When Google Inc. (NASDAQ: GOOG) coughed up $1.65 billion for YouTube in 2006, there were plenty of questions about what the Google brass was smoking. It’s still not clear whether  YouTube is making any money for Google because the company doesn’t break out YouTube’s revenues or profits. But all the signs are positive that YouTube is healthy and expected to get healthier. That’s quite a shift from a division that some people though lost $500 million in 2009.

First, Google/YouTube bought a start-up company called Next New Networks, an Internet TV production company. The company makes it reasonably cheap and easy for its customers to create and organize content for online video. Where most YouTube videos are dismissed for being amateurish at best and awful at worst, videos at Next’s web site have good production values although they still fall short of a network TV show. There’s no question that the content is better — the question now is it good enough to attract viewers that advertisers are willing to pay for.

That’s what Google wanted from this acquisition — a way to provide original content for Internet TV channels that would make it more competitive with the videos and films available from Netflix, Inc. (NASDAQ: NFLX), Amazon.com (NASDAQ: AMZN), Apple Inc. (NYSE: AAPL), and Hulu, a joint venture of News Corp. (NYSE: NWS), Walt Disney Co. (NYSE: DIS), and Comcast Corp. (NASDAQ: CMCSA), which is now the majority owner of NBC-Universal. Even Facebook has jumped into the battle for eyeballs, in a deal with Time Warner Inc. (NYSE: TWX).

For Google, higher-quality video content is expected to attract more viewers who will attract more advertising. Now that the company has figured out a way to monetize YouTube, it needs to push up the level of its content.

Music fans already go to YouTube to see the latest official music videos from their favorite artists, as well as plenty of homemade cell phone camera videos that are, shall we say, of lower quality. Most of these videos also display ads, and this nexus of music video and online advertising is what Google plans to build on.

And that’s where the second point comes in. YouTube has announced that it expects expand its estimated employee number of more than 600 by an additional 30% this year. All told, Google expects to hire more than 6,000 new employees in 2011.

Most of the new YouTube hires are likely to be in sales. Now that Google believes it has the right pieces in place to make some serious revenue from YouTube, it needs to get the word out to advertisers.

Google is betting that better quality content organized much as the various channels on cable TV are organized will draw enough viewers to put more advertising dollars to its top line.

Paul Ausick

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