A recent WSJ article mentions that when YouTube tested “pre-roll” ads (i.e., ads that play before the video launches), more than 70% of viewers abandoned the site.
Consider two startups entering the business of sharing videos:
Startup A has a lot of financing, and has not chosen a “revenue model” yet – first it plans on building dominance in the market. Then it will figure out how to monetize the traffic.
Startup B cannot afford to pass on revenue for very long, so it offers an ad-supported service. However, as in the above statistic, pre-roll ads deflect 70% of visitors – and many may switch to Startup A.
If Startup A had a plan for making money, it would have caused them to shrink and fail like Startup B. However, a day will come when Startup A must also make money – and then it will discover that its market share is only the result of its ad-free environment – as soon as it advertises it will lose viewers, too.
The difference between YouTube and most other “Startup A’s” -is that YouTube has a thousand brilliant minds at Google who spent ten months trying to find a solution. Most startups are not that fortunate.