Google Grapples With YouTube

Updated from 12:10 p.m.

Yahoo! ( YHOO), Time Warner's ( TWX) AOL and Microsoft's ( MSFT) MSN probably don't have to worry about YouTube's surging popularity quite yet.

Though the video-sharing site is gaining huge numbers of users, advertisers are still leery about associating themselves with YouTube's content, which can be racy, weird or of poor quality. That reluctance may change over time, particularly for companies looking to reach the young, hip audience that's attracted to YouTube, analysts and advertisers say.

"Will YouTube siphon dollars away from Google ( GOOG) and Yahoo!?" asks Martin Pyykkonnen, an analyst with Global Crown Capital, who rates both shares as overweight. "I don't see that right now."

Analysts expect advertisers to stick with the sites they know, such as the New York Times ( NYT) and Disney's ( DIS) ESPN. They also will avail themselves of whatever video advertising services Google eventually puts up.

Wall Street knows that YouTube will eventually have to sell more advertising without alienating its core audience. There already is speculation among bloggers about whether a big media or Internet company will buy the site, which, like its rival MySpace, has yet to turn a profit. A YouTube spokeswoman didn't comment. In other media interviews, YouTube executives have stressed that they are looking to build their service and aren't focusing on a short-term payout.

Last month, YouTube unveiled what it described as "new advertising concepts," such as specialized channels on the site and specially designed ads on which users can comment. Warner Music's ( WMG) Warner Bros. Records, News Corp.'s ( NWS) Fox and the Weinstein Co. are partaking in these services.

Though more advertisers are going to experiment with YouTube, don't look for any huge shift in spending just yet, even though demand for video advertising is skyrocketing.

Spending on online video is expected to hit $2.3 billion in 2010, about a tenfold increase from $265 million last year, according to data from eMarketer, making it the fastest growing area of Web advertising. Inventory is so tight for online video ads on Yahoo!, MSN and AOL that advertisers sometimes are buying spots on popular sites months ahead of time.

YouTube, which declined to comment for this story, could benefit from the fact that companies may be experiencing difficulty finding spots for their Web commercials on the bigger sites, says Denise Garcia, an analyst with WR Hambrecht, who has buy ratings on Google and Yahoo!.

"YouTube will benefit from the lack of inventory," she says. "There's not a lot of alternatives for video-based advertising."

More and more video content is continuing to pour online. AOL said today that it will offer the exclusive Web premieres of two new NBC TV shows, "Studio 60 on the Sunset Strip" and "Twenty Good Years." Yahoo! recently added business-news videos to its financial news site. MSN also has been adding exclusive features, such as its behind-the-scenes look at the premiere for "The DaVinci Code" movie.

Even big advertisers, including Anheuser-Busch ( BUD), are getting into the act. Last week, the self-proclaimed King of Beers announced plans to create Bud.TV, a Web site with "consumer-generated content, field news reports, celebrity interviews, music downloads and comedian vignettes."

"There's huge demand for online video," says Yahoo!'s chief sales officer, Wenda Harris Millard, in an interview. She adds that inventory for popular areas of the company's site can be scarce, but that it is not sold out.

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