YouTube’s Disruptive Innovation Kicks into Gear

By: New Markets Advisors

YouTube is looking to become far more than a home for self-produced content and pirated media clips. The Google-owned company is defining a new market between the cheap and charming videos which made it famous (what happens if we mix Diet Coke and Mentos?) and the far slicker offerings that dominate broadcast and cable TV. A significant disruptive innovation is coming.

For YouTube, disruptive innovation means leveraging the company’s current presence on Internet-enabled televisions to create a new market space of viewers engaging with YouTube “channels.” According to reports this week in the Wall Street Journal and industry media, the company plans to spend as much as $100 million commissioning low-cost content in areas such as arts and sports. It is not attacking (yet) companies like Netflix and Hulu that are offering some of the highest-end offerings of popular movies and TV series. YouTube believes there are plenty of viewers motivated to access niche content in an ad-supported business model that doesn’t need to spend very big money for the latest hits.

YouTube has unique assets that enable it to build this new market. It is directly accessible via many Internet televisions, one of very few companies in that position. Its 100+ million unique visitors per month give it a reach more than 4x that of Netflix and Hulu, so it can build audiences fast. YouTube also has substantial upside to grab — currently the average viewer spends just over 2 minutes on the site, less than a quarter of the Netflix average. Moreover, the company’s revenues are only about 1% of the $70 billion U.S. television ad market. For all of YouTube’s achievements in pulling viewers, it hasn’t yet been much of a financial success.

The company can also derive benefits from its ownership by Google. For instance, Google is introducing social networking features that enable users to see what content their friends like. Following in the path of other disruptive innovations that create new markets, this feature introduces a totally new dimension of performance that traditional competitors lack.

Yet there are plenty of outstanding questions that affect how dirsuptive a move this will be:

• Will YouTube’s advertisers come from existing sponsors of TV, which could exert pressure to conform to current notions of the TV experience? Or will they come from Google’s vast array of advertisers who target niches?
• Will the new viewership come from YouTube’s hard-core afficionados seeking new content? Or will they be marginal YouTube viewers who want the company to move in different directions?
• Will the channels adhere to commonplace categories such as “sports,” or will they redefine content to create totally new categories such as “extreme women”?

A hint of the future comes from a recent interview of YouTube CEO Salar Kamangar in the San Jose Mercury News: “When you think about the impact cable had, we think we’re in a position to have a similar impact for video delivery, like what cable has done with broadcast. In the early ’80s, you had three or four networks. Now those three or four networks are responsible for 25 percent of viewership, and the cable networks are responsible for all the rest. Right now, the fraction of traffic that is Web video is small relative to broadcast and cable, but it’s growing at a fast rate. What’s amazing is that the Web enables you to build a kind of channel that wouldn’t have made sense for cable, in the same way cable enabled you to build content that wouldn’t have made sense for broadcast. You couldn’t have done CNN with the broadcast networks; you couldn’t have done MTV with the broadcast networks.”

If that is Mr. Kamangar’s vision, YouTube’s disruptive innovation has barely begun.

Story by Steve Wunker.