It’s inevitable that everybody and anybody will play armchair quarterback with YouTube’s decision to spend $300 million on content ($100 million on production, $200 million on promotion).   The irony is that by democratizing video content creation and consumption, YouTube unearthed the reality that what audiences actually watch and what advertisers want to advertise on are very different things.  Yes, audiences like sports and entertainment, but they also like sex, violence, shocking news, inappropriately funny content — all things that give marketers trepidation.  Meanwhile, most of the squeaky-clean content that marketers favor is simply not what gets audiences excited.  YouTube has exposed that reality.

Was It Money Well Spent?

On the one hand, for parent Google, the $300 million spent was a rounding error; as of December 31 2012, Google was sitting on $48 billon in cash.  In fact, the decision was pretty smart on a few levels.  For one, it got considerable public relations mileage out of the decision, signaling to traditional media rightsholders that YouTube was serious about — and paying for — content.

Second, if the decision to prepay future revenue share proceeds to creators had panned out, the move would have been sheer financial engineering genius, effectively transferring idle millions of dollars from its balance sheet to its income statement.  The problem, of course, was that nobody really watched the programming in any meaningful scale, meaning that it will take forever for YouTube to recoup that investment, if it ever does.

Way to Skate to Where The Puck Was

In fact, YouTube has already kiboshed most of those channels by not renewing the guaranteed payments. That “head fake” (of guaranteeing so much money but then not expanding the program) encouraged more than one VC to fund companies whose sole existence was to siphon money away from Mountain View.  By not expanding on the program, many of those VC-backed companies won’t survive, because Google’s decision to curtail those guaranteed deals means that content creators have to build the business the hard, old-fashioned way: they have to earn it.

What’s Your Suggestion, Genius?

But bravado aside, YouTube’s $300 million bet was a waste of gargantuan proportions, not just because of the direct cost, but mainly because of the opportunity cost.

Everyone can think up 10 ways YouTube could have spent all that money differently, with the suggestions a mix of what they know (i.e. what sandbox they work in) and frankly, what benefits them.  So take what I say with a grain of salt, although I’m not sure how it would benefit my company if Google basically does what we strive to do in the long run.

An Alternative Strategy

Here’s what I would have done if I was making the decision, but let’s first start with the fundamental rationale:

When you consider that YouTube competitor Hulu commands much higher CPM rates and YouTube envies that, another option would have been for YouTube to a) use its war chest to acquire rights to long-form content, raw archives and stock video and then b) blend the brand name, high-quality programming that marketers covet in the format in which Web audiences want to consume video: short, snack-sized video.  If the content is licensed, then YouTube would not need to limit monetization to random pre-rolls, but could also sell sponsorships, subscriptions, downloads etc. and jack up revenues considerably.  Anyway, examples would be licensing the archives of

– “Seinfeld” — and then reproducing season recaps, character moments, ongoing running gags, etc.

– sports leagues, gjving a ton of cash for the rights to all previous seasons, and then recutting vignettes recapping each season, star players’ careers, highlight reel goals, records etc.

With so many rightsholders sitting on archives and not earning any revenue from either digital or short-form content, it’s possible that many would sign up (especially if YouTube guaranteed revenue to them).

The challenge, in general, is to recreate new content at a sensible cost without jeopardizing quality or profitability.

The challenge, for YouTube, is that this would have made it a content creator, something it has largely avoided through proxies such as the $300 million money-burning exercise.

Been There, Done That

Having explored this opportunity in depth, I’m not saying that this undertaking would be have been easy or cheap, but it could have worked with both audiences and marketers, especially given YouTube’s massive war chest.  Granted, this would entail YouTube producing and repackaging new content — but if it was willing to spend $300 million on this effort, while Google acquired content companies likes Zagat, then that is simply a matter of time.

There would be streamlined and scalable ways for YouTube to accomplish this smoothly, but with this failed effort at underwriting content, Google may turtle and retrench from underwriting content (directly or indirectly) altogether.

But given YouTube’s existing domination of online video – and online video’s nickels not quite yet matching television’s ad dollars — maybe someone at Google HQ is rewriting the screenplay to the sequel of this franchise.