In Part I I tried to explain how Google makes its profit by acting as a conduit for information of all types and inserting ads as they mediate our contact with it; in Part II I tried to explain how Google stands to maximise this profit by fostering an environment of open access to and ubiquity of information, especially through wireless networks. What’s the next step in Google’s master plan? How does this add up to changing the face of communications forever?

Back in the early 80s, when home computers were just becoming accessible to middle-class families, there was a struggle to see which of the computer manufacturers could capture the largest chunk of the market. The Macintosh was popular, and IBM put its history of making hardware to good use. It was a bit of a boom time for computer manufacturers, and quite likely, we’ll never see a boom like that again.

The reason: the hardware boom was something of a blind alley. Not long after personal computers had started to make inroads into middle-class homes, along came a company called Microsoft. Microsoft’s take was a little different; they saw that hardware was a liability – it cost so much to manufacture, and became outdated so quickly, and had such a limited market that it really wasn’t all that profitable. Software, on the other hand, could be made and distributed relatively cheaply and easily, and had near-infinite flexibility and applications to work and play. Computers only do one thing: they compute. Software, on the other hand, can do just about anything – meaning the potential market for software was virtually limitless. Microsoft, I don’t need to tell you, rode this wave to become one of the biggest and most powerful corporations in history.

The reason I bring this up is because a similar shift of focus from appliances to the content on them is currently taking place – this time, though, it relates to culture: film, television, music, and the written word. Already the paper-based publishing and news industries have suffered from the Internet’s growth. The growing reach of digital media, I believe, will soon be exploited in a way similar to how Microsoft exploited the growth in popularity of the home computer. It doesn’t matter how you get the content – by television, by radio, by computer, by cellphone. In a few years, programming will be portable from one device to the next. And just as how computer manufacture wasn’t nearly as profitable as making the programs to run on them, making TVs and cellphones and even renting the bandwidth it takes to operate them just isn’t going to be as profitable as channeling the oceans of content to users: video and music and written content that we will be free to pluck from the airwaves anywhere, anytime. But I’m getting ahead of myself.

Back in 2006, as I was writing my first application for grad school, I pitched a thesis that made a few very specific predictions. This was in late fall, shortly after Google had purchased YouTube for $1.65 billion. First, I predicted that YouTube would start licensing content from television networks (they’ve also licensed much of the music on their site as well). Second, I predicted that YouTube would start sharing advertising revenue with providers of original content. Third, I predicted that YouTube would start showing commericals, like regular broadcast television. All these things have since come to pass, albeit in a somewhat limited way, but the intentions are becoming clear. Even more important: just days ago, Google announced that, for the near future, anyway, it would be focussing primarily on expanding YouTube and making it profitable.

I made these predictions because I realised that the only reason Google would spend so much on YouTube was because they believed YouTube was going to be big – really big – bigger than television – and to be bigger than television, YouTube was going to have to start attracting real television-worthy content, and collecting revenue for delivering it.

A lot of people scratched their heads and wondered why Google would spend such a seemingly exorbitant sum on something as frivolous as YouTube – which at the time hosted mainly videos of teenagers ghostriding the whip and dropping Mentos into Diet Coke – especially since Google already had Google Video, which had advantages like higher image quality, the ability to show feature-length videos, and a great opt-in profit-sharing program that let people charge as much or as little as they wanted for viewers to download their content. The answer is both simple and complex. The simple answer is, YouTube had cachet – it was already a household name, and Google Video was not.

The more important answer to the question is that Google needed an extremely popular and versatile video distribution platform to reach its long-term goals – namely, to deliver content of a whole different order. Google has been aggressive about marketing its search engine, its shopping application, its maps application, even its blog search – traditional Internet content, in other words. But all of this is small potatoes compared to the kind of money that America’s top TV networks get for primetime advertising. Google has seen the handwriting on the wall – that broadcast television is quickly approaching its expiry date, and that video and home movie distribution is soon going to make the transition from TV to the Internet – and decided to become the equivalent of a media conglomerate, but one with no infrastructure to maintain aside from their own servers.

The important difference between YouTube and television networks, of course, is that networks are rigidly structured: ratings are obsessed over, advertising is scrupulously placed, and game theory is used to break down primetime schedules, which are then shuffled and reshuffled in an attempt to always come out on top. Content is strictly organised into 30-minute chunks, hierarchised by channel, timeslot, and genre. By contrast, on the Internet everything is levelled. As I mentioned in Part I, it makes no difference to Google if the ad they place is seen two times or two million times – they hold no liability over the cost of producing the content, so the revenue per click is the same no matter what the method of attracting viewers is. So network, timeslot, and even audience share and ratings become irrelevant to the delivery system. The entire process of distribution is democratised, and a top-rated show like American Idol can share room on YouTube with countless seconds-long home movies of sleepy kittens.

The benefit to the viewer is obvious, in that there’s an explosion of content, all of which is equally accessible to the audience. The benefit to the independent producer is also obvious – they are no longer beholden to networks; they have total creative control, and can make episodes according to whatever schedule they want, and never need to worry about being picked up (or cancelled). The benefit to the current producers of big content is not quite so immediately obvious, but in a later post I’ll try to explain why I think even the Big 4 can take advantage of a democratised means of distribution.

All that aside: Google still doesn’t produce video content. But if everyone turned to YouTube in the place of turning on their TV, YouTube would be in a position to deliver hundreds of channels of advertising, all of it tailored to eliminate extraneous media placement costs. Naturally, YouTube will have competitors; hulu.com (not available in Canada) is notable among the frontrunners, delivering “free” content with embedded advertising, not unlike broadcast TV, but available on demand. iTunes follows a different economic model (they charge $1 to $2 for every commercial-free program, which the viewer can then save and move from device to device), but one which presents YouTube with some serious competition for viewers. In the future, both YouTube and iTunes will be important sources of video content viewers can watch on their home computers, on their TVs, or on their cells – but not only the economic model will differentiate them. iTunes will most likely continue to distribute mainly high-quality “mainstream” or network programming, whereas Google has from the beginning embraced a democratic model that values user-generated content of all kinds, and has elevated home movies to the same status as any Hollywood production.

If Google and YouTube can capture even a fraction of the total amount of television content that will be moving online over the next 20 years, they will increase their current revenue exponentially.

[Jump to Part IV]