Susan Wojcicki has a plan for YouTube. It's still heavy on advertising, but not in the way you might think. YouTube has plenty of "stars." Some even have audiences that rival cable TV in the young demographics advertisers covet. But can you name any of them?
Ms. Wojcicki, YouTube's newly-named CEO, is trying to fix that problem the old-fashioned way: with TV ads, billboards, subway wraps and magazine pages. That's right -- Google, the world's single-biggest seller of advertising, has decided it needs to buy some to boost one of its brands, just as CBS, ABC and Fox do. Those companies spend tens of millions of dollars on advertising -- not to mention promotion on their own networks -- to launch new shows. Now, YouTube will be doing a lot of tried-and-true, tune-in advertising over the next few years using media it's trying to disrupt.
"Think of the last TV show you watched -- it was probably marketed to you in some way," said Ms. Wojcicki. "If you look at our top creators, they have a lot of subscribers; it's all categories like entertainment, health and beauty, food, cooking, and yet I think a lot of times advertisers and users don't know about these channels.
That's been one of the challenges: How do you highlight them?"
Welcome to the third major evolution of YouTube's business.
Let's call the first, which characterized the end of the last decade, the "How do we make money off this thing?" era. YouTube invented its skippable TrueView ad format and set up its partner program to share revenue with creators. The content orthodoxy at the time was agnostic when it came to professional vs. amateur; users defined "quality" based on what they watched, and the market set prices.
The second era, which began three years ago, was about how to make the content better. YouTube committed $100 million a year to creators to carve out "channels" in advertising-rich verticals, such as fashion, beauty, food and music. The effort, led by content chief Robert Kyncl, resulted in more than 100 new channels. YouTube pitched TV advertisers in earnest with the first of its glitzy "Brandcast" upfront events in Manhattan.
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Fast forward to today, which happens to be spring-like at YouTube headquarters in San Bruno just south of San Francisco. Naming Ms. Wojcicki, aka Google employee No. 16, as the head of YouTube in February signaled how big an opportunity Google CEO Larry Page believes YouTube represents.
YouTube, with estimated annual revenue just north of $5 billion, created the market for short-form video. But it's also attacking a market bigger than search and online display combined: TV's $212 billion global ad market.
Ms. Wojcicki famously owned the Menlo Park garage in which Google was founded in 1998 (she's since sold the house to the company). She's also known for doing more to build Google's search and display businesses than anyone else. The early challenges to those businesses, she says, are similar to the task at hand at YouTube. Namely, persuade a marketplace set in its ways to do things differently.
"I remember those days in search," she said. "It was hard going in and asking people, 'Would you like to buy keywords?' Today we accept that, but [in the beginning] we were explaining it's [cost-per-click] and you have an auction and their eyes would glaze over."
Like search a decade ago, it's still early days for video, but at this point Madison Avenue has been around the block a few times with YouTube. And it hasn't enjoyed the entire ride. The first packages it put together for channels were priced absurdly high -- some in excess of $50 million per vertical a year -- and required advertisers to buy a whole lot of impressions across YouTube to get the high-gloss, professional content they really wanted.
Agency frustration bubbled up two years later with an open letter from the top digital-ad buyers imploring the video industry -- and its biggest player, YouTube -- to do things a little more like TV: e.g., spend some money to promote shows; guarantee delivery; and be more transparent in how video was measured.
Which brings us to YouTube's new era, overseen by Ms. Wojcicki (that's Woe-jit-ski) . She's described by those who've met her as an intent listener and straight-shooter, even on points of disagreement. Her predecessor, Salar Kamangar, rarely appeared at industry events, but Ms. Wojcicki is playing a more prominent role. She's a jeans-and-sweater type, but familiar enough to magazine covers that she's comfortable doing some art-directing. During Ad Age's photo shoot in YouTube's Brand Lab, she deftly steered the camera away from colors too allied with Google. (This is a story about YouTube.) She has personal relationships with Madison Avenue from her Google days and is eagerly meeting with the content community in Los Angeles.
"The goal was to say we heard the feedback that you had and [we've] come back with an offering we think you'll want to try," she said. "Like anything in digital, every year you keep making it better."
Big audience, low awareness
As she settles in, YouTube is changing gears once again. Its investments in new content have stopped, save for a few experiments. Now, YouTube is spending millions on advertising to overcome the big-audience-but-low-awareness problem facing its "stars."
"I've been thinking long and hard about why this is," Mr. Kyncl said. TV builds audience through mass-awareness ad campaigns. That's why lots of people know what "The Good Wife" or "Parks and Recreation" are about even if they don't watch those shows. Not true on YouTube, where creators build audiences of what Mr. Kyncl calls "superfans" gathered one by one.
"When you compare our stars to someone who is a star on TV, their awareness was built through broad [advertising] campaigns on television and billboards," he said. "So they built their audience through superfans as well as through casual fans."
