YOUTUBE REVENUE: YouTube’s revenue is declining for the first
time in history. For 3 straight quarters between the middle of 2022 and the first quarter of 2023,
Google saw overall YouTube ad revenue decline. To their credit, YouTube ad revenue did start
growing again in Q2 of 2023 and we may see another positive in Q3 but whether Q3 is positive or not,
the larger concern still remains: has YouTube ad revenue reached it’s peak. Take a look at this
graph for example. Between 2017 and 2021, YouTube ad revenue nearly quadrupled. But,
from 2021 to 2022, ad revenue stayed basically the same. And with 2023 revenue estimates coming at
just over $30 billion, it looks like YouTube is in for another year of near zero revenue growth. Most
of Wall Street has written off this decline as just YouTube maturing and the ad market softening
due to high inflation and recession fears. But, I think there’s actually a much more interesting
factor at play: YouTube shorts. Eversince short form content started blowing up on TikTok,
every social media platform has wanted a piece of the pie including YouTube who launched shorts
in September of 2020. From a market share perspective, this was very much a smart
move as TikTok was starting eat into YouTube’s watch time and user engagement. But from a more
nuanced perspective, this may have actually been a massive step backwards in terms of revenue and
financials. And if you don’t believe me, take it from Zuckerberg himself. Earlier this year,
Zuckerberg confirmed that people watching Instagram Reels instead of scrolling through
main feed was costing the company $500 million worth of revenue every single quarter. And
that’s just comparing the Instagram feed to shorts. This revenue disparity is likely far
larger when comparing full length videos with shorts. To make things worse, it seems that
shorts are only growing in popularity. So, is YouTube cannibalizing their own revenue
with short form content, and what does mean for the long term profitability of YouTube?
THE GREAT CHASM: YouTube is clearly struggling due to the
shifting video landscape just like investors who are struggling due a shifting investing landscape.
High interest rates have destroyed risk on assets like growth stocks and crypto over the past 2
years. And to make things worse, high inflation has been eating away at people’s cash savings
as well. And that’s why we wanted to create a platform that would allow retail investors to
adapt to the changing investing landscape with the help of bonds. With our platform, Silo,
you can invest in government and corporate bonds which are currently generately historically high
yields of 4-7% all with the safety of $500,000 in SIPC insurance and $2.5 million in FDIC insurance.
This is precisely what all of the big tech companies and big name investors have been doing
for decades with hundreds of billions of dollars. So, if you would like to do the same thing, please
consider checking out Silo in the description below. But anyway, you’re probably thinking,
there’s no way shorts revenue is that much worse than long form revenue right? Well,
I’ve got exact numbers and it’s bad. On my channel, the average RPM for long form
content is usually right around $5 meaning that 1000 views generates $5 worth of revenue. Now,
do you wanna guess what the RPM is for short form content? Maybe a dollar? Maybe 50 cents? Well,
it's actually at 6 cents and that’s the highest I’ve ever seen it. Usually, it’s at 5 cents. So,
right off the bat, short form revenue per view is about 100 times less but that’s not exactly
a fair comparison because long form views and short form views aren’t equal. You see,
ad revenue has less to do with views and more to do with watch time. If you’re watching shorts and
you see an ad every 10 shorts, then each shorts view is only worth 1/10 of an ad impression.
If you’re watching a 45 minute long Magnates Media documentary, however, and there’s an ad
every 3 minutes, well then, each view could be worth as much as 15 ad impressions. Of course,
there’s more variables at play like average watch time and topic and seasonality and all of that,
but that’s the general idea. Shorts earn less revenue because each shorts view is less valuable
than each long form view. But, even when we account for this, shorts end up with far less
revenue per view. Let’s take my channel again for example. With long form content, this channel gets
just over 6 minutes in average view duration. This means that 1000 views translates to 6000 minutes
of watch time and $5 worth of ad revenue. In other words, $1 worth of ad revenue is equivalent to
1200 minutes of watch time when it comes to long form content. In terms of short form content,
the average short on this channel gets about 30 seconds worth of average view duration.
This means that 1000 shorts views translates to 500 minutes of watch time and $0.06 worth of ad
revenue. In other words, $1 worth of ad revenue is equivalent to over 8000 minutes of watch time when
it comes to short form content. That’s nearly 7 times less than long form content and if we
apply this math to the entirety of YouTube, things become ugly pretty quickly. Every day,
YouTube pulls in over a billion hours of watch time. If all of this watch time was from long
form content, YouTube would generate roughly $18 billion worth of ad revenue every single. If all
of this watch time was from short form content, however, YouTube would only generate about $2.6
billion worth of ad revenue or over $15 billion less. I think you can see how promoting shorts
could have a massive impact on YouTube’s top line. Zuckerberg realized this months ago and that’s why
Meta stopped paying bonuses to Reels creators. It’s really quite counter productive if you think
about. Meta was literally paying creators to make content that would make Meta far less money. Yeah,
no wonder they stopped but it’s not as easy for YouTube. For instagram, their bread and
butter is pictures so not emphasizing short form videos isn’t a big deal. For YouTube,
their bread and butter is videos, so not emphasizing the new trend with videos is a
big deal. So, YouTube is caught in this awkward catch 22 situation. They have to promote shorts
to remain competitive and retain watch time against TikTok but promoting shorts is also
directly leading to substantially less revenue for the platform. So, what exactly is the solution?
