How YouTube Turned Into a Real Business By Making Ads Optional

From my story in MIT Technology Review:

In 2008, when Shishir Mehrotra joined YouTube to take charge of advertising, the booming video-sharing service was getting hundreds of millions of views a day. ­YouTube, which had been acquired by Google in 2006, was also spending as much as $700 million on Internet bandwidth, content licensing, and other costs. With revenue of only $200 million, YouTube was widely viewed as Google’s folly.

Mehrotra, an MIT math and computer science alum who had never worked in advertising, thought he had a solution: skippable ads that advertisers would pay for only when people watched them. That would be a radical change from the conventional media model of paying for ad “impressions” regardless of whether the ads are actually viewed, and even from Google’s own pay-per-click model. He reckoned his plan would provide an incentive to create better advertising and increase the value for advertisers of those ads people chose to watch. But the risk was huge: people might not watch the ads at all.

Mehrotra’s gamble paid off. YouTube will gross $3.6 billion this year, estimates Citi analyst Mark Mahaney. The $2.4 billion that YouTube will keep after sharing ad revenue with video content partners is nearly six times the revenue the streaming video service Hulu raked in last year from ads and subscriptions. And that suggests Mehrotra has helped Google solve a problem many fast-growing Web companies continue to struggle with: how to make money off the huge audience that uses its service free.

In 2008, Mehrotra was working for Microsoft and hankered to have his own startup, but he agreed to talk to a Google executive he knew about working there instead. He decided against it—but that evening he kept thinking about how the exec was frustrated that most ad dollars go to TV, even though nobody watches TV ads. Yet at his Super Bowl party two weeks earlier, Mehrotra recalled, guests kept asking him to replay the ads. Was there a way, he wondered, to make TV ads as captivating as Super Bowl ads, every day?

The answer came to him in a flash. …

Read the complete story in MIT Technology Review.

Why Google May Be Secretly Happy That Apple’s Dropping Its YouTube App From Next iPhone

From my blog The New Persuaders:

OK, so Apple will drop its YouTube app from iOS 6, the new version of its iPhone operating system due out this fall. Cue loud and histrionic coverage about Apple’s thermonuclear war, as the late Apple cofounder Steve Jobs put it, vs. Google and its Android mobile software.

Except it seems likely that script is off the mark. Here’s why: Most people may not realize it, but that YouTube app on their iPhones is actually designed by Apple, a holdover from the iPhone’s introduction in 2007, when all the apps were Apple’s and YouTube was a big draw. (So big that one of Apple’s original iPhone ads highlighted YouTube, as in the video above.) Problem is, since then, Apple has appeared to do relatively little to advance the app, which now looks old (almost as old as that TV used in the app’s icon, at least on my impossibly old iPhone).

Even more important from the point of view of Google and the pro content producers on YouTube, the Apple YouTube app doesn’t allow ads to be run against all those billions of videos views a month that YouTube draws on mobile devices. So search for “Lady Gaga” on your iPhone and what do you see? Well, Lady Gaga, but very little from official channels such as ladygagaofficial, which means very few official videos. Contrast that to a search on “Lady Gaga” on, and official videos are there, along with ads all over the place.

Why the huge difference? Because she can’t run ads on the iPhone YouTube app, and no ads means no money generated. Multiply that by thousands of artists, movies, and all kinds of content that advertisers want to run ads against–ads that will bring in up to $3.6 billion in revenues this year, by Citigroup analyst Mark Mahaney’s recent estimate for YouTube. Now you realize why Google may not mind much that the creaky old adless Apple app is heading for the trash can icon.

Read the complete post at The New Persuaders.

Google Makes Renewed Grab for the Rest of Online Advertising

New DoubleClick ad system heats up battle to create an operating system for digital marketing

Cross-posted from my blog The New Persuaders:

It wasn’t supposed to be this way. Hundreds of well-funded online ad technology companies have sprouted up in recent years, each aiming to make it easier and more efficient for marketers to reach just the target audience they want.

Terence Kawaja, CEO of boutique investment bank Luma Partners, created this now-famous Display Lumascape to show how complex the online ad tech industry has become.

Yet the result is a crazy quilt of companies–graphically illustrated in that mess of a chart on the right–that drives marketers and agencies crazy. The very existence of so many competing products, in fact, has made placing ads online and measuring their impact more complicated and cumbersome than ever. “Venture capital has supported and financed a bunch of chaos,” advertising veteran Randall Rothenberg, CEO of the trade group Interactive Advertising Bureaugriped at a recent ad conference.

The result: Most ad dollars, nearly $200 billion a year, still get spent on television because it’s so much easier.

That’s the problem Google aims to solve with a revamped ad buying system it will announce today at a private Future of Advertising event hosted by its DoubleClick display-ad management and technology unit. (Part of the event will be livestreamed here.) The company, which already dominates 60% of the online ad business–those little text ads that appear on the right and top of the page when you do a search–now has its sights set on the remaining 40% of the industry. That would be the $25 billion worldwide market for display ads, the graphical and video banners familiar on virtually every commercial website.

Google’s goal: Provide the leading one-stop shop for advertisers and publishers to buy ads on websites, mobile phones, social networks, apps, and whatever other new media the Internet spawns. Essentially, it’s building an operating system for ads much like Microsoft did with its Windows for PCs–with much the same appeal to marketers and agencies as Windows has for PC users. “When you’re putting together a campaign, you want everything connected vs. trying to piece it all together,” says Kurt Unkel, president of the online ad buying operation at Publicis Groupe’s VivaKi digital ad agency, a Google partner.

Google’s announcement is the latest salvo in a war to control the next era of digital marketing. After a decade in which Google’s search ads overtook display ads with an unmatched ability to turn clicks directly into sales, many advertisers and publishers expect–or at least hope for–a resurgence of new kinds of display ads that could woo brand advertising dollars from TV. Neal Mohan, Google’s vice president of display advertising products, has predicted that display will be a $200 billion industry in a few years.

Read the rest of the story at The New Persuaders.

A Glimpse Into the Future of Television

If there’s one thing that struck me while I was researching an article on the future of television for Technology Review, it was all the fake living rooms. Google has one. So does Roku. So do LogitechSezmi, and Intel (which I believe has several in different states). I’m sure I missed a dozen more. It’s a sign of how important television, the star of living rooms real and faux, is to tech companies as they look to tap into the technology and media riches of the last great mass medium.

They’re all trying to figure out how to meld the medium they know–the Internet–with the one they hope to revolutionize: television. Yet with little native knowledge of television, Silicon Valley firms must troop consumer after consumer into these cozy little corners of their corporations and observe how people watch television and how they respond to their many efforts to bring the Web to the screen watched on average five hours a day. Even now, these companies are still struggling. Google, for instance, just told several consumer electronics manufacturers to hold off on planned launches of Google TV products at the Consumer Electronics Show in early January.

At the same time, the television industry has a lot to learn, too. Like the music industry, they’re in many cases fighting to keep too many people from watching television entertainment online, because that could damage their lucrative business models. But while they may have more leverage against the Internet hordes than the music industry had, thanks to both those business models and the durability of the TV experience for viewers, they don’t know any more about the Internet than the tech companies know about TV. Ultimately they will need to give viewers more flexible ways to view their content, or someone else will.

At this point, honestly, it’s tough to know how this volatile mix of TV and Net will shake out. I know, because I asked a whole lot of experts in both, and it was kind of amazing how uncertain nearly all of them are about what will happen even a couple of years from now. I hope to have provided some insight into how things could play out, but the uncertainty about what’s coming next in television is what I find most interesting: Whatever comes of this clash of two great mediums is going to surprise us all.