April 30, 2008 3:03 PM PDT

Schmidt says Google still scratching head over YouTube profits

Posted by Greg Sandoval

Google CEO Eric Schmidt likely surprised few by confirming Wednesday that his company's video-sharing powerhouse YouTube isn't quite throwing off lots of cash.

It was obvious from Google's earnings reports that YouTube has yet to generate material income. Still, it's worth noting, 18 months after Google acquired YouTube for $1.65 billion, the company has acknowledged that it hasn't "figured out the perfect solution of how to make money."

"We're working but have not yet in my view gotten a breakthrough around monetization," Schmidt said during an interview for CNBC. "We're working on that. That's our highest priority this year."

Schmidt also indicated that the company is coming out with new modes of advertising.

"We believe the best products are coming out this year," Schmidt said. "They're new products. They're not announced. They're not just putting in-line ads in the things that people are trying...Google believes that advertising itself has value. The ads literally are valuable to consumers. Not just to the advertisers, but the consumers."

Google CEO Eric Schmidt

(Credit: Elinor Mills/CNET News.com)

In-line ads are the text ads you see around video players. Google has also experimented with overlay ads that pop up within the video player itself for a few seconds. I wrote last year that I didn't think the ads were too obtrusive. TV networks have used overlays for years to battle TiVo users skipping past commercials. Audiences are already used to them.

Plenty of people disagreed with my assessment of the overlay ads.

But I'm expecting Google to be more aggressive with advertising at YouTube this year. Right now the company is providing a free video-hosting service to hundreds of millions all over the world (more than 10 hours of video is uploaded to YouTube every minute).

Google and YouTube are paying what many believe are millions in bandwidth costs every year. They have every right to be compensated.

I also think the longer Google takes to get users accustomed to some form of advertising, the harder it will be.