Last week, reports surfaced that YouTube had begun exposing users on Connected TVs to sequences of up to 10 ads at a time. Per the screenshot below, these sequences can last up to nearly four minutes, which is longer than a standard television commercial break. In a statement, YouTube explained that this experience was part of a global test to front-load ad exposures for longer videos and that the experiment has concluded.
YouTube’s growth has slowed over the past few quarters, as I discussed following its Q1 2022 earnings report in Unpacking Alphabet’s Q1 2022 earnings (but mostly: YouTube). From that piece:
One particularly dim area of growth in Q1 was YouTube: advertising revenues for the service grew by just 16% year-over-year, which was described on the call as, “reflecting ongoing strong growth in brand and more modest growth in direct response.” By way of comparison: YouTube revenues increased by 25% year-over-year in Q4 2021 and by 49% year-over-year in Q1 2021, again attributable to weak performance at the height of COVID.
As I describe in Unpacking Meta’s pivot to an open graph and short-form video, which describes Meta’s attempt to boost ad revenue through improved engagement across its properties with a shift to an AI-optimized open graph, four non-mutually exclusive opportunities exist to increase advertising revenue:
- Increase “ad load,” or the ratio of ads shown to each user per session relative to organic content;
- Increase reach, or the number of users that engage with a product and thus are exposed to ads;
- Increase the value generated by ads through higher-quality formats or better targeting, which improves the general price paid for ad inventory through increased bids from advertisers in the ad auction;
- Increase time spent on site, which provides more opportunities for ads to be served.
I make the point that these are not mutually-exclusive solutions because YouTube actually appears to be pursuing two of them: not only is YouTube experimenting with increased ad load for Connected TV viewers, but it is also attempting to increase time spent on site through a recently-announced change to its Partner Program that will incentivize creators to generate content for its TikTok competitor, Shorts. As part of this change, creators can partake in a revenue-sharing scheme for the videos they create and upload to YouTube.
Essentially, YouTube is employing the same strategy as Meta: increasing the surface area of content available to users through its Shorts feature. But it may actually be going one step further with increased ad load on Connected TV through the introduction of network television-style commercial breaks. Two other changes to YouTube’s Shorts product are worth noting: YouTube is allowing creators to reply to comments with Shorts videos, and it is unveiling a tool to automatically render vertical ads from native landscape videos.
Taken in the context of recent developments within the streaming ecosystem, the second-order effects of these changes may be more meaningful than increased ad load. YouTube does not monetize exclusively through advertising: it also offers a subscription tier that exempts users from ads. As I describe in the piece about Meta’s pivot, increasing ad load can intensify churn and potentially negate the revenue improvements from higher ad load. But given its scale, YouTube doesn’t have any immediately threatening competitors – my sense is that the more likely beneficiary of increased ad load on YouTube is not Vimeo but YouTube’s premium, ad-free product. And transitioning users from the free product to the paid product almost certainly improves YouTube’s ARPU while not materially degrading its user base scale.
Compare this to the commercial advertising strategies of Netflix and Disney for their streaming services. Netflix recently announced an ad-supported product tier that will debut at a lower price point than its ad-free tier. Disney, by contrast, announced a price increase in the US for its ad-free tier from $7.99 to $10.99, with its soon-to-be-introduced ad-supported tier priced at $7.99. As I discuss in this piece, these pricing decisions support different goals: Netflix, having suffered appreciable subscriber losses in recent quarters – 200,000 in Q1 2022 and nearly 1MM in Q2 2022 – seems to be using a cheaper, ad-supported tier to drive subscriber growth. And Disney ostensibly is using its ad-supported tier as a pricing baseline against which the premium tier can drive ARPU growth.
YouTube may be attempting to borrow strategies from both Disney and Meta: growing time spent on site through enlarged creator participation in its Shorts product while also increasing ad load.