YouTube and Business

Discussion of the Week
In this year’s Note 18 of The Kelly Letter, sent March 24, I wrote the following in the news overview:

Our former top Tier 3 holding, Google (GOOG $810) reported Thursday that its YouTube site reached one billion active monthly users, a feat accomplished just six months ago by Facebook (FB $26). The milestone took both YouTube and Facebook eight years to achieve. Twitter, by contrast, counts just 200M active monthly users after seven years of operation. YouTube crowed on its blog: “Nearly one out of every two people on the internet visits YouTube. Our monthly viewership is the equivalent of roughly ten Super Bowl audiences. If YouTube were a country, we’d be the third largest in the world after China and India.” Google bought YouTube for $1.65B in 2006 when it had an estimated 50M users.

This is impressive, but the business model may face an insurmountable challenge in that it doesn’t scale well. Bandwidth and storage requirements for hosting and streaming videos is costly, and becomes more costly with more users. Analysts estimate that YouTube generated $1.3B in video advertising last year and several hundreds of millions of dollars in other ads, but Google won’t say whether the site can yet cover its expenses. Analysts are skeptical. Brian Wieser, analyst at Pivotal Research, told the FT on Thursday: “It’s possible that the more successful YouTube is [among users], the less successful it is financially.” With only 10 pct of its videos generating revenue, YouTube’s growing pains are far from over.

An interesting question is whether the rise of smartphones and online video popularity is related to high unemployment and declining average wealth. Is it now too easy to disappear into a world of one’s own that doesn’t require meeting life’s challenges? One benefit is that digital entertainment is free or cheap, certainly cheaper than vacations or new toys. Perhaps people are less ambitious in their professional lives because it takes only a modest income to afford a screen with internet access. The YouTube story makes it hard to miss the lack of economic motivation around a leading online property. Neither the makers of the content, nor the consumers of the content, nor the providers of the content earn anything. So far, online video is a pastime.

This sparked more controversy than I expected. Victor posted on the subscriber site that there are “countless ways the content creators earn money” such as YouTube partnership networks such as Maker Studios and Vevo, and the AdSense program “which allows practically any user to earn a small buck from their video creations.” I replied:

True, there’s a small amount of ad revenue sharing possible, but it’s not as high as other revenue-sharing programs such as banners and buttons and affiliate programs. Remember, only 1 in 10 YouTube videos generates any revenue.

My guess is that the reason ads don’t work well with online video is that they’re too disruptive. A TV audience is more captive than an online audience, because there are fewer controls and distractions at the user’s fingertips, and the TV experience is more relaxing than the online experience. In general, we’re in more of a hurry when we’re online than when we’re relaxing on the couch, for example. TV ads can work if they’re entertaining, as are many Super Bowl entries. We’ll sit through 30 seconds or one minute of creativity on the TV, but not on YouTube.

Thus, I find the online video platform to be inherently ad-unfriendly. So far, this is reflected in YouTube’s poor business performance, and the meager revenue stream is further strained by the high cost of storing and streaming videos to a billion users every month.

The big tussle came from subscriber Mike’s brother, something of an online business aficionado, who took umbrage with my skepticism toward YouTube’s business effectiveness. He explained that YouTube is the second-largest search engine in the world after Google, bigger than Bing or Yahoo, then expanded:

The most popular form of digital marketing is called ‘content marketing’ which means engaging your audience with useful information rather than just promotional ads and data sheets. The most popular form of content marketing is video. YouTube isn’t the only way to deliver video content marketing but it’s arguably the best way. Ninety-nine of the top 100 global brands are on YouTube hosting over 1,200 channels with 150,000 videos to interact with customers and prospects at all stages of the customer life cycle.

Some facts:

<> Thirty-six pct of US businesses over 100 employees use YouTube for marketing, and this is expected to grow to 43 pct in 2014 (eMarketer, 8/2012)

<> Ninety-nine of the top 100 global brands are already marketing video content on YouTube and have spent an estimated $3B on video asset creation (Pixability)

<> More than half (52 pct) of senior executives say they watch work-related videos on YouTube at least weekly. (Forbes Insights 2010)

<> Four in 10 shoppers visited a store online or in-person as a direct result of watching a video online (ReelSEO, 8/2012)

<> Forty-three pct of agencies expect their luxury clients to move money away from the tube in favor of online video. (2012 Digiday/Martini Media survey)

Marketers pay for premium placement and to advertise to attract viewers on YouTube the way they do on web-based search engines like Google and Bing. Advertising on YouTube is still at an early stage —- think of it as advertising with Google search in 2002. Look at the growth of Google advertising revenue over the last 11 years. An easy approximation for that is to look at the growth of Google’s revenue, stock price, and market cap over the same period.

