November 13th, 2008

YouTube Plans to Sell Search-Based Ads a la Google

By Jessica Guynn
Los Angeles Times

YouTube unveils an auction-based advertising system, similar to the one Google pioneered, that promotes sponsored video clips alongside regular search-engine results.

Chad Hurley, co-founder of YouTube Inc., says he always gets the same question: “When are you guys going to make money?”

The answer he gave television executives at a broadcasting conference last month: “I don’t think there’s going to be a silver bullet.”

That’s why YouTube, Google Inc.’s enormously popular video-sharing site, keeps loading up on new advertising formats: It’s trying to see what works.

At its headquarters here Wednesday, YouTube officially unveiled its latest effort: an auction-based advertising system, similar to the one Google pioneered, that promotes sponsored video clips alongside regular search-engine results on the website.

The move tries to take advantage of YouTube’s new status as the No. 2 Web search provider. It recently passed Yahoo and now trails only its corporate parent, Google, in terms of searches conducted.

YouTube wants to emulate the success of Google, which became the first company to turn searches into huge profits. “What we’re trying to do is bring the best parts of Google and the best parts of YouTube together,” said Matthew Liu, product manager for the service, called YouTube Sponsored Videos.

Google bought YouTube for $1.7 billion two years ago and has been looking for ways ever since to capitalize on its popularity. With the economy in the grips of the deepest recession in a quarter of a century, the search giant needs some help restoring Wall Street’s faith in its growth prospects.

Google’s stock fell 7% to $291 on Wednesday, the first time it’s fallen below $300 in more than three years.

YouTube’s new sponsored video program allows advertisers to create ads and bid for placement alongside certain keywords, through a self-service website modeled after Google’s AdWords system for search ads. YouTube says the approach, which is initially available only in the United States, levels the playing field by making the ads available to individuals and small businesses as well as major brands.

Zagg, a Salt Lake City-based company, was one of a small number of advertisers that tested the new format. Cameron Gibbs, its Internet marketing manager, said that YouTube helped promote the protective clear film Zagg makes for hand-held electronics and that the campaign was more effective than banner ads and even some search ads.

And no one could beat the prices, which are sure to go up as the system is opened to the public. Since he had no competition, Gibbs said, he got popular keywords such as “ iPhone” for 10 cents a click, a bargain compared with tens of thousands of dollars to place a video on YouTube’s home page.

“Anyone can upload a video to YouTube, but what’s difficult is getting your video to rise above the clutter,” Gibbs said. “A lot of eyeballs have seen our videos. It has been a very effective way to get exposure.”

Fox Searchlight Pictures used the sponsored video program and other tactics to promote the release of “ Choke,” driving nearly 2 million views to the film’s trailer in six weeks on YouTube, said Daina Middleton, senior vice president of Moxie Interactive, the studio’s digital marketing agency.

YouTube has launched a number of experimental programs, including its first venture into e-commerce. Other efforts include ads that appear before a clip begins, ads that overlay text on the bottom fifth of a video, video ads on the home page and video contests sponsored by advertisers.

Analyst Greg Sterling says search advertising is YouTube’s best shot at cashing in on its online video dominance.

Google does not break out YouTube’s revenue, but analysts estimate it will pull in $200 million to $250 million, a tiny percentage of Google’s estimated $20-billion take this year. “This is a very difficult market in which to stimulate this kind of business,” Sanford C. Bernstein analyst Jeffrey Lindsay said.

Research firm EMarketer Inc. estimates that U.S. advertisers will spend $5.8 billion on video ads in 2013, up from $505 million this year. Investment bank Piper Jaffray found that the number of videos with ads on YouTube is already increasing and that YouTube appears to be suffering less from the economy-related ad slowdown than others. Investment bank Collins Stewart predicts YouTube’s revenue will double next year to about $400 million.

“If you can engage people with sight, sound and motion, they are more likely to remember your message,” said Shishir Mehrotra, YouTube’s director of advertising.

Some analysts questioned why it took YouTube so long to try the formula that made Google so profitable. Liu said YouTube took care and time in developing a search product geared to YouTube users, who are more interested in browsing than searching.

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