Financing Methods: Old Outdated Models

At the beginning of 2015, the Wall Street Journal threw a spanner in the works: “YouTube,” the headline read, “1 Billion Viewers, No Profit.”

In 2009, Time Magazine put YouTube on its Top 10 list of technological failures, along with, among others, Microsoft Vista and Segway. The magazine estimated that the odds were very much against the application ever generating any profit.

The reasons listed at the time are the same ones used today: high infrastructure costs due to monstrous bandwidth consumption, free hosting of millions of amateur videos that hold little to no interest for advertisers, as well as the fact that this low-value advertising vehicle is light years away from reaching a TV-size audience (9% of users count for 85% of all views).

That being said, YouTube’s revenue remains a well-kept secret, lumped in, as it is, with Google’s gross…so much so that analysts at Morgan Stanley, in an open letter to Google’s new CFO (a former Morgan Stanley colleague), argued that more YouTube revenue transparency would help boost the value of Google’s shares.

YouTube revenue evaluation has become a highly speculative exercise practiced by many analysts. In 2009, when Time Magazine declared YouTube a failure, its revenue was pegged at $200 million. In 2015, revenue reached $3 billion according to one analysis, a little over $4 billion according to another, and $6 billion according to a third sourceAnother source estimates that YouTube made $8.5 billion and that by 2020, the site will have generated $27.4 billion in revenues.

And without disclosing whether YouTube had become profitable or not, Alphabet, the new holding company that owns Google, announced in January 2016 a 18% increase in revenue for Q4 2015, attributed to significant growth in mobile search, YouTube contributions, and programmatic advertising.

In a context where 55% of keyword searches on Google lead to videos and 82% of those results come from YouTube – and where mobile use continues, as we know, to increase at a frenetic pace – the future of the platform as an advertising vehicle looks better than ever.

Tech tools to advertising’s rescue

And yet, a newspaper headine during the launch of the YouTube Red subscription service read: “The end of advertising on YouTube is near…but you’re going have to pay for it.”

The death notices of advertising on YouTube or any other online video platform are (as Mark Twain once said of his own mistakenly reported demise) greatly exaggerated. In fact the advertising market for the sector in enjoying remarkable growth: topping out 2015 at close to $8 billion in the US and projected to pass the $28 billion mark there by 2020, according to other estimates.

In Canada, the online video advertising market increased by 28% in 2014 and is estimated at Cdn$4,2 billion in 2015 (That being said, the American TV market is close to 10 times greater, an estimated $70 billion in 2015.)

It’s thanks to TrueView and Google Preferred advertising sales that Google attributed the significant increase in YouTube revenue for third-quarter 2015.

Along with DoubleClick, an ad service owned by Google that specializes in targeting online behaviour, they’re all part of a toolkit developed by Google to reach consumers with greater precision and to clearly demonstrate the advertiser’s return on investment.

YouTube is about to go even further in terms of direct impact: at the end of September 2015, the service announced that it was getting ready to upload video ads that would have a direct link to online purchasing. For YouTube, it’s the answer to the goal of shortening the lag between consumer ad viewing and the moment of purchase, and it takes advantage of the million-plus videos – evaluations, unpacking and other tutorials – that present products, and that have enjoyed a 40% increase in views over the past year.

Attraction is good…captivation is best

Google SEO Sundar Pichai mentioned during the company’s third-quarter 2015 presentation that the YouTube mobile app was responsible for a huge chunk of mobile watch time on the site.

Implemented by YouTube in 2012, viewing time is another way of measuring a video’s success. Viewing time favours videos that maintain user interest, as opposed to a simple view count (a previously used evaluation method).

For YouTube, the more satisfied the viewer is with their experience and the longer they remain on the site, the more it becomes possible to establish YouTube as a daily habit – in lieu of TV – and to offer a quality inventory to advertisers, which in turn will grow in value.

But what about Adblock?

YouTube may very well use the most sophisticated technology and marketing techniques, but it can’t escape the growing number of apps that block online advertising (the most well-known being Adblock), a symptom of the growing rejection of intrusive digital advertising.

One online solution: YouTube Red, available in the US as of October 28, 2015 (launch in Canada is expected by the end of 2016). YouTube Red is an ad-free subscription service built around projects created by or for YouTube stars.

YouTube Red has also secured big media participation from the likes of 21st Century Fox, NBCUniversal and Time Warner, already partnering with the platform (where they’ll receive 55% of revenues on their content just like other creators).

The competition is mobilizing

YouTube says the service was developed to, among other things, provide a new source of revenue for the platform’s most popular creators. But all these activities might really be a defence tactic against the competition that is already mobilizing, with Facebook at the helm.

Facebook introduced technological modifications that made watching and sharing videos a whole lot easier (and made video views skyrocket on the website), and started courting YouTube stars and other creators with a shared revenue plan that uses exactly the same ratio as YouTube (55% goes to creators), but different parameters.

There’s also new venues like Vessel, an online video provider launched by Hulu’s first CEO,
that uses a mixed and complex financing method based on subscriptions and advertising, and that promises to share profits far more generously than YouTube: 70% of advertising revenue and a share of subscription revenues based on video viewing time.

Vessel, which has attracted seasoned YouTubers with the prospect of more income, doesn’t position itself as competition to YouTube, but rather as another distribution network in the video sphere (for now, Vessel doesn’t attract a large base of viewers)

Fullscreen, the digital media agency that manages over 70 000 video creators with more than 600 million subscribers, on YouTube and elsewhere, has launched its own subscription video on demand service on April 2016.

At the beginning of 2006, NBC demanded that YouTube remove some 500 “Saturday Night Live” clips from its platform. The request was provoked by one clip in particular, Lazy Sunday, which went viral (with 5 million views, a milestone at the time). This incident is indicative of the conflicted relationship between traditional TV that dates all the way back to YouTube’s initial launch.

In 2015, Saturday Night Live launched a mobile app with access to 40 years of production, perhaps confirming what Apple CEO Tim Cook said about television: “the future of TV is apps.”

Recently, the Wall Street Journal leaked news that YouTube is actively negotiating rights to long-form visual content like feature films and television series for YouTube Red, throwing its hat into the ring with Netflix and Amazon.

There’s now no longer any doubt that the future of AV content is online, with all the ramifications that entails.

Danielle Desjardins
Danielle Desjardins offers analysis, research and writing services for media and cultural enterprises through her company, La Fabrique de sens. Before that, she was director of planning for Radio-Canada, where she was responsible for strategic, corporate and regulatory matters for more than 20 years.
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