Yesterday I gave a talk at The Junction, a give-no-money, take-no-equity accelerator here in Tel Aviv. While walking to dinner with one of the founders, we got into a discussion about advertising.
He was complaining about video advertising on video streaming sites like Twitch.tv, and was frustrated that he couldn’t pay a few cents to skip them. He’d pay them several times more than his impression is worth, it’d give the company a new revenue stream, and it’d result in a better experience for the user.
There are two big downsides though.
One, it encourages bad behavior. On Twitch's part, if they get paid when people skip ads, then there’s a pretty big temptation to increase revenue by putting extra advertisements on a videos so users pay more often. It might also encourage Twitch to run it's own ads, but to make them as obnoxious and skip-worthy as possible.
The second downside is it would upset the advertisers. These companies are paying to advertise to Twitch’s users. If they allow people to start skipping ads, the value of advertising on Twitch will go way down. It’ll become harder to fill their advertising inventory, which will make for fewer ads they can display, which means fewer ads users can pay to skip. The whole house of cards comes tumbling down.
This reminded me of something I’ve been saying for the last year or so. I would pay a lot - probably $240 a year ($20 a month) - to never see an advertisement on Youtube again. Specifically pre-roll ads. I hate them so much.
When I use Youtube, it’s usually because I want to see a very specific video. Or sometimes I’m having a conversation and I suddenly think of a video the other person HAS to see, so I pull up Youtube to show them. When “You HAVE to see this video!” is interrupted by an unskippable 30 second advertisement for deodorant… it really damages the experience.
Currently, Youtube makes a few pennies every time I see an ad. Lets estimate on the high end and say 5 cents (this assumes a $50 CPM, which feels pretty high, but then again I don’t know as much about CPMs in the video advertising world.)
According to Google Dashboard, I watched 77 Youtube videos last month. I’m sure I watched some while I wasn’t logged in, so lets just round that up to 100. If every video had a pre-roll ad (and the real number was no where near that), Youtube would have made $5 off me last month ($.05 per impression times 100 impressions = $5). And remember - these are using pretty optimistic estimates.
What if you could pay Youtube a monthly subscription where, for $20, you never have to see another ad. Youtube would make 4x more on you, and you'd be much happier with the experience. $20 may seem high, but people are already used to paying $8 a month for Hulu Plus… and there you still have to watch ads.
The goal here isn’t to switch entirely away from advertising. Most users wouldn’t pay $20. Most users probably wouldn’t pay anything. But if even a small percentage of users, say just 1%, subscribed, it would be a huge amount of revenue.
In 2012, Youtube made $36 billion in revenue. We’re playing with some fuzzy math here, but if 1% of their revenue was 4x bigger, it would add 1.08 billion in gross revenue (1% of 36B is $360 million. Multiply that by 4 to get subscription revenues of $1.44B, but then subtract 360 million in lost advertising impressions. Someone want to confirm that math for me?)
An extra billion dollars, also known as "One Instagram," is by no means a trivial number, but the question from the Twitch example remains: will it piss off advertisers and start to cannibalize your advertising business?
I’m not sure. You would probably lose a small amount of business if your advertising inventory is typically full and now there is room for less inventory, but as long as the number of subscribers stayed small (and you can do this by increasing the price), I think you’d reach a point of homeostasis and balance between a small number of subscribers providing (proportionately) large revenues and a large number of advertisement viewers providing a bulk of the revenue.
Will Google ever do this? I doubt it. They’re an advertising company. Whether it’s a good plan or not, my feeling is internal politics would let it happen.
That being said... Google has been working hard to diversify it’s revenue streams. In 2012, ads accounted for 96% of their revenue. As of October 2013, it was down to 91%.
All I can say for sure is that would be the best $240 a year I’ve ever spent.
Went to "the best" hummus place in Tel Aviv today. That might sound very Portlandia to you, but after eating there... I can confirm. Best hummus I've ever had.