There’s a lot of discussion today about a Wall Street Journal article (subscription) analyzing Google’s struggle to make money off of YouTube.

We already knew that Google is desperate to make money from YouTube. According to the WSJ, though, Google is so desperate to make YouTube profitable that it’s considering running pre- and post-roll ads that most YouTube users hate:

“Google plans to begin accepting “preroll” and “postroll” ads, which will run before and after some YouTube video clips, according to one person familiar with the matter. The plan under consideration, this person says, would give companies that post video clips the option to sell such ads, and share the revenue with Google.

YouTube has long forsworn such ads because consumers don’t like them. But advertisers consider them highly effective.”

4% Vs. 100%

The root of Google’s problem is that the site is based on user-generated media of wildly mixed quality and legality. Google is afraid to sell ads on almost all of its inventory. According to the WSJ, “Google will only sell ads against YouTube clips that have been posted or approved by media companies and other partners – roughly 4% of the total.”

But making money from Internet video from media companies is relatively straightforward – and something that Hulu is already doing more effectively than Google.

Google’s biggest potential with YouTube is figuring out how to make the other 96% of its videos marketable. That’s not going to happen if it’s got a billion-dollar Viacom lawsuit hanging over its head.

Google Needs To Make Its Viacom Problem Go Away

In March of last year, we said that “Google will probably have to cut a deal with Viacom – a deal that will help shape the rights of content creators and the future of Internet television.”

Sticking pre-roll ads on YouTube’s most popular content isn’t going to make Google’s Viacom problem go away or turn the bulk of its videos from deadweight into dollars. It’s just copying what Hulu is already doing – but Hulu can put pre-rolls on all of its videos, not 4%.

Fighting a battle with Viacom that it’s unlikely to win is putting off the day when Google has to finally figure out how to build a business on user-generated videos.

Google needs to:

• Figure out how to actively protect the rights of content creators and screen videos for copyrighted material;
• Do this while also protecting fair use; and
• Look for ways to identify the cream of the YouTube crop and make money from it, like Getty Images is trying to do with Flickr.

To do this, Google is going to need to settle with Viacom and get on with making user-generated media a business.

Update: Blog Maverick’s Mark Cuban concurs, wondering “If its estimated that Youtube will generate about 200mm in revenue around 4pct of its content, is it feasible to think that using a combination of manual and automated review, they could jump that to 20pct and increase their revenues by 500mm dollars?”