YouTube: The Billions Nobody Wanted

as streams. While a number of industry observers conclude there’s not much opportunity here, we disagree. The pessimists gravitate toward three arguments.

First, they suggest that few consumers will pay to watch rentals on a computer screen. Second, they conclude that the video quality of streamed-through-the-browser video will not be good enough. Third, they assume that few YouTube users will pay for content.

The first argument ignores that 10 million Americans have connected computers to their TVs in order to watch Internet Video on a large screen. In our analysis, YouTube movie rental availability will accelerate the growth of this “under the radar” trend.

In the typical configuration a laptop computer is attached to the TV thereby acting as the TV’s Internet Gateway over a WiFi home network. Given a wireless mouse and keyboard the user gets a lean-back viewing experience 15 – 20 feet distant from the screen. Generally, only the uninitiated assume the set-up is too geeky as documented by numerous  instructional videos.  Ultimately the laptop-as-Internet-Gateway becomes a forcing-factor leading to a new form factor such as browser centric televisions.

Upon examination the poor picture quality argument also falls flat. One reason is that YouTube recently started permitting users to upload high quality video formats. No doubt, the attraction of premium content was one motivation. More importantly, to a great many viewers the “instant on” characteristic of streamed-within-a-browser video trumps the marginally improved picture quality of a time consuming download. Once people decide they want to watch a movie, they want it “right now”. Unless they’re using a monstrously large screen there’s little discernable video quality difference anyway. The picture quality argument is echoes disparaging MP3 comments from the record labels. To their regret the labels learned that convenience trumps quality.

Finally the viewpoint that YouTube users won’t pay for rentals merely because they previously haven’t ignores the concept of the “latent market”. The analysis is much like the one that prominent consultants provided IBM in the 1950s when they advised the office equipment maker to avoid investing in Xerox.

Specifically, Arthur D. Little reasoned that since the entire office copying market at the time was about $200 million, Haloid-Xerox stock was overpriced even if they captured a 100% share. The consultants failed to realize that the market for copies on plain paper was gigantic by comparison to the chemically treated paper copies previously available. In his memoir, My Years With Xerox the R & D chief at the time explained that Xerox repeatedly faced such skepticism when it sought business partners. He characterized the company’s journey as “the billions nobody wanted” and employed the expression as a subtitle for his book.

About a decade later, Forbes Magazine listed Chester Carlson, who invented xerography, as one of the World’s wealthiest men. Years afterward Carlson’s widow corrected Forbes and explained that he anonymously gave away most of their money over the years.  But that’s another story, and a good one.

In short, a better measure for the potential dimensions of a YouTube movie rental market is the annual DVD rentals business which approximates $4 - $5 billion in the U.S. alone. The added convenience of getting movies “right now” from our living room sofa adds a considerable “latent market”. The YouTube community is huge and constantly hungers for new content. Google claims that search queries on YouTube make it the second largest search engine. Such points are obvious to those routinely watching YouTube videos on their TVs.

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