The popularity of online video was never in question. It was a prima facie conclusion from YouTube’s 1B users per month announcement. The problem is the lack of revenue, which is all we should measure directly. I was mostly concerned about YouTube’s own lack of revenue, but did also mention the lack of business benefit to video makers and viewers, so I’ll respond to what Mike’s brother sent.

Look carefully at some of what he provided, and you’ll see that it’s an anecdotal way to make a business case for YouTube videos. Perhaps 36 pct of businesses with more than 100 employees do use YouTube for marketing, along with dozens of other channels both online and offline. Does this mean each one works? For instance, what to make of the probability that something north of 95 pct of them use business cards for marketing? What they use for marketing does not tell us what works for marketing and, therefore, where the revenue is likely to go.

This is a general problem with web statistics. Life is moving online, so growth is going to be evident there. Thus, it’s not surprising nor especially encouraging that business executives are watching videos of interest to business executives on YouTube. Prior to YouTube, they watched them on DVD or VHS, presumably, or read such material in print. The same way podcasts are growing more rapidly than radio stations but have yet to make serious money, so YouTube is growing more rapidly than TV but has yet to make serious money.

This touches on his second bullet. It seems impressive at first glance that 99 pct of the top global brands are marketing on YouTube and have spent $3B doing so. First, look at the source. In its own words, Pixability is a firm founded to “make online video perform by getting the right video in front of the right audience to trigger the right action.” Do you suppose it’s in the firm’s interest to talk up the business benefits of online video? Of course. Putting this aside, let’s grant that firms have actually spent $3B on YouTube video marketing.

What percentage of annual TV advertising do you suppose this represents? Would 50 pct impress you? It would me. How about 25 pct? Also pretty good. However, no, it’s just 4 pct of the $74B spent on TV ads last year alone (see Obviously, big accounts are just dabbling on YouTube to see if it works, and have so far not gone to it in a big way. Since it’s been a going concern for eight years and has plenty of popularity stats to appeal to advertisers, this does not bode well. It’s easy to repurpose existing video content onto YouTube for testing, after all. Why not upload content to YouTube? It’s cheap and it can’t hurt.

As for whether 40 pct of YouTube video watchers went to a store as a direct result of watching a YouTube video, this is hard to measure. Given the multitude of sites plastered with banners and buttons, and other media we’re exposed to, it’s tough to say what draws people to stores. Companies themselves report the difficulty of gauging reaction metrics because they’ve noted that people are biased to recall exposure to whatever you ask them about since they’ve been exposed to the brand in all media.

For example, I’ve been exposed in the past week to a Coke radio spot, a Coke button, a Coke billboard, a Coke YouTube video (really: the one about the happy moments caught by hidden cameras), and so on. When I’m at the Coke machine putting my coins in the slot, if you ask me if I’m there because I saw a YouTube video, I might recall that hidden-camera spot and answer in the affirmative. If instead you’d asked me if I was there because I’d seen a billboard, I might recall that and also answer in the affirmative. In truth, all of it works together and it’s hard to know which single exposure took me to the machine. Even I wouldn’t really know.

Thus, we have to look at hard dollar movement to see what’s really going on. What we know is that a billion people a month go to YouTube, that it’s not profitable yet, and that major advertisers are spending only a tiny fraction of their TV marketing budget on YouTube marketing.

To a bigger point: It’s easy for people to become blinded by large internet audience numbers, but revenue determines relevance. If the audience doesn’t pay, it doesn’t matter how big it is. This is true offline, too. As I’ve typed this, tens of thousands of cars have driven by on a local freeway. The number is up dramatically in the past five hours given the progression into the work day. Any of those cars could reach my office in 15 minutes. Impressive, right? Wrong. Not a single one of them is paying me any money. Beware this type of inflation of irrelevant numbers online. Actually, it’s worse online because a big audience costs money. I didn’t have to pay anything for those freebie drive-bys, but YouTube has to pay for every visitor and video on its servers.

