By Yi-Wyn Yen

Google’s acquisition of ad server DoubleClick is supposed to help the search giant make a splash in the display advertising market. But it’s YouTube that Google is hoping will make it a big player on Madison Avenue.

“We’re spending a lot of time on YouTube right now because that happens to be a clear objective and clear opportunity,” said Tim Armstrong, Google’s president of advertising at a recent Bear Stearns media conference.

What isn’t clear is why Google (GOOG) hasn’t figured out how to make a profit from YouTube yet.

Google built its multi-billion empire by delivering text-based ads that appeal to marketers looking for a direct response. Now the search engine’s going after major brand advertisers who see video as an opportunity to connect with consumers on an emotional level.

For a company consumed by organizing the world’s information, Madison Avenue is an unfamiliar turf. “They’re starting to think about branding,” said Matt Sanchez, CEO of video ad network VideoEgg. “There’s a culture shift going on at Google.”

While display marketing isn’t Google’s forte, the company has created an appealing branding opportunity with YouTube. The videosharing site has become the go-to site for short, snacky clips. But some advertisers worry that, unlike watching an episode of Lost on ABC.com or a Saturday Night Live clip on Hulu, most of YouTube’s vast collection of campy, user-uploaded clips are unmarketable.

“This is a challenge for advertisers,” said Chris Allen, the video innovation director for media agency Starcom. Roughly 10 to 20% of YouTube’s content is professionally produced. That really starts to diminish the opportunities for brand advertisers.”

One media buyer takes a glass-half full approach. “We’re trying to figure out what is the value in brand association with content that’s not premium,” said Curt Hecht, chief digital officer for GM Planworks, which handles advertising for General Motors (GM). “The approach we take is, how can we package this in front of a ton of eyeballs.”

YouTube is the King Kong of online videos, and what it lacks in marketable clips it makes up for with its massive and engaged audience. In January, nearly 79 million viewers, or a third of all online viewers in the U.S., watched more than three billion user-posted videos on YouTube, according to comScore’s latest report.

However, delivering all those free video clips isn’t cheap. YouTube sends a staggering 1,000 gigabytes of data every second, or nearly 300 billion GBs each month. Several industry insiders estimate that YouTube spends roughly $1 million a day just to pay for the bandwidth to host the videos. By that number, YouTube downloads would account for roughly 3% of Google’s $11.5 billion operating costs for 2007.

YouTube, which makes the bulk of its revenue from selling display ads that run on the right-hand side of the site’s homepage, has not been a moneymaker for Google. The company states YouTube’s revenues last year were “not material” in a regulatory filing. The search giant paid $1.6 billion for the company in October 2006. “I’d be surprised if they broke $20 million in revenue in ’07,” said Anton Denissov, an online video analyst with the Yankee Group.

Part of the problem is that advertisers and companies like Google are still experimenting with what works in the web video market. Advertisers will spend $1.35 billion on online video advertising in the U.S. this year, according to eMarketer. That represents 1.5% of television advertising spending this year, and just 5% of all Internet advertising spending. The research firm forecasts that U.S. spending for web video ads will triple to $4.3 billion in 2011.

Wall Street is anxious for Google to turn the videosharing site into a cash cow. Last October during its earnings call with analysts, Google co-founder Sergey Brin said making money wasn’t a top priority. The company has focused heavily on refining a user’s experience and collecting data on how viewers find videos on YouTube. Dave Eun, who runs Google’s content businesses, said the company would “turn up the dial on monetization” next year.

Last fall Google introduced several types of ad formats with moderate success. Its says viewers are responding favorably to its overlay ads, which run on the bottom of a screen like a sports ticker 10 seconds after a video starts. A viewer can choose to close the ad or click on it to expand the ad before returning to the original clip. The overlay ads only appear on YouTube’s select premium content.

“We’ve been careful about testing different monetization approaches,” Eun said at the Bear Stearns conference on March 10. “We’ve purposely not taken the easy money. And frankly, there was a lot of easy money out there. We could have taken cut-down TV ads and pushed them down our users’ throats with pre-rolls.”

Not everyone is convinced that just because Google flips a switch, the YouTube money will start pouring in. “All of Silicon Valley has a hard time understanding that it’s not some spigot you turn on,” said VideoEgg’s Sanchez. “Maybe that’s how direct marketers work, but media buyers on the brand side don’t spend money that way.”

“There’s no silver bullet,” he added. “Google’s been testing and pushing and marketing its product, but it’s not suddenly going to do a billion dollars in revenue off YouTube.”

By Michal Lev-Ram

After over a year of development, testing and refining, online video service Hulu launches Wednesday and viewers will get to chance to see if it lives up to all the hullabaloo.

A joint venture between News Corp.’s Fox (NWS) and NBC Universal (GE), Los Angeles-based Hulu says it aims to bring together the widest selection of free, “premium” videos on the Web. But unlike Google’s YouTube (GOOG), where unauthorized clips often end up, Hulu’s content is the result of pre-established partnerships with entertainment companies like Lionsgate (LGF) and Sony Pictures Television.

