There is much blogging glee underway in the content/tech/biz media about the viability of YouTube in terms of money it is making at this point. Details in posts here, here and here. I think they all have gotten it wrong in different ways and I will try and explain how.

YouTube has been and still is a game changing play. Which means that the way in which it is changing the audio-video content business has no precedents for us to refer to. I will confess to being one of the doubting Thomases when Google acquired YouTube, but I have changed my opinion about it. But, coming back to the main point, the way in which this will play out has no previous instances to refer to. So, trying to call it on the basis of what we have already seen is not going to cut it.

You have to be very foolish to think that YouTube is a short-term play or that it is going to be cheap to run. Then again, it is considerably cheaper for someone like Google, with their extensive peering agreements and dark fiber ownership, to run the service than for a standalone player to accomplish it. Google's peering is already quite significant, with 130 prefixes, which is about half the size of someone like Limelight, which has about 300 prefixes.

Google also has a fairly long runway for success with YouTube because of two things. The first being that it is already making money of it (nearly not enough, I know), but it is better than making no money at all. And considering the shape of the competition it has out there, it can move around, change things and get it spot on in the longer run. Meanwhile, the labels will spend all their time slowly being decimated year-on-year and finally land up at Google's doorstep, taking any deal that comes their way. Secondly, as mentioned above, it is cheaper for them to run YouTube, than it would be for anyone else.

Which brings us to the key point of the relationship between Google and YouTube. They key opportunity for Google with YouTube is to make it the most important gateway to discovering any audio or video content. If you combine the rate at which the record labels are struggling, with increasing revenues from YouTube, a tipping point will be reached for the labels to take whatever money Google offers them and sit pretty with it, than to fight them to take their clips off it.

As, Peter Kafka rightly points out in his post, we are a very long way off from that point now, in terms of revenue from YouTube replacing revenue that labels are making in sales otherwise. Incidentally, the idea is to not stop the labels from selling the albums, but to get them to be okay with the idea of the clips being on YouTube. What Google is trying to do is to incentivize the presence of the labels on the platform.

From the consumer's point of view, this process is already underway. If you have noticed it, any sharing of music or clips done these days is done over links sent to YouTube. I now rarely get any email attachments, which used to be fairly regular till recently. Anyone who is looking for a particular song, now looks for it on YouTube, Google also does their part by pushing up YouTube results in generic search results. Do you get where I am going to? Let me elaborate.

Google is already the gatekeeper of textual content on the internet. If you want to find something generic, you use Google Search. If you want to read news, you use Google News. You can call those two as internet 1.0. The next stage of massive adoption for the internet is going to come from multimedia, which is what Google is aiming to crack with YouTube. The desired end game: if you are not on Google's gateways to discovering content, you just won't get much traction.

For the labels it is the story of an opportunity lost. They had a massive chance to switch to the online era by working with Napster, but they only tried their best to bury the company. For them to transition to online, they need to bring in volumes, getting users to consume vast quantities of content and getting them to pay either a flat fee or to get them to pay for a small percentage of what they consume. They blew it and what they are left with now is Apple's iTunes empire and the YouTube conundrum.

And they, incidentally, get none of my sympathies.