When Tom talked about Google, Inc.'s (NASDAQ: GOOG) failure to properly monetize YouTube, he questioned if Google's purchase of the world's largest video-sharing site was a mistake. In relative terms, Google's use of stock to purchase YouTube was a short-term impact more than anything. But he's right -- YouTube still has not found a secret sauce to monetize the huge amount of video traffic being sent to and viewed from the site every second of the day.

What has taken Google two years to figure out here? YouTube has been a playground for testing different online video monetization methods, but none of them have really worked. YouTube started out as a grassroots video-sharing site, and as its customer base has grown, it's one area where ads continually have been shunned by its viewers. So, Google may be giving up and going to a traditional method of selling advertising on YouTube: the pre-roll and post-roll ad video clip.

This model has been used on news websites and most other types of video sites with success. It's a model that works. Plug in a 10-second or 15-second video in front of (and following) a customer-requested video clip and that advertising model works. Publishers have to keep them short (10 seconds is optimal), of course. So far, Google has shunned this kind of traditional video advertising on YouTube. But, as the Wall Street Journal reported this week, it may be ready to forge ahead with this model. It needs to get a respectable amount of revenue from YouTube somehow, because now, it's not.

When Morgan Stanley's (NYSE: MS) veteran Internet analyst Mary Meeker estimated that overlay ads on YouTube could immediately add $4.8 billion in gross revenue and $720 million in net revenue to Google's Inc. (NASDAQ: GOOG), her one-time competitor Henry Blodget was puzzled.

Her figures were dramatically bigger than his estimate of $12 million to $360 million of gross revenue. As Blodget discusses in his Silcon Alley Insider blog, Meeker made a huge mathematical blunder. She didn't calculate her estimates using cost per thousands (CPM), the common measurement used in selling advertising. She just forgot to divide by a thousand. So instead of $4.8 billion, Meeker really meant to say $4.8 million and $720 million becomes $720,000.

These ads are insignificant to Google's bottom line.

Blodget, who is turning out to be more honest as a blogger than he was as an analyst, clearly is delighting in jabbing the Internet Queen Meeker. It's odd that no one on her team caught this mistake before it was published.

Investors need to remember that analysts often are wrong. When they guess too low, as Wall Street often has with Google, it's called an "upside surprise" and when they guess too high it's called a "disappointment." This is a game that Blodget knows very well.

The knock against Google is that its ad business is mostly text-based. Then again, it is a highly lucrative business – that others like Microsoft and Yahoo wish they could excel at.

However, Google realizes that, in order to continue its growth, the company needs to bring on board more mainstream advertisers. This means going away from text ads – and venturing into branding.

It's not an easy transition.  But this week, Google is making a big step in that direction. That is, in its AdSense program, there will now be video ads.

But there is an interesting twist. The ads will not play automatically; that is, the user must click on the ad.  Hence, it is "click and play" advertising.

I talked to Greg Sterling (who, by the way, got back to me at 11pm tonight), who is the founding principal of Sterling Market Intelligence, a consulting and research firm focused on online consumer and advertiser behavior.  His assessment so far:  "I haven't seen the ads in action so I can only comment in the abstract about the model. But it combines reach and performance-based targeting for video in ways that are going to be appealing to brand advertisers."

While Yahoo! certainly has had much more experience in branding ads, the company may be a bit too traditional in its approaches. Here, in the case of Google, it is offering a unique method to video advertising.  And it is leveraging its incredible AdSense technology that has already proven to be quite successful.

Links:

My interview with Greg Sterling

Greg Sterling – Blog Post