Time to kiss and make up with YouTube

NEW YORK (CNNMoney.com) -- Big media companies seem to be taking two tactics when it comes to dealing with online video upstart YouTube.

The first is to act tough and demand that the Google (Charts)-owned subsidiary remove any illegally posted copyrighted content. That's exactly what Viacom did earlier this month, forcing YouTube to take down videos from Viacom-owned cable networks such as Comedy Central, MTV and Nickelodeon.

Media executives, meet YouTube co-founders Steve Chen and Chad Hurley. They could be your friends if you want them to be.

The other is for media companies to try and build a YouTube of their own.

Viacom (Charts), for example, has purchased iFilm and Atom Entertainment and announced last week that it will allow Viacom clips to be posted on Joost, an up-and-coming online video firm started by the co-founders of Skype and Kazaa.

Sony (Charts) bought online video firm Grouper last year and announced earlier this month that it was going to run a user-generated video contest tied to Sony's upcoming "Spider-Man 3" movie exclusively on Grouper.

News Corp (Charts)., which owns the social networking firm MySpace, is trying to make MySpace videos an alternative to YouTube. It also announced in January that it was investing in ROO Group (Charts), a publicly traded company that has developed a platform for posting online videos.

And my parent company, Time Warner (Charts), through its AOL unit, has purchased several online video firms and also invested in hot upstarts like Brightcove.

But so far, it appears that shunning YouTube might not really hurt YouTube all that much. In fact, it looks like big media may need YouTube more than the other way around.

According to figures from Internet research firm Hitwise, YouTube's traffic actually increased 14 percent in the first two weeks after Viacom asked YouTube to pull its videos.

This could be a sign that YouTube, which some have suggested would be in trouble if more media companies followed Viacom's lead and demanded for videos to be taken down, may actually not be as dependent on mainstream media as previously thought.

"One thing that is quite remarkable is that people tend to be looking for consumer generated content more than actual TV content on YouTube," said Bill Tancer, general manager of global research for Hitwise.

Still, don't expect large media firms to relent in their battles with Google and YouTube any time soon. There is too much at stake. The media giants realize that even though YouTube can potentially give them a wide audience for their content, the media firms don't want to just attract viewers. They want to get paid as well.

And that's one reason why, despite YouTube's popularity, more media titans are seeking to partner with other online video companies.

"For big media firms, it's no longer sufficient to just make your content available online," said Mark Pascarella, chief executive officer with Gotuit Media, a private company that runs an online video-on-demand service. "It is no longer about aggregating a major media audience. It is less about getting new eyeballs and more about engaging that audience, growing it and making money off it."

Along those lines, one way for the media companies to generate meaningful revenue from online video is through advertising. And at this point, some say it's still uncertain whether YouTube or other sites focusing on user-generated content will ever be able to attract a sizable amount of interest from mainstream marketers.

"Advertisers want to be in front of trusted content on trusted Web sites," said Robert Petty, chief executive officer of ROO Group. "They don't necessarily want to promote their product in front of a video of a dog riding a skateboard."

There's also the issue of whether user-generated videos are a fad or not. I've argued that people will eventually grow tired of the whole "You" phenomenon. In addition, people posting videos may also want more than just the 21st century version of Warholian fame.

"YouTube is predicated on the assumption that there is a massive sea of content creators," said Max Kalehoff, vice president of marketing with Nielsen BuzzMetrics, a firm that measures consumer opinions online. "But how long does that novelty carry on? At what point do creators demand compensation beyond notoriety?"

As such, an investor in the media sector said that the established old media firms are likely to continue their efforts to develop their own online video services and that eventually, they will be able to succeed.

"Never underestimate the big media companies. It's not that they always get it right at first but they have enough power to make a difference," said Bob Nolan, founding partner at Halyard Capital, a private equity firm. "Media companies are not going to back down on this."

Of course, this doesn't mean that the end for YouTube is nigh, especially now that it is backed by Google, with its $138 billion market value and $11 billion in cash.

A more likely scenario for media companies and YouTube is that in addition to buying or building their own sites, the media giants will also realize that partnering with YouTube also makes sense.

Hitwise's Tancer said YouTube can actually help build buzz for TV shows and points to how the popularity of the "Lazy Sunday" skit from "Saturday Night Live" on YouTube helped make "SNL" more relevant again.

"After seeing 'Lazy Sunday' on YouTube, it made me think for the first time in years that maybe I shouldn't go to bed so early on Saturday nights and should start watching 'SNL' again," he said.

Ryan Jacob, manager of the Jacob Internet fund, which owns shares of Google as well as News Corp., argues that the fuss over YouTube will have to subside at some point.

"Eventually there's going to be a peaceful existence," he said. "Media companies have always been hesitant with new technology, but usually technology expands the market for them.

"YouTube gives media companies tremendous exposure. To think that a 5 minute clip of 'The Daily Show' on YouTube is going to hurt viewership on Comedy Central is absurd," Jacob added. "There's just a lot of posturing going on right now."

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The reporter of this story owns shares of Time Warner through his company's 401(k) plan.