Inside the ad, ad, ad, ad world of YouTube

If YouTube were a stand-alone company, it would be the world's fourth largest seller of digital ads. Now it's set to challenge the TV ad market, if it can control misinformation and toxic content on the platform.
June 2, 2021 9:30 AM UTC
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Alphabet’s online video service has grown from tween pastime to one of the world’s largest sellers of digital advertising.
Illustration by Charis Tsevis

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For decades, the Super Bowl has been, well, the Super Bowl of the advertising world. The biggest stage, the biggest brands, the biggest audience, and, for the channel that hosts it, the biggest payday. In February, 96.4 million people tuned in to watch the big game and the ads that ran along with it.

Also in February, Vlad and Niki Vashketov posted a handful of videos to their YouTube channel. The short, manic clips show Vlad, a gangly and expressive 8-year-old, and his doe-eyed 5-year-old brother, Niki, doing kid stuff: persuading their mom to get them a pet, building a giant Lego house, playing with toy cars. Cumulatively, the boys’ three most popular videos of the month have amassed more than 170 million views—and counting. 

The Vlad and Niki channel, which launched in 2018 when Vlad, with the help of his dad, Sergey, posted a four-minute video of Vlad playing with a toy dog and some colored blocks, now has 68 million subscribers on English-language YouTube, making the brothers the third most popular “creators” on the platform. (Globally, Sergey says, the boys have a total of 173 million subscribers in various languages.) The Vashketov family declines to say how much it makes from its share of the revenue from the ads that play against its videos on the platform—not to mention the brand sponsorship deals, merchandise sales, and toy licensing rights the channel has birthed. But analysts who track the creator industry say that, all in, the top channels on YouTube are earning $30 million to $50 million per year. That puts them at the pointy end of the pyramid of some 2 million creators who participate in YouTube’s advertising program and typically get a 55% cut of the ad revenue they generate.

It’s boom times for YouTube and its creators. The Google-owned service, bought for just $1.65 billion in 2005, reported ad revenue of $20 billion last year (plus what analysts say are billions of dollars more from subscriptions to products like YouTube Premium, the financial details of which the company doesn’t disclose). Some context: If YouTube were a stand-alone entity, that would make it the world’s fourth-largest seller of digital ads, after its parent company, Alphabet, Facebook, and Amazon. But what really has Wall Street salivating is the question of just how big it might get. YouTube’s 2020 revenue was up 31% from 2019, compared with a 12.8% increase for its parent, Alphabet. (One note that puts something of a damper on analysts’ exuberance: We still don’t know how much of that growing pool of money is profit; between creator payouts and tech costs, YouTube has significant expenses.)  

A big factor driving YouTube’s ad ascendance is the decline of traditional broadcast and cable TV. After peaking at almost 101 million households in 2012, the pay TV audience dropped to 76 million last year and is forecast to shrink to less than half that by 2025, according to market tracking firm Convergence Research. Ad dollars follow the eyeballs. Spending on TV advertising dropped 12.5% last year, while video ads surged 30.1%. Indeed, the analysts at eMarketer are predicting that the amount spent on video advertising will surpass that of TV for the first time by 2023.

“Everyone is looking for new ad opportunities for big advertisers,” says Kieley Taylor, global head of partnerships at mega ad agency GroupM. As the TV audience shrinks, she says, “we have to find other ways to talk to a lot of people.”

If you want to reach a lot of people—and especially young people—YouTube is the place to do it. It’s the most popular social platform among almost all age groups, and the number of people under 50 using YouTube regularly tops the number of people in that same cohort who are watching traditional TV, a recent study by Nielsen concluded. In April, Pew Research said 81% of Americans use YouTube, compared with 69% for Facebook, the second most popular option. It’s no wonder then that for Gen Z, YouTube stars like the Vashketov brothers, Felix Kjellberg (a.k.a. PewDiePie), and Liza Koshy are as recognized and admired as big-name athletes and celebrities.

For most of its life, YouTube’s dominance has depended on billions of mobile phone users watching videos. But it’s increasingly a force in the living room, where more people are watching smart TVs or connecting Roku, Apple TV, and other set-top boxes to watch YouTube on a big screen. YouTube said 120 million people in the U.S. watched via a TV in December, up 20% from nine months earlier. And of the top five most watched services on connected TVs—Netflix, YouTube, Amazon Prime, Disney+, and Hulu—only YouTube and Hulu sell ads.

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This growing ad empire is the domain of YouTube CEO Susan Wojcicki, employee No. 16 at Google back in the 1990s, who has overseen the video service since 2014. 

