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Summary:

As the announcement of the Google-YouTube deal unfolded last week, it was very interesting to follow the responses from various players representing the traditional media establishment. While I won’t rehash them all here, suffice it to say everyone in Hollywood and New York media circles seemed […]

As the announcement of the Google-YouTube deal unfolded last week, it was very interesting to follow the responses from various players representing the traditional media establishment. While I won’t rehash them all here, suffice it to say everyone in Hollywood and New York media circles seemed to be stunned. And as everyone began to digest all the strategic implications of the deal, one common theme seemed to thread itself from one reaction to another… fear.

It wasn’t so much the fear that Google’s pending acquisition of YouTube would give it 60% share of the online video market post-deal. No, what really seemed to worry the old guard (extending all the way to even Microsoft’s CEO, Steve Ballmer) was that Google could eventually *control* the flow of dollars generated via online video advertising. After all, as more and more videos are placed online and viewers follow (by not only consuming, but also producing), all media companies reliant on video as their content source will inevitably see their revenues increasingly dependent on online advertising. And if Google is there as the gatekeeper, well… “Mission Control, we have a problem”.

So why would the old media guard fear Google in the race to dominate online video advertising? The established media conglomerates, after all, have huge ad sales operations, entrenched in decades-long relationships with Madison Ave, who in turn have all the big brand advertisers in their pockets. The U.S. TV industry alone yields $60 billion in ad dollars every year, as a result of those closed-circle relationships.

Is it because Google just opened up a new 300,000 square-foot New York outpost (aimed squarely at Madison Ave)? Is it because Google now generates $10 billion a year on 12-word text-based Pay-Per-Click ads? The answer is “yes” to both, but only partially. The real answer lies in the fact that Google has what some would call “an unfair competitive advantage”, when it comes to the huge opportunity of monetizing online video inventory. And this unfair competitive advantage is a result of the way they developed their AdWords & AdSense platforms over the years.

Google’s weapon is their existing relationships with hundreds of thousands of small-to-medium-sized businesses (“SMBs”). These same advertising customers, who are now active bidders/buyers of text ads on Google’s ad platform, will suddenly have the opportunity, for the first time in most cases, to become video advertisers. Up until now, with the exception of some local cable advertising, most SMBs never had the budgets or the capability to advertise via video (e.g. on TV).

It’s critical to remember that the backbone of Google’s auction-based, Pay-Per-Click ad platform was primarily built on these hundreds of thousands of SMBs, and not the Fortune 1000 brands that traditionally advertise via Madison Ave. In fact, Google’s Madison Ave push for brand advertising is just now getting started in New York. This fact is counterintuitive, and it distinguishes Google from nearly all the other players in the media landscape. Even the largest media conglomerates in the world do not have hundreds of thousands of advertisers… they have few thousands. And even for those who do have tens of thousands of advertisers, like the ones who own local newspaper franchises, their ad sales operations are not coordinated and centralized for wide-scale deployment… as is Google’s.

One of the key reasons why Google’s existing relationships with SMBs will prove so critical to the future of video advertising has to do with user-generated content. The big question that everyone is asking with respect to Google’s deal to acquire YouTube boils down to the issue of how to monetize uncontrollable, often provocative user-created videos in general. Big corporations are extremely sensitive to any content that could potentially “pollute” their brands. SMBs will be less sensitive… they will weigh the risks against the newly-found opportunity and value to advertise via video. As long as Google can get those ads in front of the right customers within the desired geography and/or demographics, the SMBs have a new path to reach customers and reap ROI (particularly for those seeking to attract younger customers). And just like they did with AdWords/AdSense, aggregate enough small ad buys and Google will be a position to generate billions in online video ad dollars. Last but not least, major brands will follow in time… although they will be kicking and screaming all the way (just like they did with PPC).

  1. I don’t think video advertising of the concept of YouTube translates to 90% of SMB that are selling CPA services or truck parts (http://www.fleetoil.com) online, like it does with Adwords.

    That’s the reason Google has to be on Madison Ave with the bigger consumer brands that are selling products to the younger demographic. I doubt anyone will ever find their lawyer (unless it’s personal injury) on a YouTube ad (right before a car crash video).

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  2. And you bloggers didn’t realize this before they bought YouTube. Everyone was saying how no one should buy YouTube and if anyone does, they are a “moron”. Well now you guys are changing your tune and saying how great a deal it was. Saying that it paid for itself because their stock price went up and raised their market value 2 billion.

    Doesn’t make sense to me how you all can do a 180 on the issue especially when you do not have any facts and are only speculating. Not trying to single you out as many other bloggers are saying the same thing.

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  3. Robert,

    I like your analysis. Is it, however, the SMB edge only that places Google well? Is it also not the fact that they are the only large company with the technical horsepower and financial muscle to develop the video equivalent of Adwords / Adsense? And with YouTube, they have a massively compelling experimentation platform. With enough trial, error, and computer science, this problem, I believe can be solved. But it still remains a difficult problem, and probably, it will remain out of the reach of the rest of the big old media players.
    Sramana

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  4. now that’s a pretty darn interesting post.
    great writeup robert.

    almost makes me want to go long Google again.. at north of $400 / share.

    (almost ;)

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  5. Maybe I am the first person who tend to slightly differ from Robs opinion. Google is SMB friendly, well said. For adSense, the ads delivery was mere text which could be coined by anybody. For Video ads, SMBs have to create their own content and should be professionally done to attract viewers or will those Ads be another archive of pirated and mashed up videos ? Can SMBs really afford to spend so much on creating their own ads ?

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  6. Bazily,
    I have to disagree… I’m confident that most SMBs will find video ads to be a unique messaging vehicle for each to convey their selling propositions.

    Anonymous,
    I never agreed with Mark Cuban that only a moron would acquire YouTube. The exact opposite in fact.

    Sramana,
    I agree, of course, that Google possesses other comparative advantages… and further agree with the factors you put forth.

    Dave,
    Thinking of doing the same myself ;-)

    Chetan,
    You raise an excellent point. I firmly believe that the videos produced by SMBs will be self-generated (without professional assistance) in most cases… much like the user-generated videos themselves. Doing so, of course, will keep the costs low and manageable.

    Thanks for the comments.

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  7. Chetan, one possible solution to the issue you raise is the use of stock commercials, similar to what Spotrunner now offers. This model has it’s downsides, but has some potential for SMBs that can’t afford to produce their own video ads.

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  8. I think that if they put ads on the videos, users will immediately defect to Yahoo, MySpace or whatever.

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  9. Great post. I wrote about an article about this before the actual purchase took place – it’s on my blog: http://red66.com/blog/2006/10/why-google-should-buy-youtube/

    GoogleTube must have the traditional big players really worried. Not only is Google ready to monetize user-generated-content (which the big players can’t) but it’s also ready to dominate both the online and traditional playgrounds of old media.

    Google has the technology to store content, play it back, contract and display advertising on it and, most importantly, measure the reach and effectiveness of these ads.

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  10. Sorry for the typo… on my last comment it should be “I wrote an article about this…” and not “I wrote about an article about this…”.

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