Peter Kafka

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YouTube’s Show-Me-the-Money Problem

The big picture for YouTube looks good. The world’s biggest video site keeps getting bigger, generating more video views and more ad dollars.

Things are fuzzier for some of YouTube’s biggest programming partners. Their views are also increasing. But the ad revenue YouTube generates for their stuff isn’t keeping pace.

In the near term, that’s pushing many big YouTube networks and partners to look hard for new sources of revenue. The bigger question is whether YouTube will be able to generate enough ad money for content makers to support the “premium” programming it has been trying to attract so it can compete with traditional TV.

“It’s hard, given YouTube’s low [revenue-sharing] numbers and lack of marketing infrastructure to make the unit economics for premium programming work,” says Steve Raymond, who runs Big Frame, a YouTube network/programmer that says it has generated 3.2 billion views.

The dollars programmers earn from YouTube’s ad-selling efforts range widely. But many big publishers say that after YouTube takes its 45 percent cut of the ads it sells, they frequently end up keeping about $2.50 for every 1,000 views their clips generate — that is, if their video generates a million views, they get $2,500. Other publishers say their split can be as high as $10 per 1,000.

Those rates were supposed to improve in the last year, in part because of YouTube’s splashy effort to create advertising-friendly “channels” by advancing programmers like Big Frame millions of dollars to make exclusive shows for the site. Last May, it hosted a glitzy “Brandcast” event in New York, where it brought out stars like Jay-Z to sell marketers on the idea that YouTube should command TV-like dollars.

Instead, according to people in and outside of YouTube, last year the site ended up with a glut of inventory, which put even more pressure on ad rates.

Last fall, YouTube invited top programmers for a sneak peek at YouTube Space, a glitzy new production studio it built in Los Angeles; at the event, many of them took the occasion to gripe about the site. “Every single person in the entertainment group complained to [YouTube content executive] Alex Carloss: ‘We’re not making enough money,'” said an attendee.

Late last year, Machinima, a videogame-focused network that generates billions of YouTube views a month, reworked contracts for many of the video contributors it represents, and let others go completely. The problem, according to people familiar with the programmer, was that it had guaranteed video makers a pay-per-view rate that was higher than the payouts it was getting from YouTube.

Now Machinima, like other big YouTube programmers, is looking to augment its YouTube ad dollars by selling some of its shows via subscriptions, according to people familiar with its plans. Maker Studios, another big “multichannel network,” is looking to boost revenue via alternate streams like iTunes soundtrack sales, among other strategies.

Many big programmers are also concentrating on selling their own “integrations” with advertisers, where stars talk about or use marketers’ products, since they don’t have to split those deals with YouTube.

Some, like Vice Media, try to find backers like Intel to pay for their videos before they ever make it to YouTube. “It’s a difficult space to get to scale and to monetize it at the same time,” said Vice Media CEO Shane Smith, whose advertising/production company has plans to run 12 channels for YouTube this year; it recently announced that it has one million subscribers on the site. Relying on YouTube-generated advertising is “not going to be our monetization strategy,” Smith said.

Others are working to direct traffic from YouTube to their own sites. Last year, Freddy Wong, whose amateur special-effects clips have won him millions of fans on YouTube, launched RocketJump, a portal he and his backers created to capture more money from his movies.

Video makers who control their own sites say they are often able to generate much bigger payouts than YouTube provides, and frequently cite CPMs, or ad rates, of $20 per thousand views.

That’s partly because they can offer advertisers bells and whistles that aren’t available on YouTube, like website “skins” featuring advertisers’ logos. But YouTube critics say standalone sites can also outperform YouTube because Google doesn’t have its own YouTube sales force; instead, the site is pitched by all of Google’s sellers, alongside other products, like search ads.

“They don’t have dedicated, 100 percent focused, 100 percent trained people on these sales teams who live and breathe video. It’s that simple,” said a video industry executive. “There isn’t a single person within YouTube that thinks this is the right way to sell video.”

YouTube programmers also complain that Google’s sellers aren’t directed to sell individual shows and networks, but instead focus on broad “audience” buys.

That’s good for Google’s top line, but not for individual shows. It’s also a turnoff for some advertisers, said Mark Pavia, who oversees digital at media shop Starcom USA, which handles more than $10 billion in annual ad spending. “They tried a model that just wouldn’t work for advertisers,” said Pavia.

Google executives say they don’t have any plans to overhaul their YouTube sales approach. But they do predict that things will get better.

Up until last fall, for instance, YouTube made almost no money from videos watched on mobile phones, which now account for 25 percent of the site’s views. After reclaiming YouTube’s app from Apple and overhauling its Android app, some of those views now generate ad dollars. International traffic, which also represents many of YouTube’s views but often generates tiny ad dollars or none at all, will take longer to improve.

Here’s a statement from YouTube content head Robert Kyncl, who has pushed the site’s “funded channel” strategy:

“A key part of growing the platform is opening up inventory, which enables more partners to succeed by monetizing their content. This can lead CPMs to fluctuate in the short-term, but it’s good for the partner ecosystem long-term. We’re seeing this happen as overall partner viewership, revenue and subscriptions are on the rise.”

Some investors are betting that YouTube will get it right, and that programmers will end up building assets that are as valuable as today’s cable channels. In December, Time Warner led a $36 million funding round for Maker Studios. Last week, Bertelsmann invested in StyleHaul, another multichannel network aimed at fashion-conscious women.

YouTube will make another push for ad dollars in May, when it repeats its marketing event in Manhattan. Starcom’s Pavia is hopeful the site will adjust its pitch this time. “We have very large advertisers who believe in online video,” he said. “[YouTube has] the ability to solve this if they want to.”

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I think the NSA has a job to do and we need the NSA. But as (physicist) Robert Oppenheimer said, “When you see something that is technically sweet, you go ahead and do it and argue about what to do about it only after you’ve had your technical success. That is the way it was with the atomic bomb.”

— Phil Zimmerman, PGP inventor and Silent Circle co-founder, in an interview with Om Malik