Content And Competition To Weigh On YouTube

  • YouTube net US video ad revenue is expected to grow at a slower rate, due to increased competition, saturation of video ad space, and slowing engagement trends.
  • However, the business should be able to scale despite its competitive environment due to favorable CPMs (cost per impressions) in the video ad space.
  • While CPMs are high, content creators have yet to reach the scale in which it can compete with professional studios.
  • Therefore, YouTube will have to invest more capital into content development, which will lower the overall profitability of the segment as content acquisition costs will increase considerably.
YouTube could face topline and bottomline pressures

YouTube is one of Google’s more valuable web/app properties and  given the limited number of ways a company can monetize a mobile audience, Google has to do everything it possibly can to continue building upon the momentum of its crowd sourced video platform. Today, eMarketer released an updated forecast on YouTube sales. eMarketer expects growth rates to decline due to an increase in competition along with saturation of ad space.

YouTube net US video ad revenues

By 2016, YouTube revenue excluding content and traffic acquisition costs will be $1.75 billion. The model seems somewhat reasonable given the changing dynamics of the video ecosystem, and the rising number of YouTube stars that command the vast majority of the website’s total engagement. To retain celebrities you have to pay a higher price to keep them. And in a sense, Google will have the job of delicately balancing the rate at which it charges advertisers, and the amount which it wants to share with content creators.

US video ads to online ad spend percentage

YouTube recently announced that it would invest more heavily into content development. It’s not too surprising, as the number of amateur content creators has dwindled, and the line has more or less blurred between amateur and professional production quality. To help supplement the ambitions of content producers, YouTube has recently launched a professional production facility, which can be accessed by YouTube channels that have subscribers in excess of 5,000 people. By giving YouTube channels access to professional equipment in key markets like Los Angeles, London and New York, a small number of YouTube content creators may be able to compete with more traditional channels.

The percentage share of online video ads as a percentage of online ad-spend is expected to increase considerably according to Jefferies, Magna Global, and Interactive Advertising Bureau. The CPM trends of online video ads have grown over the past several years and it’s likely that this trend will continue, according to Credit Suisse. The confluence of projections indicates that YouTube is in a great position to grow the ad-side of the business.

US online video ad CPM

Source: eMarketer and Credit Suisse

Because the CPMs of video ads are significantly better than banner, search, newsfeed ads, YouTube will successfully scale its model even as the share of payouts are unevenly distributed between content creators and the network. But because the business is so lucrative, various companies have been buying out multi-channel networks that are partnered with YouTube. There’s a lot of upside to low budget content, depending on where it is sold, and who it’s marketed to. Because of this fact, YouTube may face competitive challenges from MCNs that decide to create competing services. Also, YouTube will have to compete for the attention of an audience that continues to be presented with an increasing number of options, i.e. Hulu and Netflix.

For YouTube to remain competitive, the overall quality of content has to near that of professional studios. Being a crowd-sourced network that creates professional content will be a very delicate balancing act, and it will not surprise me at all if YouTube begins to see some erosion of margins when partnering with YouTube stars to create TV shows, or miniature movies.

While Google remains a compelling growth investment there’s no denying that some of Google’s more popular properties like YouTube will exhibit slower rates of growth. In the case of YouTube, content investment, competition, and the difficulty of retaining top stars will weigh on both top and bottom line figures.

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