YouTube, the video site, is celebrating the third anniversary since it was bought by Google with news that it now serves more than a billion views a day to users around the world.

In a blog by YouTube CEO and co-founder Chad Hurley, he reminisces about how he and co-founder/former CTO Steve Chen made a fun video declaring themselves the “burger kings of media”. How sweet.

But on the serious side of the media equation Hurley has some important points about the fast changing world of online video (You could also call it the ‘why we won’ manifesto).

Hurley says:

• Speed matters: Videos should load and play back quickly
• Clip culture is here to stay: Short clips are voraciously consumed and perfect for watching a wide variety of content
• Open platforms open up possibility: Content creation isn’t our business; it’s yours. We wanted to create a place where anyone with a video camera, a computer, and an Internet connection can share their life, art, and voice with the world, and in many cases they can make a living from doing so

Questions remain about the business model of YouTube, which is being built around the fledgling online video advertising sector. The company is yet to declare a profit. Yet with 40 percent of all online video viewing in the US, according to comScore, YouTube will have a lot of say in writing and re-writing the rules for Web video ads.

On a Credit Suisse call with investors this morning, some online advertising experts questioned whether YouTube has improved materially in their advertising mix though they acknowledged the hard work of the YouTube team to improve the advertising environment. One advertising executive on the call said YouTube has “improved year over year”.

Let the second-guessing, the mock horror, the disbelief, the crowing begin.

Google CEO Eric Schmidt has acknowledged he realized upfront that he was overpaying to acquire YouTube, to the tune of $1 billion, judged by any conventional measures.

The many critics of Google's $1.65 billion deal to acquire the video-sharing site three years ago will claim this confirms everything they have always said about the deal. Not quite.

In fact, not really at all.

Schmidt came clean in a deposition by lawyers in the Viacom copyright lawsuit that there was very little revenue coming into YouTube to justify the price his company paid.

No surprises here. There were intangibles to consider:

1. YouTube's popularity was sky-rocketing, making it the runaway market leader among video-sharing sites.
2. It was crushing his company's own site, Google Video.
3. YouTube was up for auction and would be sold to a competitor unless Google jumped first.
4. Google overbid to ensure YouTube didn't fall into rival hands.

The Google CEO said he told his company's board of directors that the 18-month-old video-sharing site was worth $600 million to $700 million, according to CNet, which obtained a transcript of his testimony. Of course, he fails to mention the potential costs of copyright lawsuits that already loomed for YouTube.

"In the deal dynamics, the price, remember, is not set by my judgment or by financial model or discounted cash flow. It's set by what people are willing to pay," Schmidt says.

So the real justification for the 150 percent premium Google paid was in derailing, or at least delaying, the rise of a potential competitor. Of course, Google has faced a long struggle to find ways to make advertising work on the site in order to pay the costs of free video. Only last quarter could Google say YouTube would be profitable in the "not long, not-too-distant future."

Of course, all the fuss over YouTube's valuation is not really Google's problem. The real issue is the extrapolation of valuations of all the Web 2.0 companies since then which have used the YouTube price as the benchmark for all the other-worldly valuations of their unproven business models.

Here are the relevant excerpts from Schmidt's deposition by Viacom lawyers, via CNet:

Viacom attorney Stuart Jay Baskin: And what was management's valuation?

Eric Schmidt: Much lower than we paid for it.

Baskin: And how was that communicated to the board?

Schmidt: I told them.

Baskin: So why don't you tell us what you remember telling the board in connection with the valuation?

Schmidt: I believe YouTube was worth somewhere around $600 million to $700 million.

...
Baskin: What methodology did you use to come up with that number?

John P. Mancini, an attorney working for Google, objects.

Schmidt: My judgment.

Baskin: Was it based on cash flow analysis? Comparable companies? What were you using as the basis for your judgment?

Mancini objects.

Schmidt: It's just my judgment. I've been doing this a long time.

...
Baskin: I'm not very good at math, but I think that would be $1 billion or so more than you thought the company was, in fact, worth.

Mancini objects.

Schmidt: That is correct.

(Photo credit: Reuters/Jonathan Ernst)

We caught up with Netflix CEO Reed Hastings at the movie rental company’s event where it awarded a $1 million prize after a contest aimed at improving the accuracy of movie recommendations. He spoke about his hopes of working with Apple on the iPhone, the possibility that YouTube will beef up its movie service, and the future of the DVD.

