Google to Share Revenue with Video Content Providers

Over the past several weeks, and continuing into the present time, Google has been actively attacking the problem of copyright violations for videos posted to its search properties by entering into complex revenue sharing agreements with major content providers, such as studios. This news was revealed during Google's third quarter 2006 conference call late Thursday afternoon.

But many of the formulas and the variables for those deals, these same executives admitted, are too complex to be explained to analysts, and some are actually still being determined, especially as the Web continues to evolve.

The implication here is that Google's agreements with content providers may be comprised, at least in part, of "agreements to agree" on a revenue sharing system, once it is determined where that revenue will eventually come from. Yet it's these agreements which will forestall content providers from challenging Google's rights to provide videos, especially as it takes control of leading streaming video provider YouTube.

"We were able to do some very interesting deals using a combination of financial pre-payments, revenue shares, other ways in which the money flows," said Google CEO Eric Schmidt, in response to a question from a Bear Stearns analyst. "We saw that, in our partnerships, the best partnerships come when both partners have a share in the revenue success of the deal, and that's typically the deal structure that we've been doing. I'd rather not go into the specifics of those deals."

Schmidt went on to remind the analyst that Google's deal with YouTube had yet to be closed, and that it remains a separate company, implying that any deals Google has already made with content providers may not yet apply to YouTube.

Google's SVP for global sales and business development, Omid Kordestani, elaborated further: "We're very excited to see not only that Google has had great momentum in talking with content partners - in fact, a majority of the executive team have been busy meeting with as many companies as possible, and would like to touch many of them in the coming weeks, and are actively talking about ways in which we can bring...all the Google capabilities that can improve the way these products can be offered to users, and generate a lot of revenue for the content owners. We're also very pleased that we saw that same philosophy at YouTube, that they were very actively striking these relationships, and they are complex."

But how will Google find a way to monetize the YouTube service - in effect, to produce an efficient business model for a service that's operating at full throttle, but which doesn't yet have one. As Kordestani responded, a clear answer hasn't yet presented itself. The secret is apparently the fact that so many people use YouTube now, that there has to be money behind that usage model somehow.

"It is a new space. We're all trying to understand each other," stated Kordestani. "We think ultimately the answer lies with the fact that there's a lot of usage here, a lot of interest from our users, and that we believe there's a great monetization engine at Google can provide here to make this all work for all the parties."

It was another stellar quarter for Google, with revenues of $2.69 billion - a 70% increase over the third quarter of 2005, and a 10% increase over the prior quarter. Breaking that figure down, 60% of those revenues came from "Google.com," which encompasses the division of the company that shares the least amount of revenue with its partners.

Still, the 39% of revenues that came from "Network Revenues," which include from AdSense - the portion which Google shares with partners to a much larger degree - grew by 54% over Q3 2005.

That portion is the greatest contributor to what Google calls Traffic Acquisition Costs (TAC), which as the company grows, Schmidt said, will be its way of normalizing its "cost of sales" in a more conventional accounting method. In the last quarter, Google's TAC was $825 million, $780 million of which came from AdSense. Google's own net income for the past quarter alone was $733 million.

If Google were in the hardware business like Intel and AMD -- which get bad comments whenever their gross margins fall to 50% and below -- Google's margins could be considered even lower.

Next: Google Video and YouTube May Co-exist