Growing up in Palo Alto, her dad was the chairman of the Stanford University physics department, but Wojcicki insists she and her equally formidable sisters—Anne started DNA analysis company 23andMe, and Janet is a Ph.D. anthropologist and epidemiologist—had a pretty normal childhood, though hard work was highly valued. Later, in 1998, while working at Intel, Susan famously rented her garage to Google cofounders Sergey Brin and Larry Page. It wasn’t because she had a clue they would be so successful, she says. “I wanted the rent because I needed the money to pay my mortgage,” she recalls during a virtual interview held via Google’s Meet app.  

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VIDEO VISIONARY?: CEO Susan Wojcicki was the platform’s first cheerleader within the Googleplex and has led the company through massive growth and unprecedented controversy.
Photograph by Jessica Chou

Wojcicki saw YouTube’s potential early; she says she was the first person to urge Brin and Page to buy the fledgling platform. And once they did, her background building out Google’s massive ad business made her the obvious candidate to run it.

But it didn’t take long for Wojcicki to discover just how volatile a mix user-generated videos and big-name, image-conscious advertisers could be. YouTube repeatedly failed to filter out offensive content—effectively putting ads against racist, homophobic, and anti-Semitic videos. And in 2017, a who’s who of corporate America, including Coca-Cola, Walmart, Procter & Gamble, and Starbucks, pulled their ad dollars.

The trifecta of lost ad money, a hit to Alphabet’s stock price, and a PR mess got YouTube’s attention. “We needed to work through those issues and to solve them in a way that worked for our users and our advertisers … That was critical for us,” says Wojcicki. Google expanded the use of its machine-learning A.I. software to screen for toxic content and hired thousands of workers to find and assess videos that might violate the company’s terms of service. The worst of the crisis passed, and advertisers trickled back.

The reality, of course, is that the underlying issues that sparked that 2017 boycott have never entirely vanished (see: QAnon, 5G conspiracy theories, vaccine microchips). And so, as YouTube has grown, so has the infrastructure it has created to clean up its sludge-filled gutters. Today the system has four components—which chief product officer Neal Mohan describes as the “Four R’s.” The most visible is “removal”—finding and spiking the most egregious content. Next comes “reduce”: shrinking the audience of borderline videos by downgrading them with YouTube’s all-powerful algorithm. (Mohan admits this gray area is a growing challenge: “There’s a lot of content out there that is very hard to categorize as crossing the line or not, particularly in the realm of misinformation.”) The third R stands for “raising up” videos from trustworthy sources, particularly on controversial topics. For instance, when the CDC issued revised guidance for wearing masks on May 13, YouTube’s algorithms detected a potential for the spread of misinformation and curated a group of mainstream news reports on the topic, which it gave a prominent spot near the top of U.S. feeds. The final plank of the strategy is “reward”—i.e., promote the videos of creators who follow the rules.

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A TWO-WAY STREAM: Chief product officer Neal Mohan says YouTube doesn’t just reflect the world, ”YouTube impacts what’s happening out in the real world as well.”
Photograph by Jessica Chou

Keeping YouTube’s content safe—and therefore advertiser friendly—has become so critical that metrics the company uses to track its progress are included in the annual goals of Wojcicki and her top execs (these “Objectives and Key Results,” or OKRs, are the ultimate arbiters of success and failure inside the Googleplex) and, increasingly, are available to the public online. According to the latest data on the company’s site, the violative view rate—which measures the percentage of watched videos that violated the company’s policies—was between 0.16% to 0.18% in the first quarter, down from 0.17% to 0.20% a year earlier. (YouTube is surprisingly coy about the volume of videos watched on its site, but with more than a billion hours consumed per day, it’s fair to say that even 0.16% represents quite a lot of views.)

For the most part, advertisers say they are impressed with YouTube’s progress. “I’m pretty confident that we are in a safe place,” says Ron Stoupa, chief marketing officer at art-supply chain Michaels, which has been increasing spending with YouTube since it started advertising on the service 18 months ago. YouTube’s “policies and tools work as intended the vast majority of the time,” adds Patrick Daley, vice president of media at Dick’s Sporting Goods.

Some advertisers note that they hire outside companies to assess whether their spots are running alongside inappropriate content.“What we don’t do is allow our partners to check their own homework,” says Chris Paul, vice president of digital marketing at Verizon. “We have to make sure there’s an independent party giving us verification and validation.”

But while ad buyers may be feeling good about YouTube’s handle on its content, many watchdogs remain unconvinced. YouTube “has not taken enough steps” to reduce harassment and the spread of extremism, says Adam Neufeld, vice president of the Anti-Defamation League. “While they’ve announced various efforts and taken modest steps, these are both still massive problems.” Critics point to everything from COVID-19 misinformation to lies about election fraud as evidence that YouTube is still allowing dangerous videos to circulate on its platform. 

Wojcicki and members of her team allow that there’s still a way to go. “It’s something we’ll always be working on,” the CEO says. “There will always be the potential of people looking for ways to abuse the platform, and that’s why we need to make sure that we’re vigilant at all times.” 

