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Cable Technology Feature Article

July 08, 2013

YouTube Banks on Mobile Ads, Original Content

By Tara Seals, TMCnet Contributor

The transition to mobile and growth of Android (News - Alert) has driven industry leading growth in online video ads on YouTube, while its original content push is aiding a certain softness in the more traditional online video advertising space.

Rory Maher, a managing director at Hillside Partners, said that YouTube's (News - Alert) mobile business will generate just under $800 million in 2013 for mobile ads, which is becoming an increasingly important piece of the business. He pointed out that according to comScore in January 2012, Google wasn't even in the top 10 online video properties in terms of ads viewed, but accounted for 13 percent of all video ads viewed in April 2012 and 18 percent by April 2013.

“Google will continue to steal share of online video as usage moves to mobile where… its app is superior to other online video apps and has the advantage of preferred placement in the Android OS,” said Maher.

That could translate to enormous success for the company, considering that mobile video is gaining steam, paving the way for it to command premium ad rates. In fact, eMarketer in its Mobile Video Advertising: Choices for a Rapidly Changing World report estimates mobile video will account for $520 million in ad spending in the U.S. this year, or 13 percent of the entire digital video ad market. That’s a triple digit increase from last year.

And it’s growing: ad spending for mobile video set to quadruple to nearly $2.1 billion in 2016—a figure that will represent more than one-quarter of all digital video ad spending. In fact, growth rates for mobile video ad spending will be far greater than for any other related channel—television, online or total digital.

Image via The Verge

A Move to Original Content

Mobile will continue to be important, considering large percentage of streams served by Google every day, via YouTube, still aren't being monetized in any capacity, Maher pointed out.

“At some point, it would be nice if Google could just stop hosting [user-generated] content that has zero chance of making them any money,” Maher said. “Of course, the problem with that idea is that Google gets so much of its traffic from users visiting the Website to see their own clips, that traffic would drop dramatically, even to the premium content, if they did away with the free video hosting.”

The UCG, he said, is a “necessary evil” of being YouTube, thanks to its size and scale.

“Free video hosting is something they probably will never be able to move away from – even though it would reduce their costs and allow them to focus on premium content that they can monetize,” he added.

The power of original content is continuing to be felt at the company. Overall, Maher believes that YouTube’s 2013 gross revenue will likely be $3.7 billion this year, down from his previous $5 billion estimate, with video ad sellout on YouTube standing at just 14 percent and that channel revenue coming in at a $20 million run rate. But a survey of videos on some of the top rated channels during a weekday afternoon uncovered that a nearly 90 percent sellout in pre-roll or Truview video ad inventory for some ads.

Hillside noted that subscribers of YouTube’s original channels grew 14 percent monthly from launch until March 2013, and grew 11 percent per month since then. Subscriber growth continues to snowball as well: Hillside said that the latest round of YouTube channels have accumulated 11.3 million subscribers in the first 8 months since launch, vs. 7.6 million for the first channels over the same period following launch.

“In our opinion, recent viewership has likely been negatively impacted by competition from the new channels for eyeballs, but international expansion starting in October 2012 has likely enabled the original channels to maintain double-digit monthly subscriber growth, attractive growth in our view,” Maher noted.

Online video advertising is among the fastest growing advertising formats in the United States. According to eMarketer, while overall advertising spend is expected to grow by 3.5 percent on a compounded annual basis between 2012 and 2016, online video advertising spend is expected to grow by 28.9 percent. eMarketer estimated total U.S. advertising spend in 2012 to be $165.8 billion, of which online video advertising spend was $2.9 billion, or only 1.7 percent. As online audiences continue to spend more time watching videos, online video advertising spend is projected to reach $8 billion in 2016. Within online video advertising, mobile video advertising spend is expected to grow from $244 million to $2.1 billion, reflecting a 71.1 percent compounded annual growth rate from 2012 to 2016. The company believes that it is well-positioned to capture a significant portion of this growing online video advertising market.

Original content being produced by over-the-top (OTT) players will only spur that market on—and the OTT players are willing to gamble that this is the case, particularly to stake their claim against established pay-TV players.

“The democratisation of television through the rise of internet video has given Netflix, Amazon and others an opportunity to compete directly with established networks like CBS, TNT and HBO,” said Adam Levine-Weinberg at the Motley Fool. “However, it does not guarantee that Netflix or Amazon will win: in order to do so, they will need to reliably find high-quality content and monetize it profitably.”

YouTube also faces competition from other OTT services and Netflix, which may be vulnerable given the right original content strategy. According to Levine-Weinberg, Netflix is leading the way into the Internet video age, with competitors like Amazon, Hulu (News - Alert), and HBO following at a small distance. “However, while Netflix's early lead gives it a shot at success, it is by no means guaranteed to win,” he said. ““TiVo (News - Alert) revolutionized TV-watching during the last decade but was unable to generate a sustainable moat, and Netflix has an equally difficult task ahead of it.”

But subscribers will ultimately be faced with escalating choices. “While $8 per month seems like a nominal charge, if we imagine that all TV will eventually become Internet TV, there could easily be at least 15 to 20 robust ‘channels,’” said Levine-Weinberg. “Clearly, very few households could afford to subscribe to more than five or 10 channels at $8 each. A few Internet video services might have such compelling content that they would become nearly ubiquitous. However, most will have to settle for a smaller set of viewers in a particular niche.”

YouTube only last week confirmed that it will take between a $40 and $50 million investment stake in one of its top partners, the music video channel Vevo. The move shores up a critical—and symbiotic—relationship for the online streaming giant. comScore found that Vevo is the No. 4 online video property in the U.S. behind Google/YouTube and Facebook (News - Alert), drawing 52 million unique U.S. viewers in May.

The deal gives Google about a 7 percent stake in Vevo, suggesting a valuation of more than $500 million for the site, which is a joint venture between Universal Music and Sony Music Entertainment founded in 2009 to showcase their labels’ artists. Vevo runs a channel on YouTube as part of Google’s original online video content initiative, which it kicked off in October 2011.

"We made an investment in Vevo," YouTube said in a statement. "We are excited by their future prospects and to provide YouTube users with the best possible music experience."

Vevo is planning to use the money to expand globally, and said that it will invest in creating original music-related content to dovetail with official music videos from Sony and Universal.

YouTube has made it clear that it is willing to continue to invest in content. Last autumn it announced a big expansion in its original content push since reaching its initial goal of offering 100 channels. YouTube committed to launching 60 new nets, including international feeds from France, Germany and the United Kingdom, across a range of areas including local cuisine, health and wellness, parenting, sports, music, comedy, animation and news.

It also said it was investing another $200 million to expand the program and help market existing channels.

Edited by Rachel Ramsey

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