Jonathan Mahler has a big profile of YouTube’s Susan Wojcicki, wherein he makes one particular point with great vehemence. Just count the occurrences!
1. “Above all, the quality of most YouTube programming is too unpolished to draw big investments from many blue-chip advertisers.”
2. “Companies expect their ads to be placed strategically against high-quality and appropriate content.”
3. “For all of the countless hours of programming created for the site, YouTube has yet to produce a truly premium show. It may be hard to imagine something like Netflix’s ‘House of Cards’ or Amazon’s ‘Transparent’ on YouTube, but if the company wants to generate more revenue, it’s going to need more professional content.”
4. “In the past, when advertisers bought packages on YouTube, they never knew quite where their ads would appear — a big problem, given the wide range of material on the site.”
5. “YouTube’s multitude of smaller creators and hobbyists may not be attracting advertising dollars to the site.”
Note that all of these points are made by Mr Mahler, not by Ms Wojcicki: it’s not at all clear, from the quotes in the article, that she would actually agree with his analysis.
Still, Mahler is absolutely right, in terms of the reality of where ad revenues are going.
Mahler estimates YouTube’s 2014 revenues at $1.14 billion, which, he says, are generated from some 300 million hours per day of video. Conveniently enough, 300 million hours per day is pretty much the same as 114 billion hours per year. Which means that YouTube, globally, is bringing in about 1 cent per hour of video watched.
In the US, of course, that number is going to be higher. Maybe it’s 2 cents, or 3 cents. But it’s still tiny when compared to other, more professional forms of video
According to a 2012 paper by David Waterman, Ryland Sherman, and Sung Wook Ji, for instance, standard TV brings in 38 cents of ad revenue per viewer per hour, while Hulu — which is basically standard TV on the internet — brings in 28 cents. Even giving YouTube a lot of benefit of the doubt, it seems that advertisers find an hour of consumer-generated content a full order of magnitude less valuable than an hour of TV.
On its face, this is a bit weird. YouTube has greater engagement than TV: it’s a lean-forward experience, where people watch only the content they actively choose to watch. TV, by contrast, is in large part “consumed” in the background, often with the sound turned off: it’s the background radiation of American life. Why would the former experience be so much less valuable, to advertisers, than the latter? After all, the quality of YouTube comments notwithstanding, there’s no particular reason to believe that the YouTube audience itself is any less desirable to advertisers. In fact, the opposite is the case: YouTube is a great way of reaching the coveted 18–35 year-old demographic — the people who are most likely to be giving up television.
So the difference in ad revenue is not a function of the audience. And, as the numbers for Hulu show, it’s not primarily a function of the online medium, either. It really is a function, just as Mahler says, of the perceived quality of the content: advertisers are willing to pay ten times as much for professional TV shows than they are for general YouTube video.
This phenomenon is not confined to video, either. The print edition of the New York Post, for instance, is read by a surprisingly rich and upmarket demographic (as extolled by the Post in the above graphic). To be sure, almost all of those upmarket Post readers get the Times as well. But given the demographics of the audience, one might reasonably expect the Post’s print CPMs to be somewhere near those charged by the Times. Whereas, in reality, they’re nowhere close. Again, the main reason is the quality of the content: advertisers prefer to buy space adjacent to material which is considered highbrow, rather than space adjacent to material which is considered lowbrow.
It’s worth noting here that the two biggest giants of online media — Facebook, and YouTube’s parent company Google — have both risen to dominance by selling advertising which is entirely about targeted reach. All that matters is who sees the ad, the advertiser is paying per advertisee, if you will, and isn’t targeting any particular content.
But in the rest of the advertising world, the quality of editorial content remains hugely important. Brands don’t just want to get their message out in front of a certain group of individuals; when they’re buying adjacencies, they also believe — and they’re putting billions of dollars behind this belief — that what they’re adjacent to is more important than who exactly they reach.
Call it the Associative Property of Advertising: the real value of an advertisement, to the advertiser, lies not in the ad itself, but rather in its context. Ads in video games are not worth very much, because the context is not one which is likely to make the viewer think better of the brand. Ads in Vogue are worth a lot, because the context is nothing but glamor.
Online, the primacy of context is exemplified by brands like Quartz, which can serve up millions of viewers in an atmosphere designed to be highbrow and aspirational — just like the Economist is in print. Yes, advertisers care about Quartz’s audience, their income and spending habits, that kind of thing, but it’s not like that audience doesn’t read Gawker or the Mail Online as well. And a Mail Online ad buy, even if it could be targeted just at high net worth readers, would still never get the same kind of CPMs that Quartz can charge.
This strategy—of valuing certain adjacencies much more highly than others, just because of the general context, rather than because of the audience they reach—lies at the heart of the advertising industry. As the YouTube numbers show, it has also withstood the move from legacy media to the internet. But at the same time, the biggest digital ad plays basically do away with context entirely, and are all about targeting and reach.
This, then, is the big question facing Wojcicki. Does she embrace the ad-industry status quo, and try to sell ads against the tiny minority of YouTube content that advertisers consider worthy? That’s basically Mahler’s take on her job: she has to increase the size of that minority, even though it’s always going to be a small minority. Alternatively, should Wojcicki embrace the data-driven disruption of the parent company, and try to sell advertisers on the value of scale and targeting, rather than context? That, it seems to me, is the much greater opportunity facing YouTube, if she can make it work.
It’s a cliché in the advertising trade that half of all ad spend is wasted. So, what if Wojcicki started to make the case that much of the wasted ad spend is the marginal extra money spent on context, above and beyond the money spent on reach and targeting?
The counter-argument is surely that brand advertising, by its nature, is all about context. It’s about placing a brand in front of a consumer, and trying to make the consumer think more positively about the brand as a result. It’s obviously easier to do that in some glossy magazine than it is by forcing people to click away a rollover ad on a viral YouTube video.
But I’ve spent enough time around the digital advertising market to know that quantification is valued more highly than anything else. If this debate comes down to a fight between the quantifiable and the ineffable, then the quantifiable will win.
So my bet is that while Wojcicki will be happy to do whatever’s necessary to improve ad revenue from professional-grade YouTube content, her much larger ambition will be to start turning YouTube into an ad platform as indispensable as Facebook. She can’t do that by turning YouTubers into stars; the only way she can do it will be by changing the way the ad industry thinks about what it’s buying, when it buys video ads. The good news, for her, is that Facebook has already done a lot of the hard work in terms of paving the way. Now she just needs to convert.
Felix Salmon is a senior editor at Fusion