YouTube Getting Back Into Original Content Game In A Big Way

YouTube Getting Back Into Original Content Game In A Big Way

Summary

  • YouTube offers financing to top stars to boost quality, original programming.
  • Competition heating up for top short-form video content.
  • Digital advertisers pay more for quality video than any other type of content.

After spending $200 million in 2012 in an attempt to produce higher quality original content, Google’s (NASDAQ:GOOG) (NASDAQ:GOOGL) YouTube is once again initiating a strategy to raise its video quality bar, as its top talent is being courted by competitors to produce video for them.

At issue for its most popular channels is the amount of revenue the creators receive from their productions, as overall, they’re not all satisfied with the compensation for their work, even though a number of them make over $1 million a year.

One reason for that is many of them want to take their production values to the next level, and to do that they need to spend a significant amount of money on the tools they need to do so, as well as access to more professional input and training.

To that end YouTube is preparing to launch a new service by the end of 2015 which will finance programming from its cadre of most popular YouTube celebrities.

The end game is to retain the talent while providing them the financing and tools to reach their personal video production goals.
For Google and YouTube, it should ultimately boost revenue by offering safe and quality content advertisers will be willing to pay to place their brands against.

While it hasn’t been specifically stated, I wouldn’t be surprised to see YouTube eventually build out a subscription model where it shares a piece of each subscription price to the specific producer.

That’s where I see this most likely leading to. Some have gravitated to competitors that offer that model at this time.

Why The Focus On Quality, Original Programming?

The one place where marketers and brands are willing to spend more is trusted video.

Since YouTube was built primarily on amateur videos, it gained the reputation of having low-quality, edgy content that most major brands weren’t comfortable placing advertising against.

YouTube has been working to mitigate that by increasing the quality of its videos, and I believe having more of a say in what type of content is produced. That is why it’s going the financing route, as it will not only provide its top people with more tools and revenue to create what they want, but they’ll have more of a say in what they’re willing to support.

On the original programming side, that is important because an increasing number of traditional media outlets are putting mostly short-form video clips on YouTube, which simply mirrors what is being shown on broadcast or pay-TV.

YouTube doesn’t want to become solely a depository of low-quality amateur video or already-existing professional content from other platforms. It wants to carve out its own niche in the sweet spot in-between, which is where much of the attraction of YouTube now lies. This is why it’s trying hard to retain the talent that has driven such a large number of its views and revenue.

Google Preferred

Near the end of April 2014, YouTube announced it was launching an advertising platform called Google Preferred, built to address the brand concerns about low-quality, unsafe videos, targeting the top 5% of its content for advertisers to place ads against.

It appears the major impetus behind Google’s original content drive is to increase the amount of quality video content to boost advertising revenue.

Assuming it maintains its 5% parameter, if YouTube can expand that to represent more content, it would obviously boost advertising revenue on a consistent and sustainable pace.

Not long after Google Preferred was unveiled, Adweek reported there was “an even more premium tier to the platform, letting brands pay extra to run ads against only the top 1 percent of YouTube videos.”

To be allowed to acquire inventory in that 1%, according to Adweek, brands would also have to buy inventory within the wider 5%. The reason for that is YouTube doesn’t want a few companies to purchase all of the inventory in the 1% category, it wants to increase the number of brands advertising on the platform.

Again, I’m sure the original content initiative is for the purpose of making Google Preferred more compelling to marketers.

Content Format

Short-form content remains the preferred way young people want to consume digital video content, and those that win that market will essentially win the future.

With that in mind, YouTube won’t be trying to compete in the way traditional media has in the past, as it won’t be limited in any way by the usual length of TV shows on pay or broadcast TV. It will instead continue to offer a variety of videos in shorter time frames to supply that demand.

The initial content focus will be on comedy and family programming, including scripted and unscripted productions.

I’m glad to see YouTube isn’t attempting to move outside short-form video content, as it would be a disaster for it.

Instead, I believe what we’ll see is a variety of shorter video lengths, depending on the specific niche, which will be experimented with to determine what will be acceptable to viewers.

Anything besides this would be a red flag to me, as there is no doubt digital video will be successful primarily in short productions. I don’t believe YouTube will attempt to change the time preferences the market has already shown it demands.

Conclusion

The future of digital video is short-form, and within that market there is considerable room for quality, original video, which is what commands the highest advertising prices in the digital space.

It seems YouTube has finally realized its top talent have followings that in many cases surpass that of the Hollywood elite. And if it wants to leverage them, it must get behind them and offer the financial resources and tools to help them move to the next level.

It’s either that or continually lose the people that learned their craft on YouTube to competitors, who see the strong value and potential in those that have attracted followings in the millions.

As the amount of content expands, and assuming the production values move to another level of quality, we could see, as mentioned earlier, a move by YouTube to create subscription channels for the purpose of creating another revenue stream and providing another incentive for talent to remain with them.

This is a long-term strategy I like. It won’t do much for Google’s top or bottom line in the near future, but over time, if they do this right, it could become an increasingly important part of Google’s performance.

The key takeaway is video where advertisers are willing to pay the most in the digital market, and the more content that is produced that caters to that preference, the more money a company will pull in.

Investors need to watch not only the consumer response to this video content as it is released, but also the quantity of videos, along with the number of brands coming on board to buy advertising.

One concern is the length of time it will take for YouTube to get this going. Over the next 11 months or so its competitors could ramp up their efforts to woo talent away before it launches. That said, it’s possible YouTube will start to throw some money at its video producers to get production going before the official launch.

Announcing it this early in the game suggests YouTube might be trying to emotionally lock in its top producers so they keep on producing for the platform until it gets the program started.

There might be some churn in the meantime, but I think most of the top people will remain with YouTube until they see where they fit in the overall picture.

YouTube doesn’t break out its performance data, but net revenue at the end of 2013 was just under $2 billion, according to eMarketer, cited by the LA Times. Jefferies has estimated revenue in 2014 to come in at $2.8 billion, and for 2015, to reach $3.5 billion.

Assuming those figures are in the ballpark, this initiative should be able to generate another 10% in net revenue over time, and possibly higher.

I draw that conclusion from not only YouTube being able to retain its top stars, but an improvement with respect to both the quantity and quality of its videos. Because video attracts the most advertising dollars on digital platforms, marketers will be willing to spend more to place their content against it.

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