Why YouTube’s ads could change the video landscape

August 23, 2007, 9:05 AM UTC
Fortune

Google’s (GOOG) online video unit, YouTube, this week unveiled ad units for video. After months of testing, Google thinks it has finally found an ad format that will satisfy marketers without alienating video viewers.

In YouTube’s new ad format, a translucent pane appears for 10 seconds on the bottom fifth of the video screen; click to see the ad, and the video pauses and the ad plays. When the ad is finished, the video picks up where it left off.

At first blush, the video ad move might seem like little more than Google’s attempt to make back the $1.65 billion it spent last year to buy YouTube, a startup with a devoted following of video viewers, but few revenues and no profits. And indeed, Google is a public company, so it will need to find ways to make its investment pay off.

But more important for the rest of us, Google believes it has cracked the code for making money from video on the Web. And if the company is right, the new ad format could do more than monetize YouTube – it could create a whole new way to make money on the Internet.

CATS PLAYING PIANO

The world of Web video is in desperate need of a dominant ad format like YouTube’s. If history is any guide, when there’s a clear way to make money off of high-quality content, the quality and consistency of the content improves dramatically.

For an example, think back to the early days of blogs, some five or ten years ago. Back then, even many of the most popular ones offered navel-gazing diaries, or funny pictures of cats. Today, the blogosphere has grown up quite a bit; sure, there are still plenty of cat pictures, but there are also publications that carry the polish and sophistication of online magazines. Thanks to the advertising ecosystem that Google helped kickstart, the best blogs create highly professional content, and make enough money to financially support their publishers and a small staff.

Now consider today’s Wed video. One of the blockbusters of the year was a homemade clip of a cat playing the piano. Cute? Perhaps. But no one actually argues that this is good television. Today, Web video is in the same position that blogs were in a few years ago. Yes, there’s some professionally produced stuff out there. But the quality of the user-generated content (with a few exceptions,) isn’t that high.

THE AFTERSHOCKS

If Google’s ad format works on YouTube, it could dramatically alter the online video landscape. How? Numbers.

Through its AdSense ad-serving system, Google has access to the biggest pool of online advertisers – bigger than rivals Microsoft (MSFT) and Yahoo (YHOO). Through the YouTube portal, Google also has the biggest video audience on the Web. Combine those two, and Google gives advertisers the best chance of getting their commercials linked to the right content; it also gives content providers the best chance of getting a big enough audience to generate real money.

The logical effect of this is that if the ad format works, advertisers will choose to work with Google, and content creators will want to put their video there.

There are, however, several complicating factors that could cause problems for Google. A few:

1. YouTube has a big viewing audience, but not a lot of good original content. Look at the most popular content on YouTube on any given day, and much of it is clips from foreign language television or from other sources. YouTube will need a greater inventory of content that advertisers can latch onto if it’s going to make real money. If Google can link up with video podcasters in Apple’s (AAPL) iTunes network, that could be one solution.

2. Video ads are difficult to make. Part of the magic behind Google’s AdSense ads is that they are simple to make. To make an AdSense ad, all you need to do is type out a few lines of text, and link it to the business you’re promoting. Video ads, on the other hand, require more costly and sophisticated production tools, so most small businesses don’t made them at all. That’s a big market Google could miss out on.

3. It will be more difficult to make ads relevant. With its AdSense network, advertisers can bid to have their ads appear when people search for certain terms. The ads also appear on regular web pages where those terms appear. Automatically linking an ad to relevant video content is a much trickier proposition, and it’s still unclear whether this solution will accomplish that.

If Google and YouTube can get the kinks worked out of their ad system, though, the world of Web video will be in its debt. One can only watch so many videos of cats playing the piano.