Alternative Musics: Making Money With Youtube

Yesterday's announcement that Google's Eric Schmidt will be handing the CEO reins back to co-founder Larry Page came as a shock, but with the company's aura of invincibility fading, and its core business showing signs of age, the time was right for a change. There was "an example every hour," of how triumvirate decision-making by Schmidt, Page, and co-founder Segrey Brin was hurting the company, Schmidt said. If Google wants to assure investors and consumers that rumors of its looming insignificance have been greatly exaggerated, there are a few key things that Larry has to do.

No. 1: Fix Search

Google's cash cow is its online-search advertising business, but the search results are starting to look awfully spammy. Between content farms that flood the Internet with meaningless search bait and black hat optimizers that use sleazy tricks to get top results, there are entire industries devoted to gaming Google's algorithms.

People who depend on Google for their livelihood have started to notice, and consumers are showing signs of getting antsy: There is a reason Microsoft's Bing quickly picked up 12 percent of the search market, and it's not because of its Gossip Girl product placements, or even vastly superior search results. Google has also drawn some ill will with an aggressive, some say illegal, tendency to push its own services to the top of the page.

It looks like Larry gets the seriousness of the problem. Friday, on day one of his regime, Google acknowledged the issue in a blog post, even as it downplayed its severity. "Reading through some of these recent articles, you might ask whether our search quality has gotten worse," said principal engineer Matt Cutts. "The fact is that we’re not perfect, and combined with users’ skyrocketing expectations of Google, these imperfections get magnified in perception. However, we can and should do better."

It will take more than a wonky breakdown, but it's a start.

No. 2: Find Growth

The aforementioned cash cow is still so lucrative that it's easy to forget that Google has never really succeeded in any other business. Despite the ubiquity of Gmail and YouTube, they are not yet successful stand-alone businesses. YouTube only recently made it into the black after incurring hundreds of million of dollars in losses over the years.

It's not like Google isn't aware of the problem. Witness the frenzied diversification into anything that looks hot: cars that drives themselves, social networks, and yesterday's long-expected news of a Groupon clone. But trying everything hasn't produced much of anything.

Larry needs to ditch the side projects and focus on the most promising ones: the Android mobile-phone operating system, and the mobile ad network AdMob, which even makes money from iPhones as it serves up 2 billion ads a day.

No. 3: Stop the Brain Drain

Here's an enigma for Larry to unravel: Why does a company with five-star chefs, high-tech nap pods, and free massages have to throw millions of dollars in cash money at employees to get them to stay?

Part of the problem is Google's convoluted management structure, which Page is clearly trying to fix. If a team has been working on an amazing project for a year, only to hear that it overlaps with someone else's pet project, who wouldn't want to jump ship? But it also has to do with Google's size and a potentially fatal inability to face up to an unpleasant reality. From what we hear, there's reluctance from some of the old guard to accept that Google is a massive corporation now.

There is a major intangible at play as well, something that may not be easy for someone who is more Chief Engineer than Chief Executive to grapple with. If the ambitious go-getters that make it through Google's onerous interview process sense that the cool, sexy projects are happening at Facebook, Apple, or some stealth VC project with no name, then no amount of money is going to keep them on side, no matter how big a money truck Google backs up to their cubicle.

Which leads to....

No. 4: Consider a Personality Transplant

Tech bloggers were smitten with Eric Schmidt, but for all the wrong reasons. Sure, he grew Google into a $200 billion behemoth, but he also had a weakness for creepy Big Brother jokes delivered so dryly that no one could be sure he was joking. Contrast that with the controlling and charismatic Steve Jobs, surely one of the best salesmen in modern history, with a reality distortion field that may have made enemies but also bestowed an ineffable cool on his entire company.

Larry, by all accounts, makes Eric Schmidt look like Steve Jobs.

Ken Auletta explains:

He is a very private man, who often in meetings looks down at his hand-held Android device, who is not a comfortable public speaker, who hates to have a regimented schedule, who thinks it is an inefficient use of his time to invest too much of it in meetings with journalists or analysts or governments. As C.E.O., the private man will have to become more public.

Google's engineer-driven approach to new products has been a long-standing problem. (Google Wave, anybody?) Unlike Apple, it seems to build for engineers and developers, not consumers. That's great when you're making an open source mobile platform like Android, which is hot on the iPhone's tail due to its openness and potential ubiquity across multiple carriers and devices. It's not so great when you made everyone on Gmail opt into Google Buzz ’ or for creating fanboys and girls who want to use your products, even if they have to anyway.

Either way, Larry, you're going to need some charm to lend Google the same cool factor it had last time you were in charge. Maybe start by looking up from your Android phone every once in a while.

I'm seeing this sort of pitch a lot lately:

"We are the next such-and-such company" or "we take such-and-such company concept to the next level" or "unlike [insert billion dollar website name here], we have added a killer feature and thing-a-ma-jig that changes the game."

Fill in the blanks with the buzz words of the moment and I'm sure you'll get the idea. Why the sudden urge to jump into certain markets rather than others? Well, call me crazy, but for many an amateur, I believe it might have to do something with dollar signs in the press. (Let's just say $50 billion for the sake of example.)

What disturbs me about this trend is the sheer number of people that are concentrating on web companies built for "investment dollars" or "ad revenue" rather than built for immediate income-generation. Sure, Web start-ups are inexpensive to launch, but I still contend that to stay in business they must earn money. Not every website is going to get an investor onboard or a strategic acquirer interested—not by a long shot—and you have to at least afford Ramen noodles to sustain yourself.

When I partnered with a fledging start-up to help build a Web 2.0 company back in the early 2000s, I quickly fell victim to a lot of this same hype nonsense. Except at that time, it wasn't "social networking", it was video sharing. YouTube had just started to come about and I wanted in the game. Like every other Web start-up in that space at the time, we too were "revolutionary" and a "game-changer."

Only problem: we had no immediate revenue model, based our financial forecasts totally on sponsor and ad revenue, and could not keep up with the site traffic. Investors wouldn't touch us because we were still too small, yet expenses kept piling up. In the end, the company folded and tons of money was lost (and probably is still being paid off the original founders' credit cards today.)

I certainly don't want to discourage the brilliant Web engineers out there whose business models are sound; however, I do want to discourage the other people out there (yes, you know who you are) from jumping on the "$900 million bandwagon" simply because you think your idea is better, cooler, or has more features than a site that already exists. In fact, if you have the word revolutionary in your pitch, just go ahead and wipe hard-drive clean right now.

Think before you code. Just because you can build something, doesn't mean you should. Time is your most valuable asset and you want to make sure that the enterprise you are committing yourself to has a real chance of providing you with sustainable revenue. You must truly understand how your business will make real money before you bank on some unrealistic expectations concerning traffic. If you are making money, the potential to raise investment dollars becomes all the more real.

Remember, it is never a smart bet to try to build an "acquisition" rather than build a business. After all, if your business cannot survive on it's own you'll need to exit the company way before any exit strategy can even occur—because you'll be bankrupt.

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Alternative Musics

Tuesday, February 15, 2011

Making Money With Youtube

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