Ten months after dropping $1.65 billion on YouTube, Internet giant Google Inc. has decided that going with semitransparent "overlay" ads at the bottom of some video clips is the best way to go about monetizing the millions of visitors to the wildly popular video sharing site.

The ad model (first used by rival Videoegg Inc.) allows YouTube to avoid prerolls and other techniques that tend to alienate viewers, while also sidestepping some infringement land mines that come with millions of uploaded videos. The ads will go into the video clips of the 1,000 or so media companies that have licensed their videos to YouTube, avoiding the liability of ads being displayed on copyrighted materials, and giving advertisers the assurance that their ads won't appear in clips that they wouldn't want to be associated with. Ad revenue will be split between the media partner and YouTube while Google will charge advertisers $20 for every 1,000 times the ads is displayed. Among the media partners are Warner Music Group Corp., and New Line Cinema and 20th Century Fox.

With all the money that Google’s search business throws off, the company could afford to take time to figure out the best way to introduce more ads into videos while staying in the good graces of users, even as other video-sharing site sites such as MetaCafe and Revver used the time to try and close the gap between themselves and YouTube and content producers made plans for their own video sites that could chip away at YouTube. But with tremendous lead on all other video sites, YouTube's new ad system's most important contributions will likely be convincing marketers to join up with Google 's advertising juggernaut.

YouTube's revenue was a meager $15 million, based on figures from Google’s annual report. Ad money will start coming in to cover the high overhead involved in running an Internet video company. And what may be even more important to Google's long-term growth, YouTube will finally get the chance to prove it was worth its sky-high price by becoming that crucial second revenue stream that analysts blast Google for not securing.

For more on the various ways Internet companies are monetizing content in the Internet age, please join us at The Deal and Tech Confidential's Convergence 2.0 conference Sept. 17 in New York City. —George White

See The Deal's Oct. 9, 2006, YouTube coverage
See Tech effect posting on Online Video
See more on Convergence 2.0 conference

Tags: media, deals, m&a, mergers, web 2.0