Finally, the runaway popularity numbers are not necessarily good for marketers, and this could be part of YouTube’s revenue challenge. It claims in its demographics report that “over 4 billion hours of video are watched each month on YouTube.” Right, so what are the odds that anybody will see a specific one? The audience is there, sure, but the audience is fragmented, distracted, tempted away by the ease of clicking related content, and — very importantly — overwhelmingly outside of target demographics. Three out of four YouTube videos is uploaded from outside the United States, for example. Any marketer uploading an English language US-focused video will notice the percentage of the one billion monthly users that care about it dwindling quickly as filtering is applied. The segment of YouTube’s vast audience that cares about a specific campaign is the only metric valued by advertisers. Judging by their minuscule allocated spending so far, it’s not impressing them.

There’s no disagreement over the popularity of online video. There’s also no disagreement about the lack of profitability in it — when one examines revenue data rather than usage data.

Do you think online video will ever match television for advertising budgeting and effectiveness? Feel free to join the discussion in the comment area below.

This entry was posted in Discussion of the Week, Technology and tagged , . Bookmark the permalink. Both comments and trackbacks are currently closed.


  1. todd
    Posted May 1, 2014 at 10:28 pm | Permalink

    ad blindness is a big issue. We are so used to seeing pop-ups, banner ads, etc. where they no longer become effective. Also Ad executives will not spend money on advertising that cannot be measured. That is the problem with youtube. Perhaps you can measure in some way, but if it were effective, ad execs would be pounding the door down. They are not.

    What does work is recommendations from a trusted source and positive reviews.

  2. Posted April 10, 2013 at 2:00 pm | Permalink

    Maybe if YouTube eliminated all ads and just charged each user $1.00 a year to subscribe…

    I’m a throwback — 67 years old last year and really tired of all the distracting popup ads, slideup ads and, more so, audio/video ads that pervade so many sites I otherwise like.

    Whenever the choice is offered, I skip the ad. I wonder if they track the stats on how many folks do that. I love my DVR because I can watch two “hours” of cable programming in about 80 minutes by skipping commercials.

    When a cable “on demand” replay or a web video ad won’t let me skip it, I hit the mute button and snuggle with my wife at the TV or switch apps and take 30 seconds to check mail or play Spider Solitaire until the ad ends.

    So many sites seem to be stuck in the real-time broadcast TV paradigm of the 70s or 80s, thinking that during three minutes of commercials, we all don’t really head for the bathroom or the fridge or both.

    Maybe “today’s kids” put up with that crap, but will they do that forever? We’ve seen sci-fi movies and programs where entire buildings are washed with electronic ads. Unless they’re all designed like the topics in Subliminal Seduction, is anyone actually watching or beind influenced by them?

  3. Keith
    Posted April 8, 2013 at 9:03 am | Permalink

    The article, Broadcasters Worry About ‘Zero TV’ Homes may add a little info regarding TV vs. internet (YouTube, Yahoo, et al.) from the perspective of TV executives. It will be interesting to watch the tug-of-war! Of course, movie theater executives and the movie industry were at one time worried about TV competition.

  4. LadyMD
    Posted April 8, 2013 at 6:07 am | Permalink

    Regarding online video matching TV for advertising, it’s only a matter of time. More and more, people — especially the young — look at their phones and laptops a lot more often than they look at TV. A catchy 30-second ad can work wonders. Add that to the “spread the word” capacity of the Internet — connectivity which TV doesn’t have — and you have huge advertising potential.

    The other issue is how much people hate their cable companies. All that Google and amazon (for example) have to do is undercut cable company pricing and provide better service (that’ll be no sweat!), and cable TV will go the way of the typewriter.

    • Posted April 11, 2013 at 2:40 pm | Permalink

      You’re probably right, and the development of Google Fiber has cable quaking in its boots.

      However, Wired thinks Google is probably not serious about challenging the cable company monopolies, but is rather using its own high-speed testbeds to develop ad delivery of the future in anticipation of the cable companies getting there nationwide one day:

      “Google Fiber acts as a great real-world lab for Google to test the potential of ultra–high-speed networks for its ad business. But in that same real world, Google still wants unloved Verizon, AT&T, Time Warner and Comcast to shoulder the cost of building out such a network to the hundreds of millions of us who don’t live in Kansas City or Austin.”

  • The Kelly Letter logo

    Included with Your Subscription:

Bestselling Financial Author