Reuters: What will Netflix subscribers gain from the improvements in the recommendation system?

Hastings: It’s doubling the quality of our movie recommendation and that helps our subscribers get more enjoyment from movies. Because more often they love the movie they watch. More often the movies recommended will will turn out to be movies that you love. If you watch a couple of movies and don’t like many, you start to watch (sports and other programming). If every movie is incredible, you start to watch more.

Reuters: Netflix video streams on Microsoft’s Xbox Live system. What about the PS3 and Wii?
Hastings: Eventually we want to be on all the game consoles, all the Blu-ray players, all the Internet TVs. So we are working in parallel with all of those efforts. Currently our Xbox deal is exclusive and we haven’t characterized it more than that.

Reuters: Any plans to work in partnership with Apple and the iPhone?
Hastings: it’s something that’s likely to come over time. But nothing in the short term. (With) movie watching, we are not focused on mobile yet, but (instead) on the TV, on Blu-ray and on the video game consoles. We will get to mobile eventually, including the iPhone.

Reuters: What of Youtube’s potential movie service?
Hastings: I think there will be a lot of competition in this market: Hulu, Apple, Amazon, Youtube, Blockbuster. Internet video is a huge opportunity. And there will be a lot of people engaged, and that is going to be great for the consumer. All of us are going to innovate and compete with each other and provide more and more value to the consumer.

Reuters: How far along are we on the transition to all digital video watching?
Hastings: There will be people doing DVD-by-mail in 15 or 20 years, so I think DVD will last a long time. Our best guess is that DVD will peak for us in 5 or so years. But it is continuing to grow. And the streaming is exploding. So we are getting nice growth in the DVD side and huge growth on the streaming side.

Reuters: What do you make of Blockbuster’s store closing plan?
Hastings: Blockbuster and Redbox really compete on  doing the inexpensive new releases, and we are much more the streaming and the catalog. Their closings don’t really benefit us. It will benefit Redbox more than it does us.

Reuters: Have you been approached about an acquisition or partnership?
Hastings: We don’t comment and any acquisition prospects.

(Photo: Reuters archive)

YouTube is getting together with the organizers of the Outside Lands Music & Arts Festival to bring the show live to its users in the U.S. starting this Friday Aug 28th through to Sunday Aug 30th.

Top of the bill is Dave Mathews Band along with Jason Mraz, Raphael Saddiq, Thievery Corporation and many others all performing at the event in San Francisco’s Golden Gate Park.

The live webcast will feature on youtube.com/outsidelands and fans will also be able to access an archive of selected performances and highlights on YouTube’s Outside Lands channel.

It’s the first major music festival on YouTube, though it has previously streamed its own live music event called YouTube Live which celebrated some of the community’s own discovered stars and artists.

(Photo: Dave Matthew in Buenos Aires/Reuters)

YouTube executives and spinmeisters have been pushing back more aggressively at the perception that the video site is a great big drain on Google’s bottomline, probably  losing $200 million to $500 million a year by some estimates. These execs say that hundreds of major advertisers are taking spots on YouTube against “hundreds of millions” of video views every week.

The problem with this is the lack of precise details. How much revenue is YouTube generating from these monetized videos exactly (even approximately)? And how much does it cost to stream and store those hundreds of millions of videos every week? Google and YouTube decline to provide any numbers other than to say things are moving in the right direction. Wall Street and investors are yet to be convinced.

Goldman Sachs analyst James Mitchell is the latest to have a shot at a respectable estimate for YouTube. He says it will generate around $300 million in 2009. He also thinks the best is yet to come from YouTube — and that Google will see some benefit.

We believe YouTube revenue will grow at 40 percent year-over-year or faster in 2010 as YouTube is generally under-monetizing its home page traffic versus peers, and as its home page is a natural venue for studios to advertise new movies.

For Google investors, the most important part of Mitchell’s analysis is that he thinks display advertising, of which YouTube is a major part alongside DoubleClick, could add 1-2 percent to Google’s revenue growth.

In the meantime, the majority of the videos uploaded to YouTube are done so by its users — and as the world’s most popular Web video site YouTube has a lot of users. Over a 100 million in the U.S. alone according to comScore. Goldman Sachs’ Mitchell says:

We do not expect serving query-specific video advertisements to represent a substantial business for the foreseeable future given branded advertiser discomfort with unknown content, and given consumer unwillingness to tolerate 30-second advertisements against 60 seconds or less of content; however, Google does not need such advertising to make YouTube profitable given YouTube’s cost leverage against Google’s existing assets and homepage traffic.