When plans for the then-unnamed site were announced last year, many ridiculed the idea, saying “old media” doesn’t get the Internet. But when Hulu gave select viewers a look at the site, some critics changed their tune. The company received rave reviews for its site’s ease-of-use and simplicity.

The site features more than 250 television shows and 100 full-length feature films from Fox and NBC as well as content from companies like Warner Bros. Television Group (owned by Time Warner (TWX), the parent company of Fortune and CNNMoney). Clips of other shows — including Saturday Night Live — will also be available on the site.

So far Hulu has failed to sign on two other big television networks: ABC (DIS) and CBS (CBS).

Still, industry insiders say the marketing potential of Fox and NBC — makers of hit shows like “Deal or No Deal” and “24″ — is huge.

“The networks have the power to do big things with online video,” says Morgan Guenther, CEO of interactive media startup AirPlay and the former president of TiVo. “If they do it right this thing will definitely have legs.”

Unlike YouTube, Hulu has an ad network already up and and working at launch time, though its lineup of advertisers is still limited. Hulu is experimenting with letting viewers choose which commercials they watch, and doesn’t let them fast forward through ads.

But like its rival YouTube, Hulu is also encouraging viral distribution. People can edit shows down to a few seconds and then e-mail those clips to friends. They can also embed videos on blogs and their MySpace or Facebook pages.

By Michal Lev-Ram

A New York federal judge has ruled that Viacom will not be able to collect punitive damages in its $1 billion copyright suit against Google’s YouTube.

Viacom (VIA) sued YouTube (GOOG) for copyright infringement in March 2007, saying the popular video site has “built a lucrative business out of exploiting the devotion of fans to others’ creative works.” At the time, Viacom also said that almost 160,000 “unauthorized” clips — snippets of programs like “The Daily Show” — had been available on YouTube.

But Viacom’s recent attempt to add a claim for punitive damages — sometimes awarded on top of compensatory damages to discourage the defendant from engaging in similar conduct again — was denied. U.S. District Court Judge Louis Stanton ruled that copyright law does not allow for punitive damages, saying that “…the Supreme Court has long held that ‘the protection given to copyrights is wholly statutory.’ “

Of course, the recent ruling doesn’t say anything about the final outcome of the court battle between the two companies, which is still a long way from over. And if Viacom wins the case, it can still collect statutory damages ranging from $750 to $30,000 per violation (and up to a whopping $150,000 if they can prove the infringement was committed willfully).

Google has maintained that it is working with big media firms to resolve copyright issues with YouTube. Some companies, like Universal Music Group, have decided to partner with the search giant. But Viacom said last year that after a great deal of “unproductive negotiation” its only option was to “turn to the courts.”

Neither company could be reached for comment.

By Josh Quittner 

Want to learn how to make your own sushi? Or how to make an origami bird? Or how to dance without embarrassing yourself? Starting today, Howcast, a New York City-based startup founded by three ex-Googlers, will show you.

The site aims to be a kind of Wikipedia of user-generated videos for people who want to learn how to do just about anything. “We’ll show you how to chop an onion, how to swaddle a baby, how to flirt with a girl,” CEO Jason Liebman told me yesterday. “It’s kind of endless.”

That’s the goal anyway. The trick of this venture will be getting users to step up and make the kind of high-quality videos that will attract an audience. That’s a high bar. YouTube (GOOG) succeeded in large part because its founders made the act of uploading videos about as simple as possible.

But garbage in, garbage out. YouTube is having a hard time monetizing its vast library, partly because the content is so bottom-of-the-barrel. If Howcast succeeds, we’re talking about a $1 billion-plus venture here. Why? Because instructional videos, especially those made with decent production values, will fetch much higher rates from advertisers than the junk that predominate on YouTube.

To that end, Howcast offers a video director’s kit, complete with the elements — opening and closing credits, overlays, and so on — that any aspiring Quentin Tarantino will need to create a top-notch how-to video. Daniel Blackman, another co-founder (and an old pal I first met back in the late 1990s, when he was managing Barnes & Nobles’s online store) told me that the startup is working with film students — and will pay them to produce content. “You apply to our program and if you’re accepted, we’ll pay $50 a pop for videos,” he said. Plus, students in the program stand to get a revenue 50% share on pageviews above 40,000 views.

For now, Howcast has been seeded with a few thousand videos, mainly produced by Howcast and its partners, Blackman said.

Howcast’s video player is worth noting: Very cool. When you watch a video in full screen, a series of written steps appears in the right margin as hypertext. Click on, say, Step Five of How To Fake Being Sick, and you can go right to the disquisition on How to Make Fake Vomit. Pretty sweet. Likewise, you can easily zoom in on anything to study it closer.

Aside from videos, the site intends to amass user-generated, how-to wikis. Indeed, the path to creating a specific video starts with a how-to wiki, which becomes a step by step guide that a director can later use as a script.

The company has a list of partners who will be distributing its videos, including Verizon Wireless (VZ) and a Howcast channel on YouTube. Revenue now comes from sponsorships from the likes of JetBlue (JBLU), and Starcom USA. Liebman also told me that Tudor Investment Corp. kicked in $8 million in first-round funding to build out the staff and content library.