Saturday, October 24, 2015

Youtube Red - Impact on video advertising

Google has recently made an announcement that it is launching a new subscription service 'Youtube RED' for users who want ad-free content on Youtube. Google obviously believes that there is a growing market for suscription users who dont want to be disturbed by ads. In this post, I would like to analyze the impact of this service on future of advertising.

 - Traditionally Youtube has been a cash cow for Google, generating around 9.5 billion USD in ad revenues each year (estimate). Average American are spending 1 hour 30 minutes each day watching videos on digital screens compared to a 4 hour watching time for traditional television. That is only expected to grow with the advent of high speed internet and big screen mobile phones.

 - Top Adveritisers have increased ad-spend on Youtube by a whopping 40% on a YoY basis. This clearly shows that youtube is a popular destination for advertisers to generate attention.

The important question to my mind is - how many people would want to pay 10$ a month just to ensure that they are not disturbed by ads. Mind you, majority of ads on Youtube can be skipped by users after 5 seconds and it is estimated that 80-85% of skippable ads are indeed skipped and only 15% of ads are watched for full 30 seconds. If this is indeed the case, would a customer pay 10$ a month just to say a few 5 second intervals on videos. If a person earns a wage of 50$ per hour, to spend 10$ per month, she has to save atleast 12 minutes each month. Assuming you usually encounter 5 seconds skippable ads, that would mean a total of 144 videos a month (~ 5 videos a day)

To my mind, there would not be a huge market for 'Youtube red' UNLESS they have separate content for normal Youtube users and paid users. If there is exclusive content for paid users, then we have a totally different discussion. And that is what Youtube plans to add in a couple of years - source exclusive content for Youtube RED.

If the product is successful, it would be a huge loss to advertisers as my instinct tells me that the subscribers for this service would be the exact segment that most advertisers would be interested in. Not having access to such people is going to be a huge discincentive for advertisers. Whether this sevice will cannibalize on revenues on regular Youtube is something to be seen in future.

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