Two articles this week illustrate the pressure Google must be feeling after its acquisition of YouTube late last year.

• In the first, the general counsel of Viacom lays out its copyright infringement case against YouTube in a Washington Post Op-Ed piece:

YouTube defends itself from copyright infringement based on one narrow slice of the DMCA (Digital Millennium Copyright Act): protecting service providers who store copyrighted material solely and simply “at the direction of a user.” This defense is available only to users who do not have “knowledge” of infringement or who “expeditiously” take down material when they find out they are infringing a copyright. The defense is not available to someone who “derives a financial benefit” from copyrighted material he stores if he has the “right and ability to control” it.

The DMCA strikes a logical compromise among competing interests and is one of many sound policies that have allowed the Web to develop and flourish. Under the act, Web hosting companies have been able to develop with no obligation to monitor every file loaded and downloaded by their users. E-mail operators have been able to safely maintain their facilities without reading every message that passes through their systems. File storage Web sites allow users to back up their hard drives without needing to patrol every file and without fear of copyright liability.

What the DMCA doesn’t do is protect YouTube.

• The second article appeared in Advertising Age, and suggests that, for all its traffic, YouTube has yet to develop any significant advertising revenue streams:

Right now, what YouTube has is eyeballs, many more than any other video website and many that you can’t easily find watching TV. What it doesn’t have a lot of is the kind of content that advertisers, being a cautious lot, are eager to be adjacent to. Bear Stearns analyst Robert Peck has divined from Google’s filings, which don’t break out YouTube’s performance, that annual revenue for the site is a rather measly $15 million. That means Google paid over 100 times revenue for the company, a disturbing multiple if you take the estimate at face value 

Add to this, of course, the fact that NBC and Fox (backed by Microsoft) have announced their own go-it-alone Internet TV venture and it’s clear that YouTube will be dominated even more by the “America’s Not-so-Funniest Home Videos” crowd, and less by the network TV and movie clips to which it owes a large part of its success.

The deck seems very much stacked against YouTube (and Google) at the moment.  A strong and legitimate lawsuit, an axis of key content holders withholding their content, and an advertising model that just can’t seem to get started with the content that’s left — that’s a lineup of forces that present a tremendous test to Google CEO Eric Schmidt and his team.  Google has a great deal of market power, but can it work its way out of this tight spot?

And while distribution costs for video have been getting cheaper and cheaper all the time (around 1/10 of a cent in transmission cost for a typical minute of viewing), some 80 million clip views per day doesn’t come cheap (at 2 minutes per clip that would be around $200,000 in transmission cost per day, or around $75 million per year in transmission costs alone, against the $15 million in annual revenue estimated by Bear Stearns’ Robert Peck (see Ad Age article above).

This means that the YouTube environment — which is relatively light on advertising activity at the moment — will need to become a much more commercial environment…and soon.  For example, a snapshot of today’s YouTube home page shows only two signs of commercial activity (highlighted below): a Pontiac sponsorship of the NCAA Basketball channel and a Verizon Wireless sponsorship (which you need to scroll down the page to see) of a contrived “Popular Videos for Mobile Devices” category.  In short, successful as it is for generating traffic, YouTube is not a robust commercial zone.

For those of us who are video creators and publishers, this means we should use channels like YouTube for exposure and distribution while we can (we’re using it, for example, to create a YouTube version of Mitt TV for the Mitt Romney Presidential campaign), but be vigilant as the environment and ad model evolve (how will we feel, for example, when advertising of Google’s choosing — be it ads for political rivals or questionable commercial products — is placed alongside our candidate’s clips?)

Other than the Romney campaign (who views its YouTube as ancillary to its main video efforts, which generate much more traffic on their own), none of our commercial or institutional clients are considering YouTube as a serious place to build their internet TV channels.  The uncertainty about commercial activity (or rather, the certainty that it must change and get much more aggressive and noisier) has convinced them to cling to a much more controlled publishing environment.  With the arrival of the Brightcove and PermissionTV video publishing platforms in 2006 (and the presence of companies like DigiNovations to help design and implement internet TV channels on these platforms), the cost of building full-scale, commercial-free, completely controlled video experiences has suddenly become quite reasonable.

It’s too early to declare YouTube a flash-in-the-pan phenomenon that couldn’t get its commercial act together.  After all, Google has shown skill beyond dispute at monetizing web traffic.  But for now, in its current form, YouTube is not the answer or even an answer to building a video presence on the web.