Google bought YouTube for $1.65 billion in Google stock.

Why?

Because like Exxon is in the oil business, Google is in the traffic business.

Google's own stats showed that video was becoming an "item" on the Internet. Without ever-growing traffic (and monetization of that traffic), the share price of Google is going to die a gruesome death. YouTube had the most Internet video traffic (by far), so Google did what it had to do.

How did YouTube grow so fast?

Strangely, I don't see this discussed in many places. "Community" is bandied about as a reason a lot and I'll get to that in a bit, but the real reason YouTube took off so fast was they took all the friction out of Internet video publishing. They made it free, they made it easy, they made it fast (ever try to upload a video to Google?), and they weren't squeamish about copyright issues. So they got to critical mass first

That's why YouTube won.  It's also why Flickr and MySpace won too. But there's a catch.

These victories are in no way predictive of commercial success. I know that advertisers and digital pundits are drooling over the "eyeballs" these services represent, but experience says there never has been - and never will be -  an automatic conversion of traffic to monetary value.

Amazon's traffic is valuable because it's the traffic of book buyers looking to buy books. eBay's traffic is valuable because it's the traffic of online buyers who like to shop for bargains and hard-to-find items. Google's traffic is valuable (more valuable than Yahoo's and MSN which have more traffic) because they've figured out a better way to monetize search activity.

How do you monetize YouTube?  To answer that question, you have to ask another question: What the heck is YouTube anyway?

YouTube is a place for people to upload their videos. That's it. Yes there is a community aspect to it, but it's a very small fraction of the action. Flickr is the same thing. Both these companies remind me of Tripod which was one of the first companies that made it easy to put up a web site. Yes, founder Bo Peabody got rich - by selling stock. He never successfully monetized the business and to his credit he admits it.

Have Bo and and Chad and Steve (YouTube) and Caterina and Stewart (Flickr) done something socially useful? Absolutely. Did they create self-perpepuating traffic machines? Yes. Have they created properties that can monetize traffic optimally? No.

Why not? Because if I'm using a service to post and share stuff so my friends and family can see it, they and I are not there to be sold to. That's not what we're there for.  Also, we're far too diverse a group to target. (Unless you're selling film printing to Flickr members. Kodak should have bought Flickr, but that's another story.)

Community and traffic do not equal a blue sky monetization opportunity.

CB radio was a community and a big one at the height of its popularity.  Theoretically, there were a lot of eye balls (or ear lobes) to harvest, but I don't even have to point out how preposterous the idea is of interrupting people's commuciations with each other with ads.

But somehow on the web, we think traffic and "community" equals profits.

More examples of how it doesn't work:

A local bar is a community "where everybody knows your name." How do you monetize that? You sell drinks. OK. How about using the "power of community" to leverage sales messages? Maybe for the latest flavored vodka, but that's about it.

The old computer bulletin boards (BBSs) were communities with a capital "C." Ask the people who were around in those days how easy it was to monetize BBS traffic. It was impossible. The money to be made from that community was selling BBS software to board operators - and that was it.

So what am I saying?

I'm saying there's a lot more to building a money-making Internet venture than getting a lot of traffic and building a strong online community. Community is nice and it can be harnessed for self-sustaining growth - but by itself without other factors, it's near meaningless from a commercial point of view.

When I hear talk about monetizing Web 2.0 in general (as opposed to very specific cases), I'm reminded of a funny experience I had at the height of the dotcom craze. I went into the bathroom of a pretty nice restaurant near Grand Central. There staring up from the drain of the urinal was an ad for a web site. As I did what people do when they're standing at a urinal, I asked myself: "What could this company possibly have been thinking when it bought this ad space?"

Bottom line: Some traffic is just not destined to be monetized.