How I would monetize YouTube

Mark Cuban has a blog post, in which he discusses YouTube monetization. He talks about how much it costs for Google to operate YouTube (just upoading, downloading, storing costs), and thinks that it might be significant. I don’t know the numbers, but I am sure Google spends a lot of money to this free service now that they have to do some screening (of porn and piracy) as well.

I have criticized the extreme version of ‘freekonomics’ before, in which it is argued that a lot of online service including contents like YouTube should be free because the marginal cost is almost zero. See:

• Is free special?
• Wrong - Paul Krugman, Chris Anderson, Lawrence Lessig, Mike Arrington. Contents should not always be free.
• Internet is not free
• In addition to free (Part 1: Free is not a cure-all) (and later parts)

The marginal costs can go very low, but never to zero. And there are other costs that may not be directly marginal, but very real. They are fixed costs and upfront investments. You can read my posts above if you are interested.

So, how should YouTube monetize? At the moment, they are doing all kinds of advertisings. OK, do that. But I think they are missing more direct opportunities. Here are my ideas.

Charge viewing over certain amount

I suggest this, because I sometimes feel sorry to YouTube. I enjoy YouTube a lot, and sometimes use it as a background music player not even watching the video.

They can charge some dollars above certain threshold, and that will be reasonable to everyone. I am sure they have done some analysis, and my bet is that 80/20 applies here (a small % of users consume a significant % of the network and storage).

Enable priced contents

Again, I am suggesting this because I feel sorry to the content creators. I watch (or listen) music videos a lot, but I don’t think I pay back to the creators in any way.

So, give the content owners the option of making a content priced. YouTube can share certain % margin for this option. I have experienced some music videos disappearing, and I guess some of this may have to do with copyright issues. Right now, the only options for the content owner are either making it available for free or making it unavailable. I think if YouTube gives another option of making it available for a price, there will be more good contents.

Charge embedding copyrighted content

Some YouTube videos have embedding disabled. I don’t know for sure, but I guess they do this to preclude copyright infringement. But often they were the contents that I wanted to share. So, how do you make this work? Let me do it, but at a price.

There are some different ways to do this. First is to charge me (the embedder) directly. YouTube can charge a fixed fee, or they can invoice based on viewership.

Another way to do this is to charge the viewers. This needs integration with the priced-content model that I suggested above. Basically, YouTube can use me as the content retailer. In this case, I may be free to embed or even be paid to do it.

That’s about it now. I don’t know if Google has not thought about these direct models or not. But I hope Google to do now.

Good luck.

If everyone free-rides, free market may free-ride, too

A post at Marginal Revolution covered an interesting issue: http://www.marginalrevolution.com/marginalrevolution/2008/12/a-remarkable-qu.html

Here is a related question I have been thinking about the art market.

If people buy an artwork as a speculation, to sell later at a higher price, then they must be making the assumption that there will be people who ‘like’ the artwork.

But, if everyone thinks that way, that is they buy based on ‘other people’s preference’, how can the price be determined?

This seems similar to Keynesian beauty contest, in which entrants are asked to choose a set of six faces from photographs of women that were the "most beautiful" and those who picked the most popular face are then eligible for a prize. (source: http://en.wikipedia.org/wiki/Keynesian_beauty_contest)

My hypothesis is that the market will be unstable, prices swinging widly together. Because everyone is waiting for a signal that shows other people’s perception, a tiny fraction of people that moves before other people can influence the great majority. These early movers are buying based on their own aesthetic preference, unlike others. How few these independent buyers are, they are the total sample of the market and their influence can be huge.

Let’s say there is only 1 buyer who really likes a painting, and she is willing to pay $1000. Then the price that a speculative buyer would pay should not be higher than $1000. These are people who would not pay even $100 to buy the painting, without the speculative opportunity.

However, when there are a lot of speculative buyers, it does not seem to work like that. Speculative buyers guess what the price would be, based on their knowledge about people’s preference. Furthermore, it is also possible for some to try to ‘move’ the market.

Then, the voice of ‘real’ demand is mixed up with the voice of these ‘experts’. And the majority of free-riding speculators will put more weight on the experts’ opinion, because the experts represent the market, not just one buyer.

So, when things are good, they overshoot. And there is no ceiling in rising price. B hears from A that the price will go up, and tell C the same thing. C tells A that people are saying the price will go up. And it goes on. When there is few buyers buying for their own enjoying, this bubble grows itself.

When market turns pessimistic, things look opposite. When there is a real buyer, he could stop the decline of the price. He will buy when price has dropped sufficiently. But if there is no real, as opposed to speculative, buyer, there is no natural stopping of the fall. Only until the experts get bullish again.

The key difference between speculative buyers and real buyers is whether the price one is willing to pay is reasonably fixed or vary widly according to external influences. Not to make this post too long, my conclusion is that unless there are enough real buyers deciding independently the market will be very unstable.

There is another topic related to this, which I would like to write about later. That’s about ownership premium (or call it distributed ownership discount). I think distributed ownership of an asset or a business lowers the value of the asset. A company owned by many small % shareholders will be manages worse than one owned by a few large % shareholders, other things being equal.