YouTube is signing up more so called professional content such as its latest deal with Time Warner on Wednesday with shows like “Ellen Degeneres Show” and “Gossip Girls”. For now, most of what they’re getting from Time Warner and others like Disney is promotional clips. We asked about getting more full-length shows like Hulu, and executives gave a very ‘watch this space’ type of response.

YouTube, meanwhile, is working hard to show that getting people to watch more and more video online is not as easy as it looks and involves lots of clever technology and algorithms that its engineers have been working on.  The idea — as the Wall Street Journal’s Digits blog explains — is to  make sure “people don’t just watch one video when they come to  the site”.

The company’s engineers are looking for ways to predict what topics will pique a user’s interest after they’re done watching a certain video, based on data about their viewing behavior.

It’s taken a while but YouTube is officially pushing back at the various estimates on how much money it costs parent Google by satisfying our collective hunger for million of video clips every day. Google paid $1.65 billion for YouTube in 2006, when it bought the site from Chad Hurley and former CTO Steve Chen (pictured).

Various YouTube executives we’ve spoken to privately over the last year have bristled at the idea that they are an expensive experiment for Google without a clear profit-making business model. Google CEO Eric Schmidt took the first step in a change of communications strategy in an group interview with reporters at the Sun Valley conference two weeks ago, and to more listeners on the Google earnings call on Thursday. His central point was that everyone’s favorite video site is on the path to profitability.

On Monday, two of YouTube’s PR executives hit back at some of the myths about YouTube’s business with a blog titled “YouTube myth busting.” These include claims that it only features short-form, grainy user-generated content when in fact it has deals with Hollywood partners and features HD content. They also said more than 70 percent of AdAge Top 100 marketers ran campaigns on YouTube in 2008.

But two disputed myths that raised the hackles of the tech blogosphere were related to 1) estimates of YouTube’s cost structure and 2) the “oft-cited” stat that YouTube only monetizes 3-5 percent of the site, which the PR execs said was “old and wrong.” The bloggers wanted some numbers and they didn’t get any from this YouTube’s blog

Here’s Henry Blodget of Business Insider:

Enough already. We’re glad that YouTube has not turned out to be a disaster. (We weren’t among those who thought it would be). But we can’t stand this attitude. If Google is tired of people “picking any number to fit any theory,” then they should just publish the facts.

Peter Kafka of AllThings Digital calls it ‘modest boasting‘:

So really, the big takeaway here is that the Google folks are feeling ever more confident about YouTube’s prospects, enough to do some public chest-beating. But not enough to actually talk about those prospects in concrete terms. YouTube says that estimates that the site can sell ads against only three percent to five percent of its video inventory, first asserted in a well-reported Wall Street Journal piece a year ago, are “old and wrong.” But the company won’t say what percentage of the site it does sell.

Paid Content thinks it’s “myth-spinning” by YouTube and wasn’t convinced either:

The only interesting part comes here: “The truth is that all our infrastructure is built from scratch, which means models that use standard industry pricing are too high when it comes to bandwidth and similar costs. We are at a point where growth is definitely good for our bottom line, not bad.” Which gives credit to this analysis by RampRate last month, which said the costs of video delivery for YouTube are a lot lower than what analysts have previously estimated.

(Photo: Reuters)

That question has got louder and louder from investors and Wall Street analysts concerned that YouTube owner Google is racking huge profit-hindering costs to be the free online video platform for the world. It seems Google’s top guys don’t know the answer either — or if they do, they’re choosing not to share it with reporters on Thursday.

Google CEO Eric Schmidt told a media briefing at Sun Valley that he believes YouTube, which his company spent $1.65 billion to acquire three years ago, will come good thanks to its recent launch of new advertising formats such as pay-to-promote and pre-roll ads. “We’re optimisic that YouTube will be a strong revenue business for us because of these products,” he told reporters.

But the problem is investors are more concerned with the huge costs involved in streaming millions of videos globally everyday with a very small percentage of them covered by advertising. In other words when will YouTube make money from its dominance?

“We don’t make predictions,” said Schmidt. But then co-founder Larry Page piped in “It’s not that important.” Really? “I’m not worried it will be profitable, we want it to be very profitable,” Page said.

