YouTube - using FreeConomics to dominate a sector

There is an article on TechCrunch today asking if YouTube is building market dominance or building a business. The essential argument comes from 2 conflicting datasets:

(i) YouTube is apparently 37% of all video watched, says Comscore
(ii) Youtube, with c $200m revenues, is only 15% of e-Marketers estimated $1.35bn Web TV ad market

In other words they are apparently only getting 40% the revenue per TV unit output than their legion of tiny competitors. How can this be, TechCrunch asks.

This gap could mean one of two things. Either YouTube is unable to make money from a large portion of its user-generated video inventory (advertisers want to stick to the home page and the safety of their own channels). Or YouTube just hasn’t turned on the money-gushing hose yet.

Actually, they are doing both - by building market dominance they are building a business.

Leaving aside the dubiousness of any forecast in this market (I'd happily divide e-Marketers numbers by 25%, after all they will in 6 months or so anyway ), or any assertions that YouTube is less sharp at extracting Ad revenue than competitors, I can't see why this is so surprising. Any model ever built of network economics shows that (i) if you can first achieve market dominance, you rule and (ii) Free is a great business model to achieve dominance, especially if it can be subsidised by very deep pockets - and with the exception of Microsoft, there is no one on the planet in the space who Google cannot outspend to subsidise this. No one VC backed outfit can come close.

Thus YouTube is highly probably using good old Freeconomics, funded by Google (see our paper here for a detailed look at FreeConomics) to give away more than the rest of the competition and go for market dominance. Once they get to Google levels of dominance I'm sure they will find that monetisation follows, strangely enough.

Opponents may cry foul, after all this is not that different to how Microsoft beat Netscape (but they haven't cried foul yet), ie by cross subsidy, but its realbusiness so unless a regulatory hand enters its unlikely to stop.

Whether its a good investment of $1.65bn by Google - ie whether its profitable to dominate the sector - is another matter entirely, the jury is still out there (literally with the lawsuit games ), but at Google's size its not a very expensive option to play.