will update this post if they can answer any of these questions.

But in your response to my question, it was clear that you would not tolerate 30-second pre-roll ads before video content. A handful of you were adamant that any advertising would send you off to competing sites, but most of you were open to advertising on two conditions: The ads must be relevant, and they must be brief — from about 5 to 15 seconds long — if they are pre-roll ads.

Blogger and funny man Phil Shapiro envisioned shorter pre-roll ads and said YouTube should make it clear that videos have ads on them before you watch them. But Shapiro thinks there could be a plethora of tiers of involvement for producers:

In terms of sharing ad revenue with YouTube producers, it makes sense that the revenue share formula is proportional to the number of videos uploaded, the number of views of such videos, the number of subscribers a producer has, the number of other producers a subscriber subscribes to. That is to say, the greater the community involvement a producer in YouTube has, the greater his or her cut of the ad revenue, all the way from 20 percent of ad revenue to 50 percent. If you had 20 different levels of involvement, then YouTube video producers would relish the challenge of moving up the pay scale, so to speak.

Perhaps YouTube could get more creative in other ways, providing a feedback mechanism for the best video ads, according to Dustin Lindensmith. “For the sake of advertising effectiveness, I’d also incorporate some sort of viral rating scheme for the ads themselves,” he wrote. “This could become a means to promote the development of truly creative, interesting, or entertaining ads that people might actually watch on their own merit. Just imagine: ads that percolated to the top of the YouTube consciousness not by virtue of how much money the sponsors paid to Google for the best placement, but rather by virtue of how many people had favorited the ad or rated it highly.”

That’s where Google and YouTube could really make their mark — providing a way for video ads to become a bigger part of the community, complete with feedback, criticism and ratings. As for the backlash against video ads, that will eventually end as people realize that ad revenues are necessary for the business to exist. As Jackie Denton writes:

YouTube could face some backlash if they started advertising on their site, but eventually this negativity will end. People will continue using the site just like they continue using other sites that advertise. Advertising is a big part of the media and it’s something that should be expected. When websites first start off they typically don’t have advertisers, but as their popularity grows it seems that the upkeep of the site grows. Once the website becomes ‘sticky’ it seems that advertising is the best way to generate revenue in order to keep the site functioning.

One of the strengths of Google has been to find relevant advertising for people who are searching for particular keywords or viewing related content. I’ve often thought that Google would monetize YouTube by letting people buy “related video” slots that pop up after you view a video. That idea was brought up by John Kennedy as well. “One of Google’s options could be working advertising into the ‘related’ video feed,” he wrote. “This is the bar on the right or the videos that fade in and out when you’re done viewing a video. They can be produced on a very low budget but creatively. They can advertise to the users and the users have no idea.”

While I like this idea, I don’t think Google should keep viewers in the dark about any slots they sell. I have complained about the mysterious way YouTube chose its home page picks before, and am happy to see that they now label “Featured Videos” on the home page as being selected by YouTube staff. Now perhaps they can extend that transparency to the other picks on the home page such as “Director Videos.” I don’t mind if they decide to sell these slots, as long as they make it clear that that’s what they are doing.

Advertising Burn-Out

There’s a bit of a Catch-22 with these types of advertising. The site can’t exist without some type of income. The site can get decent income from ads that are relevant and cannot be ignored. But people don’t want intrusive advertising. Therefore you have to upset some people who were used to the site when it didn’t have ads. But perhaps YouTube can solve the problem by having shorter pre-roll ads that are relevant, and not repeating the same ads over and over again, perhaps by limiting the number of ads you see per visit to the site.

Jonathan Trenn thinks YouTube users just don’t have the patience for long pre-roll ads:

I can’t see this being successful if the ads run longer than 10 seconds. They’ll also have to be contextual as well. The YouTube generation (which is practically everyone at this point) won’t have the patience to see the same ad over and over again for some type of product that they have no possible interest in. That’s often the situation now on news sites.

Others just can’t stand the thought of adverising intruding on another place in their lives. “I can’t submit to yet another advertising stream coursing through our lives,” wrote Julie Abraham. “As a parent I’m already battling the fact that the average kid sees 350,000 ads by the time they’re out of high school…For pity’s sake, take the high road and let us have one avenue of pure unadulterated street creativity. Please find some other way to boost revenue.” But what way would that be?

Coldmeister piled on with another anti-advertising tirade:

Advertising is far too widespread in other media; considering that we pay for the Net access, it should be ad-free. No matter where we go, we are bombarded with noise and images for products we either don’t want or can never hope to own, as well as disclaimers, sound bites, and other intrusive bits of non-programming. We need a refuge! Besides, 30 seconds is excessive when the average clip is shorter than that. YouTube, you will be missed.

While I can understand their anger at having ads on what was previously an ad-free site, people do have to consider exactly how the site can stay in business without advertising. Google is not a charity and will not run a site that is unprofitable forever. So if you want YouTube to skip the video ads, you’ll have to come up with a way that it will make money another way.

What do you think? Is YouTube’s new partner ad program a step in the right direction? What ways can YouTube make money to stay in business? Share your thoughts in the comments below.

UPDATE: No sooner had I posted this than NBC Universal came out with a new policy about online pre-roll video ads: No ads will be accepted that are longer than 15 seconds, unless it is an ad that runs during a full-length TV show. It’s a bold move, as PaidContent’s Rafat Ali reports, because a quarter to a third of all pre-roll video ads NBC receives are still 30-second ads. Ali notes that Brightcove also has decided to limit pre-roll ads to 15 seconds in a new deal with Tremor Media.

Could this be a trend? Hopefully. And the more publishers that push for limiting the length of pre-roll ads, the more advertisers will start to create shorter ads as a matter of course.

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