Why YouTube is spending mega ad dollars to promote Vice News

June 19, 2014, 8:19 PM UTC
Courtesy: Vice

With a billion people tuning in each month, YouTube’s audience is almost as big as Facebook’s. And yet, the network lags Facebook (FB) in monetization: Last year YouTube earned around $5.6 billion, coming in below Facebook’s $7.8 billion.

That’s because the market for video advertising is younger than that of the trusty display ad, which was invented more than 20 years ago. Advertisers were slow to adopt video advertising at first, but in recent years, it has been one of the fastest-growing categories. TV still pulls in $74 billion in ad spending per year, so it’s easy for advertisers to port their 30-second spots onto the Web. Emarketer predicts video advertising will grow by 40% this year. Demand for video advertising is so strong the New York Times can’t make enough videos to fill the inventory.

Where the Times leaves off, a new class of fast-growing, Millennial-loving media startups is picking up. The most prominent competitors, Vice and BuzzFeed, have amassed large audiences, large advertisers, and ballooning valuations to match. The latter has quietly built up a mini-video empire in just a year and a half: BuzzFeed has crossed 1.1 billion video views since its inception, and CEO Jonah Peretti recently called video “the biggest shift in our business.”

Meanwhile, Vice has been creating video content for YouTube (GOOG) since 2011, with a following of almost five million subscribers. The company launched Vice News earlier this year, which has half a million subscribers. It has become the fastest-growing news-focused channel on YouTube, with viewers streaming 312 million minutes worth of news so far this year. The channel’s Ukraine coverage has been viewed more than 20 million times.

Compare that to TV ratings: NBC’s Nightly News with Brian Williams garners more than 8 million viewers on a given night. That’s respectable, but small in Web numbers. What’s more, only two million of Nightly News’s viewers are between the age of 25 and 54. The audience is older, and therefore, less attractive to advertisers. The “overwhelming majority” of Vice’s audience is between the ages of 18 and 34, a spokesperson says. When Vice launched Vice News in February, CEO Shane Smith told Fortune, “None of Generation Y is watching TV or watching the news. There’s no battle, there’s no fight. You lost. You guys have the boomers and we have Gen Y.”

Vice’s young audience explains why, in 2013, Rupert Murdoch purchased a 5% stake of Vice for $70 million, valuing the company $1.4 billion. This week, Sky News reported that Vice is in discussions to take on an additional round of funding from Time Warner (TWX) , valuing the company at $2.2 billion.

Now, just in time for to woo advertisers at the annual Cannes Lions advertiser schmooze-fest, Vice is deepening its relationship with YouTube. Following a major advertising campaign based on three YouTube stars earlier this year, YouTube will promote Vice News with TV ads during the World Cup, cinema ads, and billboards in New York, Chicago and Cannes. YouTube will also promote the content on media sites like ESPN.com, Fox.com, Pandora, Hulu; and connected devices like Xbox, Playstation and Roku.

It’s part of YouTube’s plan to attract more advertisers to online video. To do that, they need repeat viewers and a guaranteed audience. That requires premium content that’s higher quality than the cat videos YouTube is known for. YouTube’s first go-round at raising the quality of user-generated content on its platform had mixed results: The company in 2010 offered $100 million worth of “partner grants” to 100 different video makers. Two years later, YouTube re-invested in some of its partners while cutting off others. YouTube’s arrangements have left some content producers angry over the terms. Producers had to pay back YouTube for its investment before they could profit from ads on their videos, for example.

Still, YouTube has created stars with giant, loyal followings like Michelle Phan, a makeup artist with more than six million subscribers on the platform. The only problem with an Internet star like Phan is that she hasn’t quite broken through to the mainstream. That’s why YouTube has sunk a large chunk of cash into promoting its stars offline, buying old fashioned ads on subway cars and billboards to promote Phan, as well as Bethany Mota, a fashion and beauty personality, and Rosanna Pansino, a chef.

youtube michelle phan

YouTube is packaging this high quality content as part of a Google Preferred advertising platform. It likely costs more than your average YouTube ad, and because it’s serialized content with repeat viewers, it looks a lot like TV, which advertisers like. Vice solves another of YouTube’s problem with advertisers—the fact that viewers don’t watch for very long. Time spent per viewer has increased over the years, helped by professional longer-form content. Vice content ranges from seven minute to full-length feature films, and both Vice and Vice News boast engagement time is the 99th percentile of YouTube, a Vice spokesperson says.

Alongside Vice, YouTube will also promote Epic Rap Battles of History, a channel run by Disney-owned Maker Studios.