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Straight Talk Media & Entertainment

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When it comes to marketplaces, the Internet favors global monopolies, and YouTube is no exception. But the Google site’s massive scale will become its Achilles’ heel as an array of upstarts take a more targeted approach to online video.

eBay provides a classic example of the winner-takes-all theory of Internet marketplaces. If you’re a seller, you want to be where the most buyers are, and vice versa. This logic helped eBay to largely see off numerous auction sites in the early part of last decade, leaving it with only indirect competitors, such as Amazon and Craigslist.

About a year ago, YouTube was at a similar stage. Content creators wanted to be where the most viewers are, and vice versa – and that place was YouTube. It had seen off various challengers – including its parent’s Google Video – to face competition mainly at the edges of its business, from long-form providers such as Netflix and ultra-short-form specialists such as Vine.

But like eBay before it, YouTube now faces a more direct form of competition. A notable challenger to eBay is Etsy. It’s managed to carve a niche out of the auction site’s market by specializing in handcrafted and vintage items.

Therein lies the appeal: specialization. Rather than build a jack-of-all-trades marketplace for all buyers and sellers, Etsy is focused on serving a particular type of customer, one seeking to buy or sell premium "handcrafted" and "vintage" items as opposed to the "homemade" or "used" bargains that make up most of eBay's listings (Etsy's clientele will assure you there is a difference).

For these customers, eBay's scale is a turn-off. Sellers don't want their wares to get lost amongst the trash, and buyers don’t want to sift through it. Etsy acts as a filter and a mark of quality, ensuring buyers can find what they want and sellers can charge a premium. New marketplaces targeting fashion, homewares, and consumer electronics have begun to win over customers for similar reasons.

eBay could defend itself better against these threats by curating sections about such niches with more skill. But achieving this when your marketplace attracts tens of millions of listings every day is easier said than done. The Etsy aproach of targeting the segment first seems like a much more elegant solution.

YouTube faces similar challenges. Twitch, a user-generated service focused on video gaming, saw more than 21 million viewers tune into its coverage of E3 last month. YouTube’s coverage of the video-games trade show attracted about 8 million.

It would be easy to dismiss Twitch’s viewing figures as a drop in the ocean of YouTube’s one billion user base. But this rare loss has got to hurt the Google-owned site. Games channels are among its most popular, games publishers spend heavily on advertising, and gamers are a young well-off demographic keenly sought after by advertisers.

According to reports, Google tried to address the threat – or opportunity – posed by Twitch by trying to acquire the company last year before being outbid by Amazon. The search giant’s latest plan will involve introducing a dedicated app and website under the YouTube Gaming banner this summer.

The challenges of successfully segmenting YouTube are highlighted by YouTube Kids, which launched in the US earlier this year. The app has been accused by advocacy groups of exposing children to inappropriate content, such as advertising masquerading as news and entertainment and material more suited to grown-ups, including a video featuring a foul-mouthed Bert and Ernie.

Meanwhile, Netflix, Sky, and a number of startups offer more carefully curated services for kids, and others might emerge to challenge YouTube in other vertical markets popular with its users, such as fashion, news, and comedy.

The challenge from Facebook notwithstanding, YouTube will no doubt remain one of the biggest online-video marketplaces. But its size means that it won’t necessarily be the best when it comes to attracting the most valuable kinds of viewers, creators, and advertisers.

Straight Talk is a weekly briefing from the desk of the Chief Research Officer. To receive this newsletter by email, please contact us.

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