Even Google Can't Squeeze Profit From YouTube

This post first appeared on Minyanville.

Google’s (GOOG) $1.7 billion purchase of YouTube isn’t panning out quite as they'd hoped.

Shockingly, advertisers aren’t interested in hawking their products alongside such cinematic masterpieces as “Project Peepway,” “Extreme Makeover the Homeless Edition,” and innumerable clips of dorm room rockers brutalizing Beatles classics.

The Wall Street Journal reports that the Internet giant is running into a host of other troubles squeezing profits from YouTube’s massive video library: Customer complaints, redundant legal contracts and delays in approving ad campaigns, to name just a few.

Internally, Google is still wrangling with a mess of logistics never properly untangled after the acquisition. The company hopes to have the kinks ironed out by the end of the year.

The lawsuits can't haven’t helped: Viacom (VIA) sued Google last year for potential copyright infringement, alleging that Google was profiting from television clips illicitly uploaded by users.

Last Wednesday, Google was ordered to surrender all user data -- including search histories and IP addresses -- pertaining to YouTube to the copyright court, resulting in hysterical backlash from Youtube users. Already skeptical advertisers are unlikely to be swayed by videos with titles like F**k Viacom, VIACOM VS YOU = BOYCOTT and Screw You, Viacom.

In response to the lawsuit, Google has agreed not to run ads unless media companies and other partners sign off on the content. The result: Only 4% of all videos are available for advertising.

Finally, as the economy weakens, companies are cutting back on marketing and sticking to more established media outlets. Only this morning, Robert J. Coen, a leading advertising forecaster, told the New York Times that he had scaled back his 2008 ad spending estimates for the second time this year. Google itself admits that sponsors have been reticent to throw money at a largely untested strategy.

For Google, it’s not just about cracking the YouTube conundrum for the sake of secret handshakes and frozen margaritas in the corporate cafeteria. The company’s fantastic growth has been driven primarily by its dominance in the online search business, which is still expanding more than 50% each year.

Google has undoubtedly benefited from the prolonged takeover battle between Microsoft (MSFT) and Yahoo (YHOO), but the company can't maintain its breakneck growth (or meet Wall Street's demands) without expanding other business units. Google is also exploring older media venues, such as print, radio and television, in an attempt to grab some of the 90% of advertising dollars not spent on the Internet.

If Google can't successfully expand outside the world of online search, investors are apt to abandon it for the next Internet company with a convincing business model and an appealingly goofy name.