“There has been some discussion recently about the decline in importance of YouTube.  This is crazy talk,” Alex Rowland writes.  YouTube is only going to become more central to the online video ecosystem over the next year.”

Commercial vs. Promotional Vehicle

Indeed, YouTube isn’t going anywhere, but ultimately YouTube is thriving as a promotional vehicle for media companies and becoming a meaningful commercial unit in Google’s business, but not for anyone else.  In some ways, YouTube is turning into a fantastic acquisition for Google, but increasingly it is becoming a mere shadow of what its potential once was.

A Longtime Bull Becoming a Realist

I’ve long been one of the most bullish people on “YouTube as an advertising platform” because unlike Facebook and Twitter, YouTube’s DNA is video content, and video is the perfect canvas to siphon away the $75 billion that will funnel away from television and onto the Web.

Part of the reason why YouTube’s future is being held back is the typical innovator’s dilemma, or rather, billionaire’s dilemma.  If Google’s Q1-Q3’s $20.881 billion revenues are any indication, Google will generate approximately $30 billion in revenues in 2010.  Considering that management pegged the value of the “emerging” display and mobile businesses at $2.5 and $1 billion respectively, then that means that nearly 90% of Google’s revenues will come from its search units: AdSense/AdWords products.

In other words, Google is generating way too much money from its “traditional” search business to care about radically owning the new video space, though it could.

History Repeats Itself

Clearly, Google is stocked with mathematicians and not historians, for it should take a cue from the success of its search products to try to own the video market, too.  AdWords grew exponentially because anyone could open up an account and buy keywords.  Admittedly, that worked for small and medium-sized businesses that essentially shifted their advertising budgets from classifieds in newspapers to paid listings online.

As a result, in search, Google’s market share in revenues has always been in-line or higher than the market share of its queries.  However, Google has hitherto failed to make YouTube’s revenues match its jaw-dropping reach and monopoly of the video market.  While YouTube commands 45% of the video streams in the U.S., it is unlikely that it will generate $600 million from video ads in 2010 (or 40% x $1.5 billion).  Don’t forget, that $2.5 billion figure Google quotes on its display business can be credited to Doubleclick and YouTube, for YouTube generates a lot more revenue from home page takeovers (which it doesn’t share with content providers) and display banners; not video in-stream ads.  Hulu, as a measuring stick, will generate $240 million in revenues, but 100% of that is from video advertising.

In other words, YouTube has shied away from owning video advertising for various reasons.  Some are noble: not hurting the user experience.  Some aren’t and hurt content providers while holding back the growth of online video advertising.   Of course, YouTube isn’t a nonprofit, and I understand Google’s actions.

The Holy Grail: Video Advertising

With video, YouTube correctly identified ad agencies and Fortune 500 marketers as those who would turn YouTube into a billion-dollar business.   However, since Google had little experience in selling to ad agencies before it acquired YouTube, growing video revenues took a lot of time to scale.  YouTube realized this early on and allowed its content partners to sell their inventory on YouTube (disclosure: WatchMojo is an official YouTube content partner).

But instead of allowing content partners set prices based on actual market dynamics (demand and supply), YouTube implemented a set of obstacles and requirements that have made selling one’s YouTube channel all but impossible.

YouTube did this, I believe, in an attempt to thwart content producers from owning the relationships with media planners and buyers.  After all, if YouTube opened up its site, it would lose contact with advertisers and become a mere dumb pipe.

Stepping Over Dimes to Collect the Dollar Bill

The net result is that while Google will likely earn approximately $500 million in display, video and sponsorship revenues from YouTube this year, it is foregoing hundreds of millions of ad dollars each year (that content partners could bring to the table) in order to retain ownership of the ad relationship.

Google is selling YouTube’s Partner Program short and ensuring that large media companies overlook it altogether.  Doubt that?  A quick survey of a few media companies seems to corroborate my theory.  But first, let’s examine a couple of companies who have embraced YouTube.

Television network CBS is one of the most active on YouTube; its channel has generated nearly a billion views, boasts thousands of videos and commands a quarter of million subscribers.

Next up, Discovery Networks, commands a massive presence with a quarter million subscribers and a quarter billions views.

The thing is, it almost ends there.  Big media, by and large, ignore YouTube — and some, like Viacom have outright sued it while others like NBC have shunned it.

Yet there’s a massive divergencewhen you look at how some new media firms use YouTube.  Two examples that come to mind are About.com and Alloy. The former is part of NY Times and increasingly wading into video, the latter is a leader in video programming, both online and on television, having produced shows like “Gossip Girl.”

Alloy’s YouTube channel‘s has 923 subscribers and has generated 280,000 all-time views.  This doesn’t represent Alloy’s otherwise massive reach online.  It simply suggests that it views YouTube as something it might occasionally turn to to promote one of its shows, as the page skin suggests – not exactly reinforcing YouTube’s role as a dominant video “platform.”.  Yet Alloy is exactly the kind of media company that YouTube should be courting: a big sales force monetizing premium content it produces.

About.com’s channel is markedly unlike CBS or Discovery Networks, devoid of any branding or page “skins”, it has a mere 510 subscribers and 570,000 all-time views.  Once again, we’re not commenting on About.com’s online video mojo here, but how it too – like Alloy – views YouTube.  I am sure that videos on About.com generate that many views in one day.

Clearly, the way the television companies use YouTube is wildly different than the way the new media companies use it.  TV companies (CBS, Discovery) are using YouTube as promotional vehicles to drive awareness for their television assets, where they make real money.  Meanwhile, you would think that the online media companies (About, Alloy) would leverage YouTube as a commercial vehicle to extend their online reach, but nope, they seemingly can’t be bothered.  They’re not wrong to think that way.  If you have your own audience online, why bother with YouTube?  And increasingly, methinks YouTube likes it that way.

What About Media Companies Built on YouTube?

Ultimately, as a new media video content producer that happens to be a YouTube Partner, we learn, adapt and invariably, we change our strategies to leverage YouTube as a great promotional vehicle but look for other commercial opportunities.   In November YouTube accounted for 45% of our inventory; today, even though our YouTube channel has grown in absolute terms, it only represents 15%.

In this context, this is why some would argue that if leading YouTube content provider Next New Networks’ indeed sold to YouTube, it would be more of a capitulation than coup, for NNN relies so much on YouTube that it cannot possibly remain a going concern if it was not part of YouTube.  That might sound a bit dramatic, but I don’t think it’s that far from the truth.

Until branded content becomes a more meaningful aspect of video planning and strategy, media buyers won’t go through content partners; when they do, content partners will have to jump through hoops.  Of course, only if a content partner can sell out their channel will the advertiser have to go directly to them; and that is the perfect Catch-22.

Welcome to Capitalism, Sucker 

All of this, of course, is fully YouTube’s prerogative.  In fact, if I were in Google’s shoes, I doubt I would push for the fully open model, either.  But long term, all I would be doing is creating an opening for others to win the bigger ad dollars that clearly want to move online and into web video.  If I were DailyMotion or Metacafe and vying for a strategy to compete against YouTube, I’d be paying attention.  Not sure if they will consider this because they too want to own the ad relationships, but someone will.  As the leading new media company, Yahoo certainly won’t, and Hulu can’t.

One company that comes to mind is Facebook, but whether or not they pull it off remains to be seen.  Maybe that fear is enough for the overlords at Google to consider an open strategy.