Google, YouTube & the Future of Video Advertising

As the announcement of the Google-YouTube deal unfolded last week, it was very interesting to follow the responses from various players representing the traditional media establishment. While I won’t rehash them all here, suffice it to say everyone in Hollywood and New York media circles seemed to be stunned. And as everyone began to digest all the strategic implications of the deal, one common theme seemed to thread itself from one reaction to another… fear.

It wasn’t so much the fear that Google’s pending acquisition of YouTube would give it 60% share of the online video market post-deal. No, what really seemed to worry the old guard (extending all the way to even Microsoft’s CEO, Steve Ballmer) was that Google could eventually *control* the flow of dollars generated via online video advertising. After all, as more and more videos are placed online and viewers follow (by not only consuming, but also producing), all media companies reliant on video as their content source will inevitably see their revenues increasingly dependent on online advertising. And if Google is there as the gatekeeper, well… “Mission Control, we have a problem”.

So why would the old media guard fear Google in the race to dominate online video advertising? The established media conglomerates, after all, have huge ad sales operations, entrenched in decades-long relationships with Madison Ave, who in turn have all the big brand advertisers in their pockets. The U.S. TV industry alone yields $60 billion in ad dollars every year, as a result of those closed-circle relationships.

Is it because Google just opened up a new 300,000 square-foot New York outpost (aimed squarely at Madison Ave)? Is it because Google now generates $10 billion a year on 12-word text-based Pay-Per-Click ads? The answer is “yes” to both, but only partially. The real answer lies in the fact that Google has what some would call “an unfair competitive advantage”, when it comes to the huge opportunity of monetizing online video inventory. And this unfair competitive advantage is a result of the way they developed their AdWords & AdSense platforms over the years.

Google’s weapon is their existing relationships with hundreds of thousands of small-to-medium-sized businesses (“SMBs”). These same advertising customers, who are now active bidders/buyers of text ads on Google’s ad platform, will suddenly have the opportunity, for the first time in most cases, to become video advertisers. Up until now, with the exception of some local cable advertising, most SMBs never had the budgets or the capability to advertise via video (e.g. on TV).

It’s critical to remember that the backbone of Google’s auction-based, Pay-Per-Click ad platform was primarily built on these hundreds of thousands of SMBs, and not the Fortune 1000 brands that traditionally advertise via Madison Ave. In fact, Google’s Madison Ave push for brand advertising is just now getting started in New York. This fact is counterintuitive, and it distinguishes Google from nearly all the other players in the media landscape. Even the largest media conglomerates in the world do not have hundreds of thousands of advertisers… they have few thousands. And even for those who do have tens of thousands of advertisers, like the ones who own local newspaper franchises, their ad sales operations are not coordinated and centralized for wide-scale deployment… as is Google’s.

One of the key reasons why Google’s existing relationships with SMBs will prove so critical to the future of video advertising has to do with user-generated content. The big question that everyone is asking with respect to Google’s deal to acquire YouTube boils down to the issue of how to monetize uncontrollable, often provocative user-created videos in general. Big corporations are extremely sensitive to any content that could potentially “pollute” their brands. SMBs will be less sensitive… they will weigh the risks against the newly-found opportunity and value to advertise via video. As long as Google can get those ads in front of the right customers within the desired geography and/or demographics, the SMBs have a new path to reach customers and reap ROI (particularly for those seeking to attract younger customers). And just like they did with AdWords/AdSense, aggregate enough small ad buys and Google will be a position to generate billions in online video ad dollars. Last but not least, major brands will follow in time… although they will be kicking and screaming all the way (just like they did with PPC).