Brand Building Is A Strategy, Extracting Profits A Tactic

Michael Hedges April 27, 2015 Follow on Twitter

Media technology is constantly reshaping. Code-writing geniuses find new tricks to adapt people’s behavior for fun, profit or the attention of investors. Fewer business plans are written for advertising revenue these days, now that media buying is automated. Paywalls - in various forms - are like meters on oil wells.

For some it feels like only yesterday that video sharing platform YouTube arrived on the media scene. Its first video was uploaded ten years ago. For others it seems YouTube has always been here, there and everywhere. In that decade everything changed for television, advertising and consumers of both.

YouTube has been a spectacularly good investment for Google Inc., which spent US$1.6 billion in 2006. While revenues specific to YouTube are not officially reported by Google, deal-broker Cowen and Company estimates US$5.9 billion coming in this year, reported Reuters (April 23). YouTube was getting 20 million viewers a month in 2006. Now it’s 7 billion per day.

Everything about Google is about huge numbers. Quarterly revenues were up 12% over the same period 2014 to US$17.26 billion. Had foreign exchange rates not interfered revenues would have been about US$800 million higher. The company owns the world’s best known search engine brand, the billion-user Android mobile operating system, the Gmail email service, the Chrome browser and other stuff noticed mostly by specialized technology nerds. It’s also the primary developer of programatic (automated) advertising transactions systems. Market researcher Millward Brown ranked Google in 2014 as the world’s most valuable brand. Google is ranked the best work-place in the US, Canada and Germany.

YouTube is a big part of Google’s overall business. Viewer volume (paid clicks) on YouTube was up 25% against first quarter last year while per click ad rates dropped 13%, revealed by CFO Patrick Pichette in the recent earnings conference call (April 23). Clicking is Google-speak for watching.

Stock traders click furiously whenever Google executives say or do anything, searching for that Google money. Most recently, two terms have leapt to the top; the mobile platform business and YouTube revenues. “If you just want to make YouTube profitable tomorrow, that’s very easy,” said Mr. Pichette on the conference call suitable distributed on YouTube.

"TrueView ads” - the YouTube ads folks can skipping - “currently monetize at lower rates than ad clicks on Google.com, but as you know, video ads generally reach people earlier in the purchase funnel and so across the industry, they tend to have a very different pricing profile than they would have on a typical performance search ad. Excluding the impact of YouTube TrueView ads, growth in site clicks would be lower, but still positive, and our CPCs would be healthy and growing year-over-year.”

The advertising business, as Google defines it, is not all that different from the oil business. Revenue is determined by supply as demand always grows. Price - per click or barrel - is irrelevant to those with vast supply, so to speak. Anyway, lower prices have a greater affect on competitors. YouTube wins, in this game, as ad buyers shift away from traditional TV. Mobile advertising remains unproven.

Moving into “uncharted territories,” YouTube will be making another obvious leap into ad-free subscription services, reported Bloomberg (April 9), quoting an internal memo. The beta version of its Music Key music streaming subscription service launched last November to the usual howls from music rights organizations. Google already has the Music Play online service and, reportedly, danced with but walked away from acquiring Spotify because of higher than acceptable royalty payments.

YouTube Premium, it seems, will enter the Netflix-Hulu-Amazon realm relying on subscribers primarily interested in avoiding ads while clicking the typical YouTube content. Google’s genus has never extended to producing original content preferring partnerships that keep risk squarely on producers. To drill a bit further into that oil business analogy, crude is crude is crude and its for the refiner to turn it into something. And when the wells run dry there’s always fracking. But that causes earthquakes.

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