In addition to recruiting new viewers and raising the profile of creators, think of the advertising as the biggest trade campaign in the world, speaking to a rarified audience of media buyers and brands unfamiliar with the product they're being asked to buy.
Defy Media President Keith Richman likened it to AMC before its first breakout, "Mad Men." "It's hard to start a meeting with someone who doesn't know what your content is, and that never happens for Fox or NBC," he said.
The first stars to get the ad treatment under the effort are chef Rosanna Pansino and beauty impresarios Michelle Phan and Bethany Mota, whose faces will become familiar to viewers of The CW and ABC Family; local TV and billboards in New York and Chicago; readers of Teen Vogue, Seventeen and Entertainment Weekly; and even riders of the NYC subway.
The ads, developed by YouTube's agency Co:Collective, will roll out for those three and many others over the course of the year. "We are making bets on proven talent," said Mr. Kyncl. "Bethany, Michelle and Rosanna are all proven talents with huge amounts of followers, subscribers and a lot of watch time and regular release schedules."
At the same time as this marketing push, YouTube is dramatically shifting the way it sells content. In the past, YouTube treated all content and advertisers pretty much the same, but now it's packaging its top 5% of content as determined algorithmically (of course) in 14 categories and offering that up front on a guaranteed basis to advertisers. Called "Google Preferred," the offering is built for TV advertisers who want to reserve in advance and know what they're getting, separate from direct-response advertisers that buy YouTube impressions by the ton (and dominate search).
"We are just so early on -- that is a really important point -- we are at the point where we are trying to get advertisers who have traditionally bought TV to understand the YouTube platform," Ms. Wojcicki said.
In doing so, YouTube is creating scarcity among its top producers and asking for TV-like CPMs, or cost-per-thousand viewers, according to executives, as well as a significant commitment. YouTube has been pitching these new packages to advertisers, and some of the details were reported in The Wall Street Journal.
Will it work? Like the negotiator he is, ZenithOptimedia President John Nitti is keeping his cards close to the vest. A signatory to the letter last spring, he says YouTube's moves are taking it in the right direction, but the ad rates and total commitments sought are high. "It's a big ask to participate and we don't know how it's going to perform," he said. "We are looking at the pricing comparisons -- where does it compare to full-episode players [like Hulu] and premium cable?"
Just having YouTube uttered in the same breath as "premium cable" has got to exhilarate Ms. Wojcicki. Buyers play it both ways at upfront time, talking down opportunities in digital while using that option as a bargaining chip with the networks. It's all part of a dance that gets increasingly complicated as the internet and devices with screens slowly pry open the infrastructure of TV, locked tight for the last 60 years.
But for the era that's emerging -- one of ubiquitous, on-demand video and massive choice -- simply blasting messages at eyeballs won't work. This is the market YouTube created, one where brands like GoPro, Red Bull and even some ad agencies make ads people actually choose to watch. As YouTube likes to point out, ads are popular on the service. In fact, three of its top 10 videos from the past year were ads: Volvo Trucks' Claude Van Damme stunt, Evian's dancing-babies video and a trailer MGM's remake of Stephen King's "Carrie."
That kind of success is what's really appealing to brands, which is why for buyers of Google Preferred, YouTube is offering free consulting services to help brands create better content.
Time to make things happen
In the two months since Ms. Wojcicki moved her office from the Googleplex in Mountain View 30 miles north to San Bruno, a rash of deals have rocked the video world, including the acquisition of the best-known operator of YouTube channels, Maker Studios, by Disney in a deal that could reach nearly $1 billion. While a fraction of the size, the deal looks a lot like Disney's acquisition of Pixar in 2006. At the time, animation was going CGI and Disney needed expertise (as well as a catalog). This time, Disney had been standing on the sidelines of a new world defined by YouTube and needed expertise in producing video content directly to consumers.
"It shows that traditional media companies have an interest in reaching their users online. They are interested in access to this endemic YouTube talent, native YouTube talent, and they think there is opportunity to bring those together," Ms. Wojcicki said.
Yet the reality is media companies built on YouTube are generally either big and money-losing (Maker, Machinima) or small businesses that earn a considerable chunk of their revenue from YouTube. YouTube takes 45% of ad revenues, even when the channel operators sell inventory themselves, up to a certain threshold. "Of course, everyone would like to make more money than they are, but we have to remember it's still early," said Maker Studios CEO Ynon Kriez, pointing out that video is the biggest growth story in media, even if from a very small base.
Is it a problem that the producer community isn't scaling the way some would like? Ms. Wojcicki says to give it time. "As the platform matures and we have better monetization, we want to be able to continue to grow the whole ecosystem in a way that's good for advertisers, good for publishers and good for users," she said.
While she preaches patience from producers, prepping and sitting for our photo shoot is holding Ms. Wojcicki up, and it's clear she's ready for it to be over. "OK, are we done?" she says to no one in particular. "Time to do some real work! Do some real engineering and make things happen."