Youtube and their "wraparound" adverts

There is an amazing amount of time and money being invested in User Generated Content (UGC) by both tech companies such as Google and advertisers and yet the value of this content is still up for debate. Both Google and News International clearly believe that UCG is the future and all those friends of mine out there on Facebook clearly agree (sorry but I just don’t get it as yet). However to justify the values placed on these businesses, advertising and PR on these sites is going to have to be worth its weight in gold. I’m just not convinced it is – at least not yet.

Google has apparently decided that they need to put adbreaks around video clips (see http://www.youtube.com/advertise#invideoads) to start clawing back some of the $1.65bn they spent on buying YouTube. My concern for them is that will users of youtube simply avoid this ads (as users of PVRs do – see some research from IBM on this here) or even more worrying, they go elsewhere with their 30 second MMS clips? The price that Google paid for YouTube equates to something like $29 for each unique user per month at current rates ($1.6bn / 55m). Assuming payback over five years, discount rates and strong growth in unique users – say 25% - I think they need to get each user to click through on about 4 ads a month to break even. If growth stalls then the price Google paid for YouTube will look painfully high. However since they paid in stock and not cash, maybe things aren’t that bad.

Anyway, where does that leave the advertisers themselves. Well UGC has some well documented issues and advertisers need to be careful about how they embrace it. There are some great examples out there of advertisers turning UGC to their advantage (e.g. Coke eventually) whilst some big brands have really struggled. UGC enables brands to join in converstaions with customers but ultimately the power stays with the consumer and not the brand. Advertisers and site owners need to remember this. Look at how quickly the “community” abandoned MySpace. Is there any reason why something else won’t come along and replace the current raft of network sites? Wasn’t Netscape replaced quite quickly. Didn’t Lycos and Yahoo look like the early winners of the Internet search engine crown.