For Schmidt, an important part of YouTube’s future will involve more premium content from small three-man production teams to Hollywood studios. He acknowledged he’d like for YouTube to have some of the content of Hulu.com, which now features Disney-owned shows as well as NBC and News Corp programming. All three companies own Hulu. “We think we need premium content,” he said.

(Photo: Reuters/Rick Wilking)

Corrects blog post to show Buffett was talking about YouTube, not Facebook.

Attention YouTube: Warren Buffett wants to give you money.

That’s the word from Liberty Media Chairman John Malone, who sat on a panel about digital media at the Allen & Co confab in Sun Valley on Tuesday.

Malone told reporters on the sidelines of the event that billionaire investor Buffet, aka the Oracle of Omaha, had told him privately that he would be willing to pay $5 a month to use YouTube, the popular video site owned by Google.

YouTube, of course, is a free Web service which makes its money through advertising. But other popular social media like Twitter have yet to generate revenue, and monetizing social networks is a big topic of discussion among the media and tech executives gathered for the conference.

“Sooner or later people are going to get addicted to some of these services and they’ll be willing to pay for it. The question is really the economics,” Malone said.

Google CEO Eric Schmidt, or founders Sergey Brin and Larry Page, have yet to turn up at the event.

If one of them does, they might want to have a chat with Buffett.

(Photo: Malone talks to reporters as he arrives at the Sun Valley Inn, July 8, 2009. REUTERS/Rick Wilking)

YouTube has launched a new video channel called the Reporters’ Center to teach aspiring citizen journalists everything they need to know, with contributions from Bob Woodward, Katie Couric and a slew of other organizations including Reuters.

The advice ranges from the prosaic (”How to distribute your YouTube video on Facebook,” “How to not sound like an idiot“) to the profound.

“The first rule of reporting is to make sure you get back alive,” the New York Times’ Nicholas Kristof tells viewers in “Covering a Global Crisis.” “There’s no point in getting a great interview with a warlord if afterward he kills you and takes your recorder.”

Here’s Reuters’ Dean Wright on how to earn the trust of an audience and stick to the basic principles of honesty, fairness and pursuit of the truth.

How much money is Google losing from YouTube?

Not as much as you think, according to a new report by an IT research and consulting firm.

The cost of streaming billions of videos a month, and Google’s difficulties monetizing those videos, has put YouTube on track to lose almost a half billion dollars this year, according to a famous report by Credit Suisse released in April.

But that report failed to take into account key aspects of the Internet infrastructure business that significantly lower YouTube’s costs, says RampRate, a San Francisco firm that consults companies on IT outsourcing practices.

According to RampRate, YouTube’s vast size means it can negotiate bandwidth deals for about half the cost per megabit per second that Credit Suisse used in its estimates. More importantly, roughly three quarters of YouTube’s bandwidth costs are virtually free thanks to peering arrangements that allow it to bypass carrier networks and the associated fees.

“YouTube’s costs are a fraction of any other company running similar operations,” said RampRate’s report, which also estimated YouTube’s hardware costs to be significantly below Credit Suisse’s assumptions, thanks to Google’s use of off-the-shelf commodity hardware.

All told, RampRate estimates that YouTube’s loss this year is only $174 million versus the $470 million estimated by Credit Suisse.

Google, of course, doesn’t break out financial figures for YouTube, which it acquired for $1.65 billion in 2006. And RampRate said its analysis is based not on any inside information about Google, but rather from the knowledge of the online infrastructure business it has acquired by working with clients.

Of course, RampRate’s estimate of a $174 million loss means YouTube is still losing a hefty chunk of change.

But RampRate argues that YouTube provides value by serving as a sort of loss leader for Google. While Google loses money on YouTube, the extra scale it gets with the video service gives the company the clout to negotiate better infrastructure deals for Google’s broader needs.

“Far from being an infrastructure money pit, YouTube is key to reducing operational costs for other Google initiatives,” said the RampRate report.

Keep an eye on:

• Apple 3G S reviews are mostly positive (New York Times, WSJ, USA Today)
• Sirius launched its iPhone App, sans Howard Stern (Reuters, Siriusbuzz)
• Tom Tom adds Homer Simpson’s voice to navigation devices (Reuters)
• Microsoft makes gains with Bing search engine (Reuters)