Business 2.0:  
Google's big bet
The search giant's $1.65 billion deal for YouTube is all about the future of online video advertising. That future should scare you.
By Susanna Hamner, Business 2.0 Magazine writer-reporter

(Business 2.0 Magazine) -- Barely a day goes by without news of a blockbuster deal involving the Internet and video. Witness Google's $1.65 billion purchase Monday of YouTube, the upstart video-sharing website.

While skeptics were left scratching their heads over reports of a bidding war - and the lofty price ultimately paid - for privately-held YouTube, it's clear what drove the deal: advertising dollars. Billions of them.

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That is, billions of dollars in future ad sales. Online video ads are still the runt of the advertising world, but they'll be a $1.3 billion business by 2011, or four times what they they are today, according to JupiterResearch.

Google (Charts) is betting that YouTube, which boasts a monthly audience of 20 million, will put it front and center at that feeding trough.

First, though, video advertising is in need of a major overhaul.

Making it click

Most online video ads today aren't much to look at. They're often the same 30-second spots that marketers air on television, only reformatted for the Web. Users don't have the patience to watch them and technology makes it easy to avoid them.

But what if advertisers know so much about a consumer that they'll be able to customize ads based on her known preferences? Say, for instance, that she's a 20-something urban professional who recently looked online at the new Mazda Miatas, went on her honeymoon in Hawaii, bought clothes at Anthropologie, and ordered coffee beans from Peet's.

While visiting a news site, a voice calls out her name. She looks and a brand new Mazda pops up in a video. The car is shown zipping past an Anthropologie store and a Peet's cafe. If the user clicks on the Anthropologie store front, she'll be taken immediately to the new winter collection. The companies featured all pay a portion of the advertising costs.

Brace yourself: Customized ads like this are coming soon. Visible World, a New York-based technology company, is working on a service that instantly delivers ads customized to appeal to individual users based on factors like where they live and what they buy.

"These innovations are so critical to advertisers," says Christian Spinillo, an executive at PointRoll, a creator of Web ad technology and subsidiary of newspaper giant Gannett (Charts)."Rather than listening to or watching a message, video ads promise to give [users] the opportunity to interact without being intrusive."

Knowing the limits

Like it or not, advertisers now know more about consumers than they ever have before, thanks to Web tracking services and the popularity of social networks like News Corp.'s (Charts) MySpace, where users showcase their lives for the world to see - and marketers to track.

To privacy advocates, the future of advertising looks like a horror movie. To profit-minded businesses, it's a blockbuster in the making.

The key for Google, with YouTube in hand, is not to ruin a good thing.

If ads are too intrusive, consumers will rebel. "The ad must be relevant and make the process valuable to the user," warns Jason Deland, a partner with New York agency Anomaly. "Just because you can do this type of ad, doesn't always mean you should."

Already there have been some successful ads on YouTube. Ecko Clothing, a Florida-based apparel brand for young urbanites, recently posted a commercial on the video-sharing site that featured a graffiti artist defacing Air Force One and was designed to look like a homemade video.

The spoof reached an estimated 135 million consumers, including ones who viewed it online and others who read the media coverage that followed.

For a relatively unknown company like Ecko, that's a huge payoff. By way of comparison, the finale of last season's most popular TV show, "American Idol," drew about 36 million, or almost a quarter of that.

And, as far as advertisers go, that's all that matters. Top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.