Last week the media world was rocked by the stunning $1.65 billion purchase of YouTube by Google. While not that unexpected, it offers an exciting new chapter in the evolution of both the Internet overall and advertising in particular. I believe there are two interesting takes on the merger from a Challenge Dividend perspective and offer them up here.
Nate Elliott, a star analyst at Jupiter, published an opinion on his blog and in the UK's Daily Telegraph last week that is at the heart of the Challenge Dividend. According to Elliott, YouTube will be much less successful because of its purchase by Google, because it will feel less pressure to generate profits. Here's his argument in brief:
- As an independent company, YouTube would have aggressively sought out new revenue models.
- Google makes so much money from search that it has less need to force YouTube into profitability.
- Google itself has been unable to shift from its successful text-based ad model, but its huge profits on these ads mean it has less pressure to change.
Elliott points out one early example of a pattern of "unpressured choices" in that YouTube and Google have both chosen not to place short ads (called "pre-roll advertising") at the start of video clips. This is a service that media agencies and their clients are literally begging for; and most consumers seem to accept that to see free content they need to watch a short ad. But in August, YouTube's CEO rejected the idea.
Some might argue that Google is making a long-term bet and YouTube should not be under pressure to create immediate returns. In fact, one of my loyal readers suggested that the weakness in my entire Challenge Dividend argument is that it may decrease the opportunity for important long-term investments (that need protection from quick payout).
I believe that long-term investments can and will be successful in a Challenge Dividend world, but only if companies continually challenge their investments in other ways. There are more examples of failed long-term investments than successful ones, mainly because these are completely isolated from pressure of any kind - be it profitability, ROI, or hitting key milestones. Xerox PARC was an amazing source of new technology and brainpower, but most of its ideas never made it to market first. This brain trust was famously isolated away from headquarters and failed to tie into existing products and markets for Xerox.
A better example is Procter & Gamble's investment in diaper technology that led to today's Pampers franchise. As described in the book Will & Vision, P&G knew that it had to get the price down to about 6 cents for disposable diapers to be used on everyday occasions by parents in the 1950s. This challenging number became the rallying cry and internal ROI measure. It took R&D and test marketing 10 years to figure out how to dramatically reduce production costs while honing the marketing needed to convince parents to switch from cloth. Its rollout in 1966 was a huge success and the disposable diaper market grew from $10 million to $370 million by 1973.
Time will tell if GoogTube is able to payout its $1.65 billion investment. I would be more confident if Google had made a "statement" like P&G in diapers - that it was shooting for a long-term goal that was meant at opening up a new market. But even if the merger fails, the good news for consumers and advertisers is that the YouTube payout is a motivator for new entrepreneurs, and the Google purchase is pressure for Yahoo! and MSN to take similar risks.
Comments