Google is set to actively enter the entertainment business by injecting $100 million in the production of unique YouTube-only content produced by professional Hollywood talent agencies.
The content will be made available, for free, via specialized YouTube "channels", some of which will be created around already existing YouTube content.
The investment, production, and YouTube restructure will take place before the end of 2011 and will position YouTube, the 3rd most visited web site after Facebook and Google, as a mainstream media channel.
BIG MONEY & FREE CONTENT
Google bought YouTube in 2006 for $1.6 billion dollar.
With 35 hour of video uploaded to YouTube every minute and revenue only coming from advertisement powered by Google's own Adwords system, YouTube was thought to be a moneypit for several years.
Early 2010 figures, when YouTube turned profit for the first time, showed otherwise, however, and the prognosis for 2011 is that YouTube will do about $945 million.
Much of YouTube's content is made available to Google for free: users produce, create, edit, and upload video's ranging wildly in quality from your average family video to $30 million Hollywood deal winning special effects productions.
Free content + Revenue = lot of pure profit.
CHEAP PAID CONTENT
In all cases the deals never go far because Google is unwilling to pay the high licensing fees its main competitors Hulu and Netflix are willing to.
By injecting $100 million " "peanuts" for Google " into the creation of low-cost/high-profit content Google creates its own space, increases its own profit margin, and becomes a main entertainment player itself.
A Canadian TV channel like Slice shows that you can turn a profit with a lot reality shows (think Newlywed Nearly Dead, Rich Bride Poor Bride, X-weighted, etc.). While unscripted reality shows can still cost $100.000-$500.000 to produce per 30 minute episode they are a lot cheaper than $1 million+ scripted shows " and there is still room to further reduce cost.
DATA DRIVEN USER TARGETED ENTERTAINMENT
In the end it is our use of YouTube that should scare online competitors.
YouTube serves at least 2 billion video streams a day with visitors staying an average of 15 minutes.
Google already uses social signals by showing you what your friends like and recommend. It uses your own viewing data to recommend videos similar to those you seem to like.
With that viewing and engagement information at a scale none of its competitors even remotely come close to, Google is well positioned to figure out exactly what works and what doesn't. Not just on a broad production and acquisition scale but also on a per-viewer basis, suggesting you only the topics and video lengths you seem to go for.
Google's goal is to get more visitors to stay on the site longer.
WHAT THIS MEANS
Big networks still have nothing to fear. Online video and indeed online time in general has panned out not to cut into the time we spend in front on the television. Instead we spend more time with more screens simultaneously.
As a new generation of YouTube "grown kids comes of age the bigger danger is for traditional programming competitors like Hulu and Netflix. They have a much, much smaller audience. They rely on a smaller revenue model. Their programming costs are much higher, shrinking their profit margin.
Net neutrality and metered Internet access also come into play as our 34 GB a day diet is still going up. While players like Hulu and Netflix may be faced with having to pay for priority distribution down the line, Google has been buying "black fiber" for years, reducing YouTube's bandwidth cost to zero and becoming an Internet connection player itself. This luxurious position already puts Google in a win/win situation, making government-sidestepping deals possible.