Digital Shake-out

A couple of years ago Google started a program where they tried to sell ads in print media replicating their online search model offline. Today, they killed it. There is a larger story here that I think is worth sharing.

For years now we have all heard about digital killing traditional media, and I am really not going to argue against the momentum Google has over NBC and the NYT. However, something that has not really been focussed on is that, still, most of the online world does not make money. YouTube, Facebook, LinkedIn, MySpace - all are desperately trying to monetize themselves and have thus far failed. In fact, the single biggest revenue generator for MySpace was selling exclusive search rights to Google. That was a $900M windfall for MySpace, but subsequently Google announced they are losing money on the deal in a big way. MySpace are not going to get that windfall again, and selling 30K banners is simply not cutting it for them.

So here is where it gets interesting. If you are the CFO of Google how long do you keep funding the loss making YouTube? YouTube is uploading something like 10 hours of new content a minute. They have to pay for that storage space, running costs and everything else to keep the site up. Google affords it by subsidizing from its search business. In the current recession, if that search golden egg slows down, what do you do with YouTube? It is even tougher for NewCorp who own MySpace. The massive majority of NewsCorp revenue comes from traditional media properties, the Fox network, WSJ, Direct TV etc, all of which are suffering horribly. So unlike Google, NewsCorp does not have a wildly profitable golden egg property to help subsidize the losses at MySpace. At least not without a lot of pain.

Now multiply this problem across the web. While there is still an incredible potential in many digital properties, there is little money, and if YouTube and Facebook with their huge audiences are struggling, how do you think smaller sites are coping? Oh, and another by-product of the credit crunch, venture capital funds have dropped off a cliff. So riding out the storm by tapping your VC may not be an option either.

Of course, there is no way Google are going to let YouTube die, but I think we are heading for a significant shake-out not just in traditional media, but also digital. A lot of VCs, and corporate parents are going to have to make some really tough choices about their still nascent digital vehicles, and as we all know, cutting is easier than investing.