Peter Kafka of All Things Digital has a post well worth your time about whether YouTube will finally bring in a profit for Google in 2010. He points to recent predictions by Barclays analyst Douglas Anmuth that YouTube will see revenue jump 55 percent, to $700 million, in 2010, and that it will “start contributing positively” to the Google’s earnings. Anmuth writes:

Perhaps the main take-away for Google’s display business is that in 2010 we believe YouTube will start contributing positively to EPS. An improving advertising environment certainly helps, but with YouTube monetizing more than 1 billion video views every week, and with strong sell-out rates on its home-page from larger advertisers–we note 90% of the top 50 Ad Age have advertised on YouTube–we believe the site can profitably take share of the branded display & video market. We project YouTube to generate $700 million in revenue in 2010, up 55% Y/Y. Usage continues to grow. In November the total number of YouTube’s videos viewed grew 139% to 12.2 billion in November and unique visitors grew 32% Y/Y to 129 million. As a comparison, Hulu, the second most popular video site by videos viewed according to comScore, recording 923 million videos viewed.

I agree that YouTube seems poised to grow its ad revenue in 2010, and I also agree with the market dynamics that Anmuth points out. However, 55% strikes me as an aggressive target. Some of the forces working in YouTube’s favor will be mitigated by headwinds from negative factors. Here’s a list of pros and cons the company will face in 2010:

PROS

• The site is adding more and more premium content, which of course is more monetizable than the user generated content (UGC) that made the site into the giant that it is.
• Usage rates keep growing, which I continue to be amazed by. Its dominance in the video space remains essentially unchallenged, despite Hulu’s strenghts as an episodic TV specialist.
• YouTube is getting smarter about the way it monetizes videos — more ad formats, a better overall presentation.

CONS:

• As hard as it tries to become a premium content portal, YouTube can’t shake the perception that it’s a UGC site. Even in the best of cases, it will only be able to monetize a small portion of its video inventory this year.
• The space will get more crowded as Hulu continues to spread its wings and other sites (i.e., Netflix) also gain traction.
• The spread of Internet-connected TVs could be a double-edged sword for YouTube. On one hand, the site could gain by making licensing deals w/consumer electonics firms. On the other hand, other companies (Amazon, Blockbuster, Netflix, Hulu) are also going to be scrambling to make deals, so consumers will have a wider array of options than in the mid-2000s, when YouTube took advtange of an open field.
• Because of the enormous price that Google paid for YouTube, the site has to do a lot more than reach profitability in order to pay off for the parent company. While I don’t think Google is unhappy with YouTube, there is more pressure to perform on YouTube than there would have been if the purchase price had been closer to the ground.

In summary, I think Douglas Anmuth’s projection is a bit aggressive. Taking into account the above, I agree that YouTube’s revenues should grow this year, but somewhere on the order of 10%-20%.