By Rolfe Winkler
Google Inc. nurtured YouTube into a cultural phenomenon,
attracting more than one billion users each month. Still, YouTube
hasn't become a profitable business.
The online-video unit posted revenue of about $4 billion in
2014, up from $3 billion a year earlier, according to two people
familiar with its financials, as advertiser-friendly moves enticed
some big brands to spend more. But while YouTube accounted for
about 6% of Google's overall sales last year, it didn't contribute
to earnings. After paying for content, and the equipment to deliver
speedy videos, YouTube's bottom line is "roughly break-even,"
according to a person with knowledge of the figure.
By comparison, Facebook Inc. generated more than $12 billion in
revenue, and nearly $3 billion in profit, from its 1.3 billion
users last year.
The results reflect YouTube's struggles to expand its core
audience beyond teens and tweens. Most YouTube users treat the site
as a video repository to be accessed from links or embedded video
players posted elsewhere, rather visiting YouTube.com daily. Google
executives want them to turn on YouTube the way they turn on
television, as a habit, where they can expect to find different
"channels" of entertainment.
That is a problem still facing veteran Google executive Susan
Wojcicki as she begins her second year running YouTube, one that
could be tougher to solve if declining profit margins for Google
overall limit her ability to invest in new content and
services.
New challengers also add urgency to her task. Facebook and
Twitter Inc., which routinely send traffic to YouTube, are building
their own video offerings. Facebook, and startups such as Vessel,
are trying to poach YouTube stars. Meanwhile, Amazon.com Inc. and
Netflix Inc. are changing the image of "online video" by licensing
Hollywood-produced content and creating original programming.
"There's a lot of junk" on YouTube, says Pivotal Research
analyst Brian Weiser. "If they want meaningful TV budgets, they
need to invest in TV content."
Robert Kyncl, YouTube's head of business and content operations,
says online video is on the cusp of a growth spurt, much like cable
television 30 years ago. He says it makes more sense for YouTube to
invest in "Internet native creators," rather than traditional TV
shows.
Google bought YouTube in 2006 for $1.65 billion, but generated
little revenue in the early years. Revenue accelerated in part due
to skippable ads YouTube introduced in 2010. Viewers like them
because they can skip ads they don't want to watch; advertisers
like them because they pay only when viewers do watch.
Past efforts to make YouTube more of a regular destination bore
little fruit. In 2012, YouTube paid hundreds of millions of dollars
to content producers, an early effort to create television-like
channels. YouTube also redesigned its home page and tweaked
algorithms that promote videos to encourage more frequent
visits.
But many of those channels failed. An executive tasked with
improving search to help users find YouTube videos departed earlier
this month, just a few months after Ms. Wojcicki recruited him.
People close to YouTube say the site still struggles to attract
users directly, rather than via links.
One reason is that it caters to a narrow audience of young
viewers. Music videos are its most popular content. YouTube's stars
remain relatively unknown. Felix "PewDiePie" Kjellberg is the
biggest star, with 35 million subscribers to his wacky videogame
montages. But Ms. Wojcicki hadn't heard of him before joining
YouTube, she told a conference last fall.
To be sure, some advertisers covet these devoted fans. Josh
Jacobs, chief executive of Accuen, the programmatic-advertising arm
of Omnicom Group Inc., says ad buyers want to reach young fans as
they build brand "affinities."
But the narrow audience means advertisers typically reach far
fewer people than via television, says Pivotal's Mr. Weiser. He
estimates that 9% of viewers account for 85% of online-video
views.
In January, YouTube moved to broaden its audience by securing
rights to National Football League game clips, interviews and more.
The deal followed a similar Facebook deal with the NFL in December.
It is also featuring original episodes of "Sesame Street" and
"Thomas the Tank Engine" for a new app for children.
Otherwise, YouTube has mostly focused on investments in
"originals" produced by its homegrown stars; it is paying some of
them bonuses not to jump ship to rivals.
Other steps to boost viewership include playing more videos
automatically, as they do on Facebook, Instagram and Twitter's
Vine. The "autoplay" feature is expected to roll out shortly, say
two people familiar with the matter.
Beyond broadening the audience, Ms. Wojcicki is also under
pressure to boost sales, as growth slows at Google's core-search
advertising business.
Last year YouTube gave advertisers the ability to reserve spots
next to popular videos, like those from PewDiePie and comedian
Jenna Marbles, separate from the hundreds of hours uploaded to the
site every minute. In late 2013, YouTube agreed to let advertisers
use Nielsen technology, instead of YouTube's, to measure who sees
their ads.
OMD, the media-buying unit of Omnicom, increased spending with
YouTube "exponentially" in 2014 as a result, said Ben Winkler,
chief digital officer.
At the same time, YouTube is moving to develop subscription
services. In November, YouTube announced a music-subscription
service, similar to Spotify, that will offer ad-free listening and
other tools for $10 a month. YouTube executives have discussed
another subscription offering for non-music content, according to
one industry official, which would be in addition to its existing
ad-supported service.
If those services succeed, they would provide a steady revenue
stream that could help support investments in higher-quality
programming.
YouTube executives also are considering a plan to tap Google's
data to target ads more effectively, according to two people
briefed on the plans.
Today, YouTube relies on tracking cookies deployed on users'
computers by Google's DoubleClick unit, which builds user profiles
based on the non-Google websites they visit. Using the data Google
captures from its own sites, including users' search history, could
prove more effective.
For example, someone researching vacation plans via Google
search might see commercials for Caribbean getaways on YouTube.
Today, YouTube advertisers are left to guess who is planning a
vacation based on other travel websites that DoubleClick has
spotted them visiting.
The new ad-targeting system could arrive this year, say the
people familiar with it, though one cautions that the system is
complicated and may be difficult to roll out.
Suzanne Vranica contributed to this article.
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