Now Playing on YouTube: Ads

Google launches in-video advertising on its top video-sharing site, YouTube. Will users mind watching ads embedded in videos?

Fifteen seconds into a rock music video on YouTube, a large pink-frosted donut rolls across the bottom of the screen, obscuring the image of the musician's girlfriend. A beat later, a bright yellow Homer Simpson chases after the cartoon confection. The ad for an animated movie based on the popular Fox (NWS) television show contrasts sharply with the tone of the somber emo video, but it gets the message across: The Simpsons Movie is playing in theaters now.

There's an even bigger message conveyed by Homer and his donut: For the first time, ads are playing in videos posted on Google's (GOOG) video site, and watching clips on the world's most popular video-sharing site may never be the same. The move to include ads with videos was expected. Ever since Google bought YouTube for $1.65 billion last October, it has said new forms of advertising were on the way (see, 10/10/06, "YouTube's New Deep Pockets"). Analysts say it's a smart way to generate greater revenue from online video, but viewers may nevertheless balk at having ads clutter an in-progress clip.

Embedded Advertising

On Aug. 21, Google announced plans to show ads within thousands of YouTube videos, breaking with the current practice of placing ads on a page where videos are featured, but never inserting them immediately before, during, or after the clip plays on screen. The new ads will primarily appear as translucent animations or graphics overlaid on the lower section of professionally produced videos, such as those from media companies like Warner Music Group (WMG). In some cases, Google will also place ads on clips created by amateurs. "This is the first time that we are inserting an ad within the video experience itself," says Eileen Naughton, Google's director of media platforms.

Google will charge advertisers each time an ad is shown, sharing part of the revenue with the maker of the video, including the chosen few individuals whose homemade videos are deemed worthy. Google began a revenue-sharing program with users back in May. It plans to append ads to more user-generated videos that have been vetted for copyrighted material.

The Web search giant could find other ways to wring sales from its new practice. Google could charge more for clicks on the ads or specific actions, such as purchasing a music download after being prompted by an ad. "We are continuing to experiment with other formats, and as time goes by I'm sure we will continue to create and introduce new formats and expand on existing formats," says Shashi Seth, a group product manager at YouTube.

The New YouTube Research firm eMarketer anticipates that video advertising will grow from an estimated $775 million market this year to a $4.3 billion market in 2011. By then, advertisers will have begun shifting a small portion of television's projected $46.3 billion market to the Web (see, 7/16/07, "Online Video Ads: Just Wait").

The new ads mark the next evolution of YouTube and, in some ways, user-generated video-sharing sites in general. At first, YouTube, like many other startup video sites that let users post their own content, focused on growing audiences and content and had only a vague idea of how an ad-supported business model would work. As the sites began streaming millions of videos a day, companies such as Time Warner's (TWX) AOL began placing short commercial-like ads before the requested content—a format known as "pre-roll" advertising (see BusinessWeek, 8/7/06, "AOL Video: Close but No TiVo"). Other sites such as Revver attached ads at the end of videos.

Though pre-roll and so-called post-roll ads grabbed some marketer attention, video sites have been working to find an alternative that both users and advertisers would like better. "Users today expect control over their environment and pre-roll is, by its nature, disruptive and creates a negative user experience," says Matt Sanchez, chief executive and co-founder of Web video company VideoEgg.

The Least Intrusive Path to Ad Dollars

Early on in YouTube's existence, founders Chad Hurley and Steve Chen pledged to avoid the pre-roll format altogether. Instead they featured "banner advertisements," poster-like ads that run in a fixed place on a Web page. They also enabled marketers to build "branded channels" on YouTube where users could watch their content.

Google reckons the embedded graphic will be the least intrusive form of ads attached to a video. "We have been figuring out ways we can deliver ads to YouTube users that would be nonintrusive and could take advantage of the hundreds of millions of streams daily on YouTube," says Google's Naughton. Before YouTube's announcement, graphic overlays were gaining traction as the Web way to advertise on video. Yahoo! (YHOO) and VideoEgg each use such ads on their streaming video content. "The market is now in a place where there is a general agreement that pre-roll isn't an effective way to advertise in these environments," says Sanchez. "Beyond that, people are experimenting with a lot of different options."

Even if the translucent ads are less intrusive, they're still ads. And YouTube's audience, which has long grown used to seeing content without any kind of message in their video stream, is unlikely to welcome the video version of pop-ups. More important, advertisers are similarly unlikely to embrace user-generated video simply because Google has a new advertising format.

Sure, they will want to associate their brands with studio-produced music videos and other major media content that they trust. They may even vie to put ads next to certain semiprofessional video creators such as Lonelygirl15. But they will likely remain reluctant to associate their brands with a piece of content a computer program has deemed free of copyrighted material and safe for sponsors. "This form seems like it will be a useful experiment because it gets around the problems with pre-roll," says eMarketer senior analyst David Hallerman. "But there are still not going to be many ads attached to user-generated content."

That's a risk Google is willing to take, reaping the benefits with every ad-laden video that gets watched.

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