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The unique three-pronged relationship between advertisers, YouTube, and its vast network of creators can create both controversy and opportunity. Last summer, when the murder of George Floyd by a Minnesota police officer sparked nationwide protests, YouTube was awash in videos providing information about the crime and about the experiences of other victims of police brutality. Some Black creators on the site had pledged to donate their ad profits to organizations like Black Lives Matter and were encouraging viewers to click on their ads and watch them over and over as a way to show their support. Advertisers, unhappy about paying for these repetitive clicks, complained, and YouTube cracked down on the behavior. The company says it replaced the donations with its own contributions to racial justice organizations, but for some creators the damage was already done. 

Beauty blogger Zoe Amira, who came up with the idea, calls the decision “disappointing.” “I guess I understood that it was in defense of their relationship with their advertisers,” she says, adding, on the other hand: “It should be left up to the watchers how they engage.”

In other instances, the company has attempted to use its clout with advertisers to encourage them to reassess their strategies in a way that could both boost their business and support creators and content that’s been overlooked in the past. One such area is hip-hop videos, a popular YouTube segment that big advertisers have historically avoided. YouTube pitched advertisers to reexamine the genre, noting that virtually every music video top 10 list around the world is dominated by hip-hop artists and pledging that the latest technology could filter out videos with inappropriate lyrics or images. “If you’re an advertiser and you want to be connecting with audiences and relevant in culture, not being in hip-hop is a big miss,” says Debbie Weinstein, VP of video global solutions at YouTube who oversees ad partnerships. 

While YouTube declined to share any details about the results of the effort, there is some suggestion that advertisers are starting to evolve. Until the summer of 2020, many companies included the phrase Black Lives Matter on their list of “banned words”—terms that third-party software uses to block their ads from appearing against a video, says GroupM’s Taylor. But as the platform filled with news and social commentary videos citing BLM, some of those advertisers agreed to strike it from their list, she says: “I’m encouraged by the self-reflection and maturation I see with many multinational brands.”

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For all its focus on internal issues, perhaps the biggest threats to YouTube’s future come from the world beyond its platform. At the moment, it’s one of the few streamers to accept ads, but HBO Max has said it plans to go that route soon, and if Netflix or Disney ever decide to follow suit, the space could get crowded fast. On the social side, the same could be said of TikTok, the short-form video app that currently wears Silicon Valley’s “hot new thing” mantle. TikTok and Instagram, which has been aggressively rolling out new video features and additional ways for people to make money on the app, are also major risk factors when it comes to maintaining the creators’ loyalty.

To keep the people who make its videos engaged, YouTube has been focused on expanding monetization options. Already, creators can sell monthly memberships, digital goods like online stickers, and merch—all from within their YouTube sites and via YouTube’s payments system. Next up: a way to collect one-time payments, like a tip jar, for viewers who may derive a lot of value from a video.

YouTube’s new 60-seconds-or-less video feature, Shorts, which debuted in India in September and in the U.S. in March, is already attracting 6.5 billion views per day. The snack-size option gives creators, who have complained that the demands of making enough content to remain a top YouTuber can be exhausting and overwhelming, a forum to create simpler videos (and, yes, helps YouTube challenge TikTok). YouTube set up a $100 million fund to pay creators for making shorts while it gets its ad systems up and running in the new format. 

YouTube has also been experimenting with ways to offer more value to advertisers. One such trial soon to be rolled out more broadly is access to the Google Merchant Center. The feature allows advertisers to place links to their products above relevant content, so users who search YouTube for, say, “best baseball glove” will see a bunch of glove ads hovering above the video. 

If YouTube were a stand-alone entity, that would make it the world’s fourth-largest seller of digital ads, after its parent company, Alphabet, Facebook, and Amazon.

Of course, for any Big Tech player, the ultimate threat, especially right now, is regulation. Efforts are underway around the globe to crack down on social media, including proposals that would hold content-hosting companies legally liable for any dangerous posts or videos. 

Some of YouTube’s critics see such regulation as the only way to curb the spread of toxic content. “I don’t think we should expect private companies to save the world,” says University at Buffalo professor Yotam Ophir, who studies misinformation. “I don’t trust them … They can do much better, but they need the incentives to do so.”

Wojcicki obviously disagrees. Some proposals could make it impossible for amateurs to post videos or otherwise handicap the creator economy that underpins her company.

“We want to work with governments to make sure that they’re doing what’s right for citizens and communities,” she says. “But it might not have been thought through.” 

YouTube has certainly had its share of experience with unintended consequences and what can happen when things might not have been thought all the way through. So, as to whether its future will follow the path Wojcicki wills, or something quite different—you’ll have to smash that “subscribe” button to find out. 

Additional reporting by Danielle Abril

This article appears in the June/July 2021 issue of Fortune.