THE SOLUTION?: The reality is that there
is no simple solution this situation. So, YouTube is simply trying their best to keep things moving
forward from three angles starting with doubling down on long form content. When one part of your
business isn’t doing as well, one solution is to double down on the part of your business that is
doing well and have this part of this business make up for the other part. And it seems that this
is exactly what YouTube is doing with long form content. I know a lot of you wont like this but
YouTube is moving towards showing more ads on long form content. The most recent of these changes is
an update to ad control for creators. As you may know, creators currently have the control
to choose between pre-roll, post-roll, skippable, and non skippable ads. But, starting in November,
creators will only have the option to turn pre roll and post roll ads on or off. And it will
be up to YouTube to decide whether its skippable or non skippable and whether it appears before or
after a video or both. Moving forward, YouTube is also introducing a new option when it comes
to mid roll ads called manual plus automatic. Essentially, this option allows creators to
manually place mid roll ads throughout the video and YouTube to show even more ads throughout the
video on top of that whenever they want. If you ask YouTube about these policy changes,
they’ll probably say something like “These policies changes are meant to make the YouTube
ad experience more refined and enjoyable.” But, that’s just code for “We’re taking more
control over ads so that we can optimize their placement and length to maximize revenue.” And
this is just the most recent development in YouTube’s monetization effort. YouTube has
been rolling out such changes this entire year. For example, they have become much more serious
when it comes to blocking ad block. They’ve been experimenting with 30 second ads on YouTube TV.
And, they have even gone as far as stopping video playback for users with AdBlock. So, YouTube is
very much doubling down on long form monetization but that’s only half the story. At the same time,
YouTube is trying their best to convince advertisers to give short form content a try.
One of the main reasons that shorts ad revenue is so horrendous is because advertisers are quite
hesitant when it comes to short form advertising. For one, a lot of them aren’t familiar with how
to craft short form ads that convert but honestly, that’s something that they can figure out by just
hiring the right people. The larger issue is that they view short form content as less than and it’s
no wonder why. Most short form content is cringey, braindead, useless dumb entertainment that you
forgot in a matter of minutes. So, advertising next to this sort of content isn’t exactly ideal
but here’s the thing, social media ads in general used to be viewed in the same light 10 to 15 years
ago and that’s why social media marketing was way cheaper than traditional TV marketing. But,
over time, some more progressive companies stepped forward, experimented with social media marketing,
and showed the entire world just how effective it could be. And today, many niches on YouTube
like finance and enterpreneurship demand the same CPMs as prime time television. And YouTube
is hoping that with time, advertisers will realize that its the same thing with short
form content. But realistically speaking, it’ll take several years for such a shift to happen,
and all of this still leaves YouTube vulnerable to the next shift in video medium whether that AR
or VR or whatever else. And that’s precisely why YouTube is heavily leaning into strategy number 3.
THE GREAT PIVOT: Optimizing long form monetization
and promoting short form monetization is great and all but what YouTube really wants is independence
from all of this. When YouTube first came out, it was just a fun platform where people shared
simple videos that they made by themselves or with their friends, and that still exists on one side
of YouTube. But the more popular side of YouTube is filled with the MrBeasts and Marques Brownlees
and Good Mythical Mornings of the world and all of these guys are just straight up production
studios. Even creators who seem more relaxed like Ryan Trahan aren’t. You know the saying,
it takes effort to seem effortless. Well, that’s exactly what’s going on there. And as all these
creators evolved so did the audience. Back in the day, YouTube was something that would people
would use to fill up free time. Today, YouTube is something that hundreds of millions of people
use as their primary form of entertainment. So, it’s not far fetched for YouTube to want
all these people to directly pay for their use of the platform which brings us into YouTube
Premium. YouTube currently has a total of 2 billion monthly active users out of which 80
million are already paid subscribers. So, right off the bat, YouTube is doing pretty well when
it comes to paid subscribers but it’s actually even better than it looks. Here’s the thing,
while it’s cool that YouTube reaches 2 billion people every month, most of these people aren’t
really serious users. Most of them probably just watch a video here and there and that’s why it’s
far more important to look at daily active users. YouTube currently stands at 122 million daily
active users. Of course, not every single core user is gonna use YouTube everyday single day. So,
YouTube's core user base is likely around 200 to 300 million people. Given that 80 million
of these people are already paying, YouTube has already converted 25 to 40% of their core user
base into paid subscribers, so their primary goal moving forward would be to convert the rest. This,
however, is a bit of a tricky situation. YouTube needs to make ads annoying enough such that all of
their core user base switches to premium but not so annoying that they bleed watch time to TikTok
and Meta. And this is what all of YouTube’s recent moves have been all about: blocking ad block,
increasing ad length, and reducing creator control over ads. It’s all about striking the
perfect balance to maximize YouTube premium users while still keeping YouTube free and accessible to
casual viewers. This has been the play for a few years now, but now that they’re starting to feel
the pain of declining revenue, the pressure is on as they go all in on trying to free themselves
from their dependency on ad revenue. If you’d like to free yourself from your dependency on your job
by investing for the long term, please consider checking out Silo in the description below.