Can you make turkeys fly by giving them longer runways?

Now that eBay has admitted they were a tad optimistic on Skype valuation, its clear Google feels it too can talk a bit about YouTube: From Nic Brisbourne:

I’ve been hearing rumours to this effect for a while now, but yesterday Eric Schmidt confirmed that YouTube isn’t exactly throwing off oodles of cash. Reported here on News.com and here on Sillicon Alley Insider.

I wish this were not the case for two reasons.

Firstly, everyone with an interest in the startup ecosystem wants to see more top-dollar transactions like the Google acquisition of YouTube and that will only happen if a decent proportion of the ones that have happened to date are deemed successes. Following ebay’s Skype writedown it has become even more critical that Google finds a way to make YouTube work

(At this rate we predict AOL will be in the confessional by Xmas 2009)

At the time we wondered if Google had considered the "DiY" business case rather than a highly priced acquisition - here was our deeply analytical approach which we did a bit later:

Broadstuff Biz Case (expurgated version*)

Cost of Service build - $1m
Cost of Operation before breakeven - $100m
Cost of "persuading" critical mass of YouTube UGC videos onto new service = $5 / video x 50 million clips = $ 250m (added to their content)

And if breakeven took longer than $100m, that's still a lot of headroom before picking up the tab for YouTube.

Bargain

Now we know that the deal was "strategic", but once done it has to make sense economically too (thats the rub with those strategic deals) and if they are turkeys, no amount of extra runway will help. Especially if the initial acquisition price is way, way too high - it changes from a Turkey on the runway to an Albatross round the neck.

In this specific case, Google is far too large to be on a wing and a prayer if YouTube can't fly, as Nic says the issue more that it has an impact on the valuation of the whole "Web TV" market development. And that issue now is how to find a way to make money in a world where there is so much video inventory looking for advertising that average CPM's will possibly fall to less than the fully loaded cost of transmitting the video in the first place.