Google's YouTube Ads Different Than AdWords

| About: Alphabet Inc. (GOOG)

On Wednesday Google (NASDAQ:GOOG) finally unveiled the advertising format for YouTube videos. Ads will appear 15 seconds after a user starts viewing a video as an overlay on the bottom fifth of the screen. Users can click on the overlay to watch a full form video advertisement. According to the NYTimes, Google will charge a flat $20 per 1,000 ad impressions. The unveiling of a substantial monetization strategy for YouTube comes 10 months after Google's acquisition of the site for $1.65 billion.

Putting aside the potential hurdles of user dissatisfaction and patent disputes, is this really a big deal? Some have drawn comparisons to Adwords, which Google used to monetize its search engine and derive revenue from endless third party websites across the internet.

For many reasons, Google's video ads in their current form are not Adwords.

Adwords took off because it expanded to become an advertising distribution channel for the entire internet. Not only were ads placed alongside search results, they were also eventually distributed across a vast content network. Any website owner looking to monetize traffic could easily inject the tiny Google ads into their web pages.

In the case of the new video ads, it seems doubtful that Google will be able to create a similar video advertising distribution channel across all internet video content. Because of the copyright issues which have always plagued internet video, Google has to be very careful about which videos include ads. Currently, they are only running the ads on a small group of established YouTube content providers to ensure that ads do not appear on copyrighted clips.

Adwords was embraced by advertisers because the system brought efficiency and accountability to internet advertising. Advertisers could bid for specific keywords and were only charged if a user clicked on the ad to visit the advertiser's website. Because this allowed advertisers to better target audiences and easily track results, they were comfortable bidding ever-increasing amounts for each click.

Google's video ads in their current form do not seem to carry the same efficiency and accountability. Video content cannot be targeted based on specific keywords. At best, video is segregated into channels of similar themed content. Advertisers have less of an opportunity to directly target users interested in a specific product. Currently, Google is selling video ads on a cost per impression basis, as opposed to a pay per click model. That means that it will be far more difficult for ad rates to escalate the way that was possible with Adwords.

Google enjoyed a relatively low cost structure for Adwords, particularly for ads served across its content network. Content providers who included ads on their website, generally paid the costs hosting and promoting their websites. Google only needed to sell and place the ads through their automated system.

In the case of video ads, Google pays the hosting and bandwidth costs associated with showing the videos since they all originate from YouTube. Google must also pay the costs associated with showing all of the videos outside its tiny group of established content providers which do not carry video ads. At this time, it seems like the vast majority of videos on YouTube will fall into this category.

While there will be many ways to expand the tiny stream of revenue from internet video ads, it certainly will never be like the gravy train that is Adwords.

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