Each day, 7 million fans tune in to YouTube to see bubbly video blogger Bethany Mota make breakfast or braid her hair.
The breakout video star draws tweens eager for a taste of Mota’s fashion and beauty must-haves, averaging 100 million minutes of video watched per month. She’s equally attractive to brand advertisers, clinching campaigns and clothing lines with Forever 21 and Aeropostale.
But YouTube, the video platform Google acquired for $1.65 billion in 2006, has become much more than a Millennial magnet. Consider Disney Collector, a channel attracting a fan base of two million parents and their little tykes who tune in for toy demos.
“This [channel] is getting 2.6 billion page views and what’s interesting is, this is very brand safe content in a clean, well-lit environment,” said Brian Pitz, an equity analyst at Jefferies during an investor call late last week. “Brands are advertising against this content.”
YouTube, according to Jefferies report “The Future Of Online Video Advertising: A Focused Deep Dive on YouTube” accounts for roughly 7-11% of Google’s market cap or $40-$63 per share. Gross revenue was an estimated $5.9 billion this year, and at a 35% compound growth rate, that could rise to close to $10 billion by 2017.
The Golden Content Ticket
This year, AOL, Yahoo and Amazon collectively doubled down on original content.
Google’s content partners, most commonly known as multi-channel networks (MCNs), are largely responsible for the seismic shift in YouTube from its earlier days as a repository of user uploaded cat videos.
“We haven’t seen the financials of these companies, but Disney’s acquisition of Maker Studios for [$500] million should give some confidence in the type of growth these companies are seeing right now,” Pitz said. “Online video content is improving dramatically…resulting in more brand-safe inventory.”
During YouTube’s digital newfront Brandcast this May, VICE CEO Shane Smith heralded today’s “historic moment in media, where we’re witnessing a changing of the guard in real time – people are leaving TV in droves and many are calling VICE the Time Warner of the streets.”
VICE, known to put camera-equipped reporters in the center of war zones and protests, just secured $250 million from A&E Networks and $250 from Technology Crossover Ventures to ramp up production and feasibly set the stage for its own cable channel. Separately, 20th Century Fox closed a digital distribution deal with the company.
“A&E’s [investing] in VICE is another sign that the MCNs have been able to build dedicated audiences that represent long-term value,” according to Paul Kontonis, executive director of the Global Online Video Association (GOVA) and a partner at media investment and content strategy firm Centridium.
VICE News’ YouTube audience is nearing a million. “Given the increasing fragmentation of where people view video, it makes sense that traditional networks are buying in to MCNs.”
Audience, Guaranteed
From the beginning, Google sought to secure high-caliber content for the YouTube platform.
Despite reports of YouTube’s courting Hollywood producers to support movie-grade programming, Google has historically been the distributor, not the creator. MCNs created.
“The way YouTube started, it was a broadcast model where anyone could essentially be a broadcaster,” said Reid Genauer, CMO of online video editing and distribution platform Magisto. “As an advertiser, it was hard to know what content was going to show up and if I’m Google, I’m less interested in videos that get five views. So that meant distributing premium content.”
For brands to stick around and spend, there had to be a filter – and YouTube gained that through Google Preferred, an algorithmically driven crust of the top 5% of videos across 14 categories on YouTube.
YouTube, during its May newfront, positioned Google Preferred as a limited set of the most popular and engaging channels on the platform. Partnering with comScore and Nielsen, Google promised comparable metrics and cross-platform measurement (though the extent of Google’s early beta brand tests with Nielsen OCR tags are a well-kept secret), along with audience guarantees. Conversely, Google Preferred promises publishers branded content support in their own channels.
“They’re trying to create scarcity around a select list of channels that perform best on the platform,” said a source with knowledge of YouTube. “That helps them sell the depth and breadth of the platform while bringing into play more of the auction-based model.”
YouTube’s Share Of Revenue
Despite the fact that Google Preferred deals are charged on more of an “upfront” basis, there is “profound” programmatic media opportunity for YouTube on an exchange-based basis, said a source whose company partners with YouTube.
“Google Preferred is a great way of getting more people to think about spending money in YouTube, but it does sort of run a little bit against where we think they’ll be successful in the long term: They’re an auction-based company.”
Most of YouTube’s inventory is accessible through the DoubleClick Exchange, including MCN-created content from YouTube channels like Machinima and Maker. About 220,000 publishers are ad-supported on YouTube.
While music labels tend to avoid YouTube in favor of Vevo or mainstream media brands like ESPN or Fox (which may want to control the rights themselves) Google’s emphasis on viewability and maintaining a safe, clean environment makes it more attractive than its video exchange competitors.
Google’s TrueView ad formats are a further differentiator, charging advertisers only when the viewer reaches a certain level of completion, giving clients five free seconds of branding regardless of whether the user skips the ad after five seconds.
TrueView ads, according to Jefferies’ report, drive about 55% of YouTube revenue. In-stream ads account for roughly 22% of revenue with CPMs in the $8-$18 range. The remainder of YouTube’s revenue comes from other formats, such as in-video overlays or 300×250 display ads that appear near featured videos or suggested video lists. As far as Google’s cut of YouTube ad revenue, most content creators snag 55% of the share to Google’s 45%. Some of the larger content partners and MCNs take “in excess of 55%,” Pitz said.
Although Google will face competition from multiple angles, including Facebook and Twitter, which are rapidly growing into viable video distribution platforms with publisher hooks, one of the most obvious challenges is striking the right balance between effectively monetizing today’s channels and finding the Bethany Mota of tomorrow.
“There are companies that are monetizing original content and doing it well, but brands have not caught up in terms of their demand for content like this,” claimed Jim Daily, GM, North America for video ads platform Ebuzzing. “That’s partly because they’re still buying ‘traditionally’ produced, made for TV content. That will shift, but not overnight.”
