By now, we all know about the popularity of YouTube and the dramatic effect the site has had on video creation and sharing.  However, despite its popularity and dominating position as the Web's most popular user-generated video site, it seems to me that YouTube could be in danger of going under.  "That's preposterous", you say.  "Millions of people are viewing the site on a daily basis! How could you  be so stupid to say that it's going under?"  Well, while we have plenty of reports citing the millions of page views and millions of videos generated on YouTube, what we don't have are reports citing YouTube's millions of dollars in profits.  And that is because YouTube profits are nonexistent, despite all the hype surrounding the website.  If the site fails to produce an effective business model complete with actual profits, as opposed to losses, in the near future, this ground-breaking Web dominator could be in serious trouble.

Let's take a look at the facts.

• According to the Wall Street Journal, as of August 30, 2006, there were 6.1 million videos on YouTube.
• Since its establishment last year, people have spent a total of 9,305 years watching YouTube videos. 
• About 500,000 people have profiles on YouTube.
• According to Forbes, YouTube streams 200 tetrabytes of data every day, approximately 100 million videos.
• According to Alexa, YouTube is now the 8th most popular website in the US, the 14th most popular site in Japan, and the 11th most popular site in the UK.

In summary, YouTube is hugely popular and has a massive fan base. Underneath these amazing user stats, however, there are financial problems.  It seems that YouTube and other sites like it that depend on free, user-generated content, have yet to figure out a way to turn site traffic into profit.

It's time for some more facts.

• YouTube is reliant on funds from venture capitalists for financial support. Investments in the confirmed amount of $11.5 million from Sequoia Capital make up the base of these funds.  But a rumor from TechCrunch says that this may have increased to $25 million.
• YouTube does make some money from advertising, but if you look at the site, you will see that it is remarkably sparse in the advertising department.  In addition, these ads are a relatively new feature that only started appearing in March.
• The biggest problem facing YouTube is that, according to Business Week and other sources, the site has to shell out between $900,000 and $1.5 million per month for costs associated with computer servers and the massive bandwidth required to display all those videos.
• As a result of these costs, the Economist reports that YouTube is losing around $500,000 per month.

Basically, YouTube won't last forever using its current strategies.  Something has to give.  Because of this, YouTube is taking on some new advertising strategies.  The first is the creation of independent "channels" on YouTube where official sources can promote their products.  Paris Hilton and Warner Music Group are the first to take on such a project. On the "Paris" YouTube channel, WMG promotes Paris Hilton's new cd, and users can view her music video. The benefits in this strategy for participating companies are two-fold: they get to promote their product to one of the largest online communities on the Web, primarily composed of young people.  Second, the company can make extra money from ads featured on their channel. You Tube, in turn, makes cash from the company's purchase of their channel.  Seems like a win-win for everyone involved, right?

Well, maybe, but one sponsored channel and a few scattered ads is not enough to pull YouTube out of the financial doldrums.  Venture capitalists want to make money, and with social networking sites like MySpace selling for $580 million, it seems like the best way for YouTube investors to cash in on their investment is to sell the site to a major media mogul.  Maybe that is why YouTube decided that it wouldn't sell unless it received an offer of $1 billion.  It makes sense, but there is one major problem with this.  Who in their right mind would buy YouTube?

It's a profit-less site running the risk of a facing copyright lawsuit in the near future.  This, combined with the lack of official policing on YouTube for questionable content rules out possible buyers like Yahoo! or Google, or even major TV networks.  The risks of copyright infringement (let's face it, some of the best and most popular content on YouTube are clips from TV shows like John Stewart, the Colbert Report, and Saturday Night Live) and having one's brand name appear next to a video of offensive or questionable nature are simply too high to make purchasing a business without a profit model reasonable.  (John Battelle's SearchBlog makes some interesting comments on this, as well).  YouTube does promise the removal of illegally-reproduced or copyrighted material on request, but lacks a system for tracking copyrighted videos on its own.  Also, the removal of inappropriate content lies mostly in the hands of YouTube users.

Another threat to YouTube, besides the high costs of bandwidth, the high risks of copyrighted infringement, and the lack of a potential buyer, is that there are a number of new video sharing sites cropping up that may prove to be substiantial competitors for YouTube.  Revver and blip.tv combine the ease of uploading videos that YouTube envisioned with one other important component: profit.  On these sites, videos are followed by short advertisements.  Every time a viewer clicks on one of these ads, the profit from the advertisement is split between the site and the person who uploaded the
video.  So, the more popular your videos, the better chance you have of making some cash.  

Microsoft is also coming out with a new site, called Soapbox.  Like YouTube, this site will be free.  Unlike YouTube, it won't use any ads.   It's sites like these that make me wonder, why the race to compete in the user-generated video (or content delivery) industry?  Especially for a site like Soapbox, with no additional edge or functionality, what's the attraction here? It's true that the viral nature of these videos can mean the easy promotion of movies, music, and music videos, but there simply is no pattern for profit yet. 

There is one more problem.  For many, YouTube is not a destination site, but merely a platform for embedding videos in blogs.  Peter Chernin, Chief Operating Officer of NewsCorp., estimated that 60% of YouTube's traffic was coming from MySpace.  This means that if MySpace were to launch a better, or even similar, video service, YouTube could easily be crushed.  YouTube's main advantage is that it has no other serious competitors that can sway YouTubers away from their tried-and-true method of uploading and sharing videos.  But if this were to change, which is likely given the emergence of Revver, blip.tv, and the possible MySpace video system, YouTube would be in serious trouble.  Right now, YouTube has the market cornered…but I doubt that will last much longer.

I suspect that YouTube and its competitors will figure out a way to turn site traffic into cash, but in the meantime, sites like Revver and blip.tv that make ads the core of their functionality might develop an edge over YouTube (certainly in profit, at least).  The only question remaining is can any site compete with YouTube's massive user base?  I'm not sure.  But it will be interesting to see how YouTube and content delivery strategies change in the future.  Until these sites can begin to turn a profit, I'm afraid it's pretty clear that we are securely entrenched in the next-generation Internet bubble, the Bubble 2.0.  Who will be the first site to burst?

For more discussion, check out Blog Maverick's "The Coming Decline of YouTube"–by Mark Cuban, owner of the Dallas Mavericks.