Yesterday, YouTube announced that it was adding pay per click ads to the site in the form of sponsored videos. Users and advertisers can now bid on targeted advertisements that run alongside search results on the site and push users toward specific clips. Erick Schonfeld over at TechCrunch thinks YouTube’s new ads are a sign of weakness. But we disagree.
“Here is the stark reality of online video: nobody is making much money,” Schonfeld writes. “The writing is already on the wall. YouTube is resorting to selling off video search results to the sexiest bidder and just today announced that it is extending overlay ads in YouTube Partner videos to embedded videos on other sites (previously these would only show up on YouTube itself). It is pulling out all the stops to try to get those revenues flowing.”
Schonfeld notes that though YouTube streams the lion’s share of videos online, only about 3-4% have ads. That’s a huge number, but he argues that smaller competitors like Hulu who focus on professionally produced content, which is generally more appealing to advertisers, are actually better suited to generate revenue than Google.
But if there is one thing Google knows how to do, it’s make money from search engines — and YouTube, just happens to be one of the largest. As Silicon Alley Insider points out, YouTube is actually the world’s second largest search property, generating twice as many searches as Microsoft, and more even than Yahoo!
We’ve also seen how important YouTube videos can be at getting out an advertising message. There are two good recent examples. One is the US presidential election, in which Barack Obama and John McCain battled for free air time on YouTube — Obama’s channel surged in the final week, make of that what you will. The other example is Microsoft’s Seinfeld/Gates commercial advertising campaign, which flopped on TV, but got a ton of play via viral channels such as YouTube.
YouTube opening up an advertising channel to push people toward advertising videos is a smart move, in our book. The site gives away free airtime for ads, but is allowing advertisers to pay to drive traffic toward that content — that’s the same model that has worked so well for their other search engine. Some of the ad targeting so far is very poor, but we expect that will change once more advertisers are active on the system.
How many record companies will pay to push more users toward the music videos of their newest artists? How many film studios will pay to get more views of their latest film trailers. Companies could conceivably use ads to jump start viral video advertising campaigns by paying for that initial flow of traffic to videos. Once that happens, if the content is good, the viral dynamics of YouTube will take over. We also think that this will be a great channel for smaller, independent film and video producers to promote their projects.
Far from a desperate move, PPC ads on YouTube is a smart one. Google may have finally found a way to make money on the long tail of videos, in much the same way that they previously figured out how to make money on the long tail of web sites.