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A few weeks ago, at a large media buying agency in New York, Chad Hurley and Steve Chen, the two men in their 20s who founded YouTube, were hosting a meeting.
The event was swamped, especially by the younger employees of the agency who wanted to meet these latest heroes of the web.
“There is such a mystique about YouTube,” says one executive who attended. “Everyone just wanted to see these guys, who set up a company in their garage less than two years ago, and may one day be billionaires.”
The two partners are getting used to such adulation. Just last month, at the media industry’s most exclusive annual gathering in Sun Valley, some of the most seasoned media executives were jostling for a chance to spend time with Mr Hurley, the 29-year-old chief executive of YouTube.
The reason for the excitement among advertisers and media executives is YouTube’s astonishing online audience. The company was set up in February 2005, and has become one of the biggest internet destinations.
More than 100m videos are watched on the site each day. Many of them are videos created by people themselves. Copies of television shows and content recorded from the television or the internet, often illegally, are also widely watched.
However, it is far from clear how YouTube, media groups and advertisers will co-exist in the longer term.
On the advertising front, YouTube on Tuesday revealed a number of initiatives aimed at attracting some of the billions of dollars that marketers are shifting to online spending.
Just as MySpace.com, the social networking site owned by News Corp that has also risen to be a top online destination in a short time, has developed special areas for advertisers not directly linked to unscreened content created by amateurs, YouTube has created “brand channels”.
In addition, advertisers can create pages where users can make their own commercials, using the tools that have fuelled the popularity of YouTube, MySpace and similar sites. These “web 2.0” tools allow people to create, edit, share and comment on content.
But while advertisers are leaping on the user-generated content bandwagon and increasingly letting people get involved in making commercials, the biggest content companies such as music groups or film studios are not sure how such manipulation will work for them.
Discussions are taking place between content providers and YouTube, as well as with other user-generated content sites. Warner Music and EMI have confirmed they are in talks with YouTube. “With all the social community sites out there our goal is to develop valuable, sustainable revenue streams from them,” said George White, senior vice-president of strategy and product digital development at Warner Music. “We are putting a lot of effort into these discussions.”
YouTube has reached an agreement with NBC Universal to create a special branded area on the site where NBC can showcase its top content, a recognition of the marketing potential of having YouTube users pass around their favourite clips.
According to executives involved in discussions, there are two areas of negotiation. The first involves a fairly traditional issue: how YouTube should pay content providers. Just as sites such as AOL and Yahoo began paying to show music videos online, similar talks are being held with YouTube. Instead of licensing content, the business model is expected to involve sharing advertising revenues.
Already, a lot of videos shown on YouTube are music videos, but they run without explicit permission. For YouTube, reaching agreement with the music companies is very important. It reduces the chances of being sued by the big music groups, a path that led to the extinction of previous internet sensation Napster.
It might also mean advertisers are more attracted to the site, as big brands prefer to advertise next to professional content rather than amateur productions.
But there is a bigger negotiating issue, which media executives say is the area where discussions are the most heated and for which there is not really a model yet: whether professionally produced content can be manipulated by viewers.
“This is an entirely new area,” says one executive. “To work out agreements which allow your content to be changed by others involves a completely different perspective, and not everyone is willing to make that leap.”
If Mr Hurley and Mr Chen can jump over this hurdle and make YouTube a new kind of distribution partner for some of the world’s biggest media companies, the chances that they will actually become billionaires, or at least millionaires, would likely increase.
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