With the victory in the court case against Viacom, YouTube has eliminated liabilities which threatened its business. A successful music partnership with Vevo has turned some enemies into partners and provides an example to other content owners of the benefits of partnering with YouTube. In the rest of this article we examine these strategies, plus:
[NB. We'll also be covering these themes in depth at the Digital Entertainment 2.0 stream of the upcoming New Digital Economics Brainstorms (Palo Alto, 4-7 April, London, 11-13 May, and Singapore 22-23 June). You can also email us at [email protected] or call +44 (0) 207 547 5003.]
To share this article easily, please click:There have long been rumbling doubts in the industry about how YouTube makes money for Google, though for a while we've been of the view that it more than earns its keep by how it feeds the overall Google ecosystem (see 'Google - How (precisely) it profits from YouTube'. Today we're further upping our stance to 'formally bullish' and think YouTube is a big plus to Google and its value and contribution will grow considerably in the future.
The rationale for our further change in stance lies not in the immediate profitability of YouTube, which more analysts still think is loss making although the veiled figures make a definitive statement somewhat elusive at this point. Instead, we see the key successes of YouTube in the last couple of years in its much improved monetization of viewing and in the strengthening of its balance sheet.
In the USA, YouTube dominates the online video scene with 144m unique viewers watching over four hours of videos in Jan 2011. The dominance is even more impressive if the partner site, Vevo, is included in the figures. YouTube viewers spend more time on the site than even the broadcaster owned Hulu, who specializes in long form content showing TV shows. To place this in context, average TV viewing in the USA is approximately four hours per day. As TV's become connected to the internet, the growth opportunities for YouTube are further enhanced. Similar trends to the USA can be seen across the globe with, for instance, almost half of population of the UK, visiting YouTube in any given month.
Google doesn't separate out YouTube revenues but in the last earnings call reported that YouTube revenues had "doubled over the last year". Previously, Eric Schmidt had revealed that YouTube revenues had doubled over the period 2007-9. So whilst not knowing the absolute figure, we know for sure that YouTube revenues are growing at an extremely healthy rate. Analyst estimates of the revenues vary widely between US$500m and US$1bn.
Over the last couple of years, YouTube has changed the way it has viewed advertised and created solutions and programs specifically for YouTube. As the Head of Ads for YouTube puts it "When I took this job a year and a half ago, people kept asking 'What is going to be the equivalent of the Google text ad for YouTube?' What we realized is there is no one ad format for video, because consumers come to YouTube to do different things."
One of the success stories has been selling the home page, which has been extremely popular with movie marketers keen to drive youngsters to the theatres at the weekend. YouTube has been so successful that it sold out its inventory in the fourth quarter of 2010, with bidding wars between the studios on Thursdays and Fridays promoting the weekend openings. The cost of these home page ads is rumoured to be around $300k/day in the USA, which equates to a US$100m/annum business in the USA. In the UK, YouTube are selling the front page as well and, in the run up to the last election, the Conservatives bought the front page; another party revealed they had been offered the same deal for £50k. Movies and political ads are traditional fare for any broadcasting network, which shows how far YouTube has come in the last couple of years.
Nobody ever doubted the huge inventory of YouTube, but people questioned whether they would be able to sell it. In a recent interview, the head of ads for YouTube revealed that they were running more than 3 billion adverts a week against its inventory of 14 billion weekly views. A fill rate about of around 20% is nothing special, but this is an increase of 50% in just under a year - another sign YouTube is gaining scale and, more importantly, gaining acceptance with the advertisers.
For years, companies have uploaded their advertisements to YouTube and promoted them outside of YouTube. In 2009, YouTube launched "Promoted Videos" on the site's search results which are charged on a cost-per-view basis and YouTube claim the auctions regularly clear 10 to 40 times the cost of ads on network TV. The reason is that users that opt-in to watch adverts are paying much more attention than on ad breaks on network TV. YouTube have extended this insight to ads inserted on long form content, where they allow the user to skip an ad if they are not interested.
All videos uploaded to YouTube are now scanned by Google's ContentID system, which generates cryptographic fingerprints in order to compare them to those of original videos provided by known content owners. If infringing material is found, whether a clip of TV show or a Music Video, the content owner is notified and offered the option to either take down the material, or run adverts against it with a revenue share arrangement. For music there is another alternative, where YouTube runs pop-up ads that let people buy the song or the ring tone,and again shares the revenue with the copyright owner. It is estimated that more than a third of the ads that YouTube serves in-stream are against copyright infringers. This has essentially defused the issue.
