With Twitch acquisition, YouTube might finally make live streaming matter

YouTube (S GOOG) hasn’t confirmed this weekend’s reports that it is about to acquire video game live streaming site Twitch for $1 billion in cash, but I’d imagine that the news made folks working at YouTube, as well as many of the service’s publishers, very happy. That’s because a Twitch acquisition could help YouTube finally get a foothold in the live video space.

Live video has been a complicated subject for YouTube. The Google-owned video service started to dabble with live streaming all the way back in 2010, and gradually opened up the ability to go live to almost all of its publishers in the following years. But aside from a few marquee events, the quality of live content on the platform has been questionable. Discovery has been a huge headache, and efforts to professionalize live streaming have been cut short. At this point, YouTube Live is barely alive.

YouTube’s disappearing live streams

Case in point: Earlier this year, YouTube removed any mention of live programming from its website — and barely anyone noticed. Previously, all of the site’s live streams were aggregated on YouTube.com/Live, and links to that live programming guide were prominently placed within the site’s navigation. Go to YouTube.com/Live now, and all you get is an error message.

There is still a channel aggregating live content, but you won’t find a link to it anywhere (okay, here you go), and the streams featured aren’t exactly what you’d call blockbusters. The news section is dominated by Korean, Russian and Armenian programming, which won’t get YouTube lots of viewers — or ad dollars, for that matter.

The sports category occasionally features interesting soccer matches, but most of the other categories are an obscure mix of foreign-language content, audio-only streams and Hangouts with questionable quality levels. And without any way to discover this content on the site, viewership for most of this programming is close to nonexistent.

More like cable TV

YouTube does still produce the occasional high-profile live event, including the recent live stream coverage of the Coachella festival. The service also made headlines with the live stream of Felix Baumgartner’s 2012 space live jump, which was watched by more than eight million viewers simultaneously. And the White House, as well as plenty of other organizations, regularly use YouTube to live stream their press conferences and other events.

In the past, though, YouTube had plans to take live streaming much further. When YouTube poured $100 million into original content production in 2011,  it also invested some money into My Damn Channel Live, a daily comedy show that promised to be “what a cable television network would look like – if it was run by lunatics.”

And when YouTube opened up its production space in Los Angeles a year later, it apparently considered using the space for a big push into the live video space. YouTube hired producers from TWIT and PJTV with experience in the live video space to man the studio, and I’ve been told by sources with knowledge of those plans that it considered producing regularly-scheduled live programming that would have felt a lot more like a cable channel than the current on-demand nature of most YouTube videos.

So much potential, so little money

However, those plans never panned out, and My Damn Channel Live met an untimely end just nine months after its launch. The problem for YouTube is that making money with live video is actually pretty hard. In theory, live should lead to viewers tuning in longer, which should help the service get ad rates that are higher, and closer to what traditional TV is charging.

In reality, live still doesn’t get big enough audiences to warrant high ad prices, and the fragmented nature of live streaming on YouTube hasn’t made it easier to win over big brands. Live streaming pioneers like Ustream and Livestream.com learned the same lesson the hard way, and both companies have since changed course away from traditional preroll ads, with Ustream concentrating on its enterprise business and Livestream betting on native monetization.

There is one notable exception to this move away from ad-supported live streaming: Twitch. The site has managed to pull off huge growth by focusing on highly engaging content for a young niche audience that’s very desirable for advertisers, and reports from this weekend indicate that Twitch is expecting to be profitable this year.

With that, Twitch could become YouTube’s blueprint to get live right, one niche at a time.

Disclosure: Gigaom has a business relationship with Livestream.com for delivering live video content from its events.