It’s almost time to wish a happy one-year anniversary to GoogTube! Google (GOOG) announced on October 9, 2006 that it was spending $1.65 billion to buy YouTube, the Web’s most popular destination for online video. But a lot has changed in this still fledgling business within the past year.

Despite YouTube’s formidable market share lead over other established online video sites such as Metacafe, Break.com, Heavy and Dailymotion, even more challengers have cropped up to battle YouTube, many focusing on niche interests. Will Ferrell has contributed his talents to online comedy site FunnyorDie.com while Harry Shearer of “This is Spinal Tap!” and “The Simpsons” fame is a main creative force behind MyDamnChannel. There’s even a YouTube-esque site for the more pious online video viewer called GodTube.

Big media companies have also stepped up their efforts to combat YouTube. News Corp. (NWS) and GE’s (GE) NBC Universal are launching the unfortunately named Hulu, which will feature content from the Fox and NBC libraries. My parent company Time Warner (TWX), through its AOL unit, has made several online video acquisitions in the past few months.

And then there’s Viacom (VIAB). The media conglomerate launched a $1 billion copyright infringement lawsuit against Google and YouTube in March after growing tired of seeing pirated clips from Comedy Central and other Viacom-owned cable networks show up on YouTube.

But the most interesting thing that’s happened since Google and YouTube joined forces is that slowly but surely, the online video business is in fact becoming just that - a business. Online video advertising is still a tiny fraction of the overall ad market but it is expected to grow at a healthy clip the next few years. With that in mind, many online video industry experts think it’s too soon to declare Google and YouTube the ultimate winner.

“We all benefit from YouTube making this a market quickly. But the more difficult challenge is making the business model, creating a business that works. These are the early days. I hate to pronounce the victory of or death of anything,” said Erick Hachenburg, chief executive officer of Metacafe.

Like YouTube, Metacafe is a site focusing largely on user-generated content over so-called professional mainstream content. But Metacafe is making a name for itself by paying users a cut of online ad revenue generated from their videos once they reach a certain traffic threshold. YouTube has a similar program for some of its online talent but it’s only for the most popular creators, while Metacafe’s program is open to all users.

Hachenburg said that because the online video advertising market is still in its infancy, it remains to be seen which types of ads will succeed.

Many online video sites are finding that the pre-roll or post-roll model of showing commercials before, between or after videos that works on television may not translate well to the Web, particularly for short user-generated videos. As such, many sites, including YouTube, are experimenting with overlays, banners or text that appear at the bottom of a video while it’s playing.

That said, the key to successful advertising in online videos, experts say, is to have an ad that is relevant and can actually enhance the viewing experience. Unlike TV, an online video user can immediately act upon an ad by clicking on it. So the more targeted and less obtrusive the ad, the better.

“For short-form content, pre, mid and post roll does not work as well as it does in TV,” said Nick Wilson, chief technology officer of Break.com, a site that focuses mainly on young men. “We can build things that don’t even look like overlays and have a subtle message. We are at the beginning of an exciting phase of using the Web for what it’s good at, an asynchronous experience where people can do multiple things at one time.”

Hachenburg said Metacafe is also using overlays and added that the company is looking at sponsorships for online videos and product placement as a way to generate more revenue.

Still, one problem for advertisers is that while the explosion of online video has created a vast amount of content, much of it has little, if any potential value to them.

“Viral videos have been very popular but at the end of the day there hasn’t been that much money changing ads,” said Suranga Chandratillake, founder and CEO of Blinkx, a video search company that went public on London’s Alternative Investment Market earlier this year. “Video advertising is picking up and growing very fast. But big brand name advertisers are advertising in content that is safe and that they are comfortable with.”

Blinkx is hoping to change that with a tool called AdHoc, which Chandratillake describes as being like Google’s AdSense for video. The tool processes video and matches relevant ads to it based on the content of the video.

Still, even though it may become easier to target relevant ads for online videos, some argue that online video will remain a relatively low profit-margin business because the costs of delivering video are much higher than the amount of money that the online video sites can bring in from advertising.

“The business models in online video are currently upside down. It’s a terrible business to be in right now,” said Ashwin Navin, co-founder and president of BitTorrent, a company that runs a popular peer-to-peer file sharing service for videos and other content.

He said that unless more online video companies adopt peer-to-peer networks like his to reduce bandwidth costs, online video will be “unprofitable for many publishers.”

Gilles BianRosa, CEO of Azureus, the company behind Vuze, another peer-to-peer online video site, agrees with that assessment. He said that for now, advertisers are only willing to pay relatively small prices for online video ads, and that he doesn’t expect that to change until sites can offer more quality.

By that, he’s not just referring to the type of videos but also the viewing experience. He argues that advertisers will find more bang for their buck online when clips are a “full-screen experience with DVD quality video and content that is considered safe.”

In other words, marketers may not be so interested in paying for an ad to run alongside a grainy video of a cat playing a piano. But is that really the case? Break.com’s Wilson contends that users aren’t flocking solely to “professional content,” so neither should advertisers.

“Video quality depends on the content. There is no correlation between visual quality and the number of times it was viewed. Some of the best stuff on our site is shot on a cell phone,” he said.

Of course, YouTube’s success, i.e. the eye-popping price that it fetched in its sale to Google, has bred many imitators. And there probably won’t be enough online ad revenue, venture capital money or M&A interest to sustain the scores of online video companies out there.

“There is a lot of hype and buzz about online video advertising. The potential is there but there is so much noise and there are so many different players. It feels like it’s going to be really big but it’s still nascent,” said Chase Norlin, CEO of Pixsy, a video and image search firm.

With that in mind, one online video executive said that it would be a mistake for companies to hitch their wagon exclusively to the Web. Sure, online video is cool and rapidly growing but it’s not the only form of media for video.

“No distribution method is the be all and end all,” said Paul Kontonis, CEO of For Your Imagination, a company that produces original Internet TV shows for syndication. He said that for his company’s shows, the goal is not just to be the most viewed on the popular video sharing sites but to create enough of an interest so that he can also sell merchandise, DVDs and maybe even get some of the shows onto television. TV? That supposedly dying medium? Why embrace such a 20th century notion?

“Hell, who wouldn’t want to get their show on television and make a lot of money? The revenue model is proven there,” said Kontonis.

Words of wisdom that executives at other online video sites might want to take to heart.