YouTube have realized that User Generated Content needs to be more professional to attract bigger audiences. So they have developed a partner program, where YouTube invite people to join based upon an unknown algorithm, which is presumably based upon popularity. YouTube doesn't reveal the share of advertising, but it is rumored to be just about 50%. YouTube now has around 15,000 partners around the globe. A few YouTube partners have topped a million dollars, hundreds more are making six-figure sums, and many more are making more than the US median salary of $40,000. The net result according to Shenaz Zack, product manager at YouTube, is "We've seen the production value of these videos have gone up tremendously. No longer are they bedroom-only [video bloggers]." Again, this is a twist on the network TV model. YouTube doesn't take the risk of production costs and instead, rewards the successful few with a revenue share of inventory they sell.
Sports has long been known to attract huge audiences which are very valuable to advertisers and therefore the broadcast networks pay huge sums of money for the rights. YouTube is getting into the Sports broadcasting business with quite an innovative approach - it is acquiring rights in countries where the rights could not be sold for a revenue share with the content owners. 
The first example of this was when YouTube streamed the 2010 Indian Premier League, the world's most popular cricket tournament, generating 51m views over the course of the six-week tournament and becoming the top ranked sports video website in the world. Since then, YouTube has struck a similar deal with Major League Baseball, to be shown in Japan 36 hours after the games originally air with a highlight packages and full length game re-runs. YouTube has also hired Claude Ruibal, former head of Universal Sports, to drive more Sports deals across the globe. Again, YouTube is becoming to look more like a traditional broadcaster.
The biggest headache for YouTube disappeared in June 2010, when a judge ruled that YouTube was protected by the Digital Millenium Copyright Act (DMCA) against claims of copyright infringement and threw out the Viacom case. The judge found that while there were a huge number of infringing videos on YouTube, the site did take them down when notified. The judge pointed out one instance in 2007 when Viacom gave YouTube a single takedown notice for 100,000 videos, which YouTube successfully took down by the next day. The fact that the case didn't even get to trial meant that the YouTube operations model was validated. YouTube can continue to allow its users to upload anything and only has to take anything down once a DCMA notice is issued to them from the content owners. Effectively the cost of policing YouTube is shifted to someone else. In practice this forces content owners to co-operate with the YouTube Content ID system described above, with the declared aim of automatically detecting copyright material. This Content ID system will prove incredibly valuable to YouTube over the years and effectively allows YouTube to build the largest rights catalogue and database of meta-tags across the globe.
In December 2009, Vevo was launched in the USA with the stated aim of becoming the top music video destination site on the web. In its first month, it overtook MySpace Music and achieved its goal. YouTube has no equity ownership of Vevo, but provides all the hosting, and although Vevo sells the adverts, YouTube earns a revenue share. Vevo is another important milestone in the YouTube story as it turns yet more litigious content owners into friends. YouTube has found the easiest way of making friends in the content industry is by helping them pick up frequent cheques.
YouTube looks more and more like a traditional media aggregator with the twist that it offers revenue share deals and doesn't take a risk on production costs. YouTube has made great strides in partnering with content owners and improving the monetization of content. And, as we wrote previously in Google - How (precisely) it profits from YouTube, YouTube continues to feed the Google machine new data, new opportunities to see. Increasingly, we believe, it will feed it hard cash.
For Advertisers, YouTube is potentially a very strong addition to their arsenal. The YouTube metrics are especially strong and the pricing according to "Cost-per-View" offers a very compelling alternative to the traditional "Cost per Thousand".
For Media Owners, YouTube has become a fact of life and media owners should be experimenting around how to maximise the value of their content by using YouTube - either as a promotion channel for longer form content or as a destination site itself. For CSPs, the situation is more challenging.
For Mobile Operators who charge tiered data plans, heavy use of YouTube and other online video could be a godsend encouraging users to purchase higher priced data bundles. However, it is of note that at the recent Mobile World Congress a recurrent theme was that the mobile operators do not think YouTube (and others) is paying a fair contribution and generally the solution mooted was lobbying of the EU to ensure that YouTube pays its way in the future.
For fixed line providers, YouTube is not proving to be much a problem in terms of capacity, but the providers are excluded from any revenue stream. A bigger potential problem is where the fixed provider is a video provider in their own right, especially for the cable networks, where YouTube could cannibalize eyeballs away from their own video channels diminishing their value either in the eyes of advertisers, when they are free-to-air, or subscribers, where the channels are paid for.
[Reminder - do join us to discuss these themes in depth at the Digital Entertainment 2.0 stream of the upcoming New Digital Economics Brainstorms (Palo Alto, 4-7 April, London, 11-13 May, and Singapore 22-23 June). You can also email us at [email protected] or call +44 (0) 207 547 5003.]
