YouTube recently embarked on a new round of discussions with Hollywood and independent producers to fund premium content. A move no doubt inspired by the successes of Netflix, this is part of YouTube's continuing efforts to increase viewership and to transform itself into a destination for long-form original content. But will it work?
Despite spending more than $100 million so far, YouTube has not seen much success luring viewers to their long-form content. Sure, YouTube is still an excellent place to visit for a few minutes and watch a cute video about cats around the world sleeping in strange places. And with the addition of channels like VEVO, there's finally something to fill the void MTV left when it exited the music video business.
Why won't we watch?
So why aren't we drawn to YouTube for long-form content? Primarily because YouTube (and more specifically, AdSense) is heavily optimized for short-form content. YouTube advertising is extremely aggressive and pervasive from the moment you arrive on the site. 30-second ads preempt content, banners fill the bottom of an in-play video and banner ads/paid-placement videos populate the right column.
We've learned to tolerate these interruptions and to filter out most of the annoying, disruptive banners to get to the content. But apply the same or similar advertising tactics to long-format and viewers won't stick around. This is a post-DVR/ Netflix world where users can consume TV shows and movies (even on networks) and either see no ads at all or speed past them at warp 9.1. Could you imagine watching your favorite episode of The Walking Dead and having banner ads surface at the bottom?
How can Hulu support long-format with ads?
Media juggernauts 21st Century Fox, NBCUniversal and The Walt Disney Company own the majority stake in Hulu. Hulu currently offers two models: free Hulu and the somewhat inexplicable Hulu Plus for $7.99/month. The difference is mostly related to device access and getting all episodes in a series rather than the most recent five. Either way, you're watching ads just like regular TV without the ability to fast forward. It may seem puzzling how this model works for Hulu until you realize what Hulu really is: recycled content. Broadcasters and studios make the lion's share of profit from other distribution channels (TV, cable and theatrical distribution). All Hulu needs to do is support its operating costs. The huge costs of production can be borne by the primary revenue channels while Hulu picks up (relatively) small change that may otherwise have been lost. With $1 billion in revenue in 2013, that small change adds up.
Why YouTube can't Hulu
So what would happen if YouTube took a more Hulu-like approach to serving ads? The issue of long-format production costs would still plague them. Unlike rockin' grandmas, how-to videos and music videos (that are really ads to buy a song) long-format, high- (or even medium-) quality programming requires massive speculative investments on pilots, high budgets for equipment, crew, editors, directors, writers...the costs quickly become prohibitive.
Google's AdSense is completely optimized for short-format, low cost-per-impression content, with the highest cost per click reaching just over $100. Unless Google completely retooled AdSense they would need a huge audience that all clicked on most of the ads just to recoup costs.
Short Format Just Makes Sense for YouTube
The user engagement for short format allows Google to serve a much higher number of ad impressions per hour then users would tolerate in long format shows. And since Google is, at its heart, a learning machine, it's just as happy to know what ads you don't click on as the ones you do. Volume is key for knowing about the individual and learning about groups and users as a whole.
Will YouTube offer a premium, ad-free model?
YouTube is just a part of the vast machine-learning project that is Google. It's designed to continually gather data about users and groups to better serve them targeted advertising. YouTube is not a single entity but rather one loop in a wide (and ever-widening) net that collects data on user behavior. It is more valuable for Google to know which ads you watch, engage or skip than it is for them to take a premium fee and lose that precious data.
However you look at it, YouTube has found its inescapable niche as the source of short-form user generated content for casual viewers. Trying to branch out into long-form original content will just waste money and dilute the brand. Leave the long-form to Netflix and Hulu, YouTube, and focus on what you do best: videos like this.
EVP of Operations