Friday, August 31, 2007

Ads on YouTube will struggle to pay the bills

A version of this piece was published in Marketing in 2007

When Google bought YouTube in October last year for $1.6 billion, its revenues were virtually non-existent, and nobody there seemed to know where or how it was ever going to make a profit.

Was this a return to the old dotcom days when companies were measured by their burn rate – the pace at which they burnt through their investors’ capital – or had the ubermenschen at Google spotted something us mere mortals hadn’t?

Whilst Google’s paid-for search listings have been next to much of YouTube’s content for some time now, attention is mostly focused on the video – and if it performs for advertising like any other social networking site, revenues aren’t likely to be spectacular.  Almost a year after the acquisition then, with a small amount of uncharacteristically Google fanfare, we’ve just seen the launch of in-video advertising on YouTube.

We’ve all seen pre- and post-rolls before, and we know how irritating they can be.  Google have wisely avoided this video format, but not just for this reason.  Pre-rolls aren’t interactive.  You can’t click on them, and they can’t be served out of an adserver.

So whilst pre-rolls appeal to traditional media folk (they feel like ad breaks and work like linear media), they’re just not going to set the world alight.

Google have instead gone for an overlay – an ad that appears over the bottom 20% of the video screen and runs for ten seconds, starting 15 seconds after the video.  The ad is partly transparent, and the video over which it plays is paused automatically if the user interacts with it.

This isn’t a new approach.  Videoegg, a competitor of YouTube have been doing this for just over a year now and claim to have patents for the technique.  But then Google didn’t invent either search or the Vickery auction that has so successfully powered its growth – they’ve just done these things better than anyone had before.

YouTube built its name on content created by its users, and understandably this move has created much controversy on the messageboards around the site.  Interestingly though, whilst predictably there have been the usual anti-commercial outbursts from the swivel-eyed end of the community, the majority of posters have taken a more supportive view, either accepting the need for YouTube to make money to keep their service free, or suggesting different ways the site might consider implementing in-video advertising.

One of these is sharing revenue from advertising with the content owners who upload videos.  Competitor video-uploading sites Revver, VuMe and Flixya all offer to share ad revenue, and YouTube founder Chad Hurley announced a similar deal to the BBC in February which was slated for launch “in a couple of months”.  The company have gone a bit quiet about that one since then, and it hasn’t formed a part of the current plan.

So if their audience is prepared to accept the format, is this going to be a hit with advertisers?

Google’s record in selling non-search products to advertisers has been poor to date.  The refusal to accept third-party adserving (the bedrock of the accountability that has driven online advertising’s success), combined with the lack of a sales culture deriving from a lead product that sells itself, have led to lacklustre performance when it comes to display advertising.

And as I wrote about last week, advertising in social media is cheap.  Response rates tend to be low, and advertisers offset this by reflecting it in the rates they pay.  So unless the performance of this new format is radically different from other types of advertising, it’s unlikely to yield the sort of revenues that would move the needle at Google.

So the format’s good, the audience seem prepared to tolerate it, YouTube is competitively a strong product.  But it’s going to take a bit more than this to get their $1.6bn back.

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