The Wayne YouTube Original was a Gen Z version of Bonnie and Clyde mixed with Deadpool’s rough humor. This golden egg was YouTube’s hope of breaking into the world of streaming originals. Long story short, their hopes died with the failure of this show. This failure marks a critical pivot in YouTube’s business model. They transitioned to a model that prioritizes an array of content that is not just ad-friendly, but ad optimized. Understanding this pivot helps creators align their business strategy with this new direction. To understand this new business model, we need to review YouTube’s history of growth and monetization.
A History of YouTube Monetization
Thirteen years ago, Neil Cicierega uploaded a 2-minute video called Harry Potter Puppet Pals to YouTube. Now that video has 192,913,827 views, and YouTube enthusiasts revere it as a culture-defining classic. This democratized unfiltered viral content was YouTube’s brand in the late 2000s. The exciting start-up revolutionized how people consumed digital content but lacked a robust monetization model. At the time, YouTube only approved a handful of creators for advertising through its partnership program.
YouTube changed this In 2009 when it updated its partnership program to include the monetization of individual videos. This move opened the door for small creators to generate revenue by making viral videos. Content like Harry Potter Puppet Pals now had a way to make money from its views.
Then in 2012, YouTube adjusted its partnership program again by opening monetization up to everyone. This created a new incentive structure that resulted in a production value boom. Videos like Gangnam Style and I’m on a Boat replaced the Harry Potter Puppet Pals ascetic as YouTube’s new brand.
Hours of video uploaded to YouTube every minute as of May 2019:
This era of YouTube was a gold rush for creators. The platform prioritized user-generated content and approved volumes for monetization without any question. This pattern changed in 2017 when advertisers in the UK noticed their ads on extremist content like ISIS and KKK videos. This news hurt Google’s bottom line and forced YouTube to enforce stricter guidelines for ad-friendly content.
Advertising wasn’t the only growth model YouTube was using, however. Their business model included an investment strategy in subscription-based streams of revenue. In 2010, they started a rental program, then in 2014, they created a subscription service for music called YouTube Red. YouTube was splitting their efforts between an SVOD (Subscription Video On Demand) and AVOD (Advertising Video On Demand) business model.
The Difference Between SVOD and AVOD.
An SVOD (Subscription Video On Demand) model is a video-on-demand service where users pay a flat rate each month to gain access to as much content as they wish. So with this model, content is created and funded with the primary purpose of attracting and retaining viewership. This objective saves SVOD’s time and hassle of curating and promoting ad-friendly content.
The AVOD (Advertising Video On Demand) model does not charge viewers for its content; it charges advertisers access to viewer’s data and attention. In this model, YouTube needs to attract and retain viewership while also curating and promoting ad-friendly content.
The AVOD model is more labor-intensive but less competitive. After addressing concerns over inappropriate content in 2017, YouTube also invested more in its SVOD model. They dropped their most controversial YouTuber, Pewdiepie, from YouTube Red and started investing in scripted shows. In 2018 they updated their YouTube Red subscription service to YouTube Premium. So subscribers now had access to exclusive ad-free YouTube Originals like Wayne, and all of their favorite channels and music services.
Why YouTube Originals Failed
In 2016, YouTube had just over 1 billion total users, with only 1.5 million monthly subscribers in YouTube Red. In 2018, YouTube believed that they could compete with Netflix, Hulu, and Amazon by attracting their 1 billion users to YouTube Premium. So they released the pilots of shows like Wayne on their central platform in a significant promotional effort.
The show was a massive success with the critics. It received a 100% fresh rating on rotten tomatoes and 27 million people viewed the pilot. Despite its success, Youtube couldn’t convince enough viewers to purchase a subscription to keep watching. Viewers had two reasons not to buy.
Brand Conditioning and Opportunity Cost
The first reason was that YouTube’s core brand was and still is user-generated content. It is in their name. Users are not likely to pay a subscription for content that isn’t associated with YouTube’s brand. So That subscription wasn’t a purchase of Wayne; it was an investment in future YouTube originals. This investment is hard to sell when it isn’t in the company’s brand.
YouTube conditions users to receive ads. The whole model facilitates the right ads and the right amount of ads while also retaining viewership. Since most viewers are already conditioned for this, they had minimal incentive to pay extra for zero ads.
Lastly, YouTube’s investment in scripted paywall content was an opportunity cost. YouTube’s ad-supported business generates billions of dollars in revenue a year. This cash cow couldn’t compete with the revenue from subscriptions. As a result, successful shows like Wayne were costing the company money by excluding them from the ads.
In 2019, YouTube publicly acknowledged that the SVOD model could no longer compete with the AVOD model. As a result, they dropped these scripted shows from the paywall and quietly stopped investing in scripted content. This decision provided more room for the two leading giants, Netflix and Amazon, to duke it out in the streaming wars. We may even see one of these streaming services purchase the rights to Originals like Wayne.
This change in strategy means that YouTube pivoted its growth model. Instead of moving into the SVOD space, they reinvested that time and money to grow their ad revenue. Most of their efforts have been in setting stricter enforcement of their ad policies and incentivizing more ad-optimized content.
The Difference Between Ad Friendly and Ad Optimized Content
Ad-friendly content is a list of topics that YouTube will not include in its monetization program. This policy extends to all parts of the content, including the video, thumbnail, metadata, description, and tags.
If the content on the platform includes any of the topics listed in the policy, it can potentially be demonetized. The only exception to this is informative or educational content.
The “adpocalypse” is evidence of stricter enforcement of YouTube’s guidelines around ad-friendly content. Since the 2017 controversy, YouTube has been increasingly enforcing their policies through demonetizing creators who violate their guidelines. They have improved their algorithm’s ability to catch this kind of content, demonetize, and even suppress it. Now that their business strategy heavily invests in the AVOD model, this will only get better and stricter.
Suppressing content isn’t the only tool in their business strategy. YouTube’s algorithm can now prioritize content optimized for ads. They do this through a backdoor curation tool set by advertisers.
YouTube’s algorithm reviews every video to determine if any of these five categories apply:
- Tragedy and conflict
- Sensitive social issues
- Sexually suggestive content
- Sensational and shocking
- Profanity and rough language
Now, advertisers can exclude any of these categories. This ability creates a tiered categorization of all content. As a result, YouTube is incentivized to prioritize high tiered content that makes more ad revenue.
This model is very different from the golden era of viral user-generated content. The algorithm isn’t just learning what viewers like; it is learning what advertisers want. This machine learning is why users see product review channels promoted right alongside music channels. The new incentive model is why videos like Harry Potter Puppet pals no longer appear on the front page of YouTube.
What this means for creators
YouTube’s prioritization has evolved from user-generated content to scripted shows to a mix of ad-optimized user and network-generated content. Creators shouldn’t see this as an obstacle. YouTube isn’t a gatekeeper; it is a business partner. Our last post explains how creators could benefit from strategic business alliances with other channels. This alliance can increase YouTube revenue per view and provide leverage to smaller independent channels. The key to these alliances is in structuring a business strategy that benefits both parties. YouTubers in the partner program are already in a strategic partnership with YouTube, whether they realize it or not.
Understanding YouTube’s business strategy helps creators structure their business model around a successful partnership with YouTube. As a law firm specializing in creative entrepreneurship, we can help creators innovate and restructure their business strategy in light of these trends. Contact us for more consul on this or any of our service offerings.