Google (NASDAQ:GOOG) has had trouble figuring out how it will make money from its huge video sharing website YouTube since it bought the company for $1.65 billion in October 2006.  In 2007, Viacom filed a $1 billion lawsuit for copyright infringement against the Google-owned site. YouTube has responded by banning the company’s premium content.

YouTube has had trouble finding advertisers. Marketers usually do not want to be associated with the site’s homemade videos, many of which are created with low-quality video cameras and some of which are risqué. YouTube’s lack of a revenue model has caused it to lose over $300 million a year for Google, according to some analyst estimates.

But, Google has come upon a business model that it believes will change its fortunes.

The search company’s management has begun to argue that YouTube is the ideal place for major media companies to host their premium video and perhaps even charge for it. Google’s rationale is strong. It says that premium video sites like Hulu have large audiences but that they are only a fraction of YouTube’s. YouTube is and will probably be for some time, the No.1 destination on the worldwide web for consumers who want to look at video content.

A Google executive told the FT, “At some point in time it becomes an economic choice by the content owners. It’s a matter of core competences,” Nikesh Arora, the company’s president of global sales operations and business development said. Google’s case is that it knows how to host and distribute video and that it has already created an audience that is drawn to YouTube much more than to sites set up and run by NBC, CBS (NYSE:CBS), Disney (NYSE:DIS), or Viacom (NYSE:VIA). These companies might as well give up their own efforts and join the industry leader, YouTube.

Google also wants to convince premium content companies that it is better at selling online advertising for video content than the  premium content companies themselves. YouTube’s financial losses would indicate otherwise.

YouTube does have the audience that large media companies lack and large media companies have the content that YouTube wants. That makes it a matter of creating business models that work for both sides, and, in the uncharted territory of making money on premium video content, the competing goals of the parties may prevent that from ever happening.

Douglas A. McIntyre

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