The Most Valuable Thing You Never Knew About YouTube’s Business Model

Guest post by Doug Shineman of The Orchard's Daily Rind.

What if I said that the better you understand the mechanism behind YouTube’s business model, the higher your streaming rate will be on YouTube? Yes, that means reading this article could improve your YouTube rates — maybe even double or triple them. Get ready for a major change in the way your content is valued.

If your business currently revolves around retail models, whether iTunes or brick-and-mortar stores or subscription services like Spotify or Netflix, you may not be aware of the primary driver of YouTube’s unique business model, which is projected by Citi to generate $3.6 billion in gross revenue this year. What’s incredible about their model is that even as YouTube integrates more and more pre-roll ads, which should reduce viewership, traffic grows 20% a quarter according to comScore.

The fundamental difference between the industry built around YouTube (arguably “the future”) and the industry music and film rights owners are accustomed to (a little too early to call it “the past”) is the difference between an auction and a retail store. Music and film rights owners have built their businesses around a retail model, where rates are set and their ability to drive revenue is tied to their ability to sell units or get streams. YouTube’s model works more like a TV network, where the value of the product is only as big as advertisers are willing to pay to advertise against it, so the networks are always looking for the highest bidder, like an auction. For a TV show that auction typically happens by the season, but on YouTube that auction runs by the split second.

So YouTube is an auction, which makes your new customers (the buyers) the brands and advertisers. While fans control your traffic, which is equally important, the brands control the value of your content (the price) in this new ecosystem.

Imagine your album or film in physical form is being sold at auction. The bidding might start at $1. In the crowd, you hear “two dollars!” Then three, then six, and it sells for $10. Now what if that was the only way you sold your release to your fans, one by one. When you want to sell your album globally, you might set up an auction in every major country, and in every major city. You might try to set up auctions in locations where you know your fans might be — like at a college, or in a library, or right after a popular rock show or related film screening. By now, you’ve honed your strategy, realizing that the better the crowd of people at your auction align with your product, the higher it sells for. In some auctions it sells for $1; the right crowd just wasn’t there and due to some competing releases that came out, you had some tough competition. But some days it might sell for $20; the timing was perfect and the right people were in the crowd. This is the world of YouTube, where the value of your content is a fluid concept which varies by person, by stream, by location, and hundreds of other variables that collectively represent supply and demand. I would argue that this methodology is closer to the value of a live musical performance than the artist’s recorded album. The ticket price depends on location, demand and other factors.

Here are the 3 biggest drivers of the value of your content in this ecosystem — or more precisely the cost of your content to advertisers measured in units of 1,000 streams, known as CPM:

• Metadata & CTR – YouTube’s algorithm tries to align ads that are appropriate for the viewer. The more aligned the ad is to the demographic of the viewer, the higher the click-through-rate (CTR), the more YouTube charges the advertiser for the ads, and therefore the higher your content is valued. Metadata is one of the big drivers of ad alignment so make sure it’s all relevant and be careful with the words you choose to use, especially in the description and search tag fields. Use specific words that align to your content (e.g. “death metal” or “mountain biking”) and avoid overly general terminology (e.g. “music” or “film”).

• Watch Time – One of the biggest drivers of value now is watch time, which means the more of the video someone watches on average, the greater the value of your video. This also means that if people aren’t engaged with your video and lose interest quickly, the value of your content drops. If someone is using YouTube just to listen to a song, for example, and the song runs on longer than they have the patience for and they jump to a new video, your rate will drop. So consider how the cut down radio versions might make more sense for YouTube; or for film producers, consider how the length and type of the clip you upload impacts engagement and therefore the value. Almost half of YouTube’s traffic comes from mobile devices, so consider your typical viewer, the distractions they have, the size of their screen, their patience, and ensure your videos align with that experience to obtain the highest rates. And finally, even picking thumbnails that more accurately represent your video can result in higher rates, since luring viewers with a deceptive thumbnail means they’ll leave the page and lower your watch time.

• Premium vs. UGC – Videos that are uploaded to channels under The Orchard’s partnership with YouTube will earn significantly higher rates than user-uploaded clips. The videos are considered to be from a trusted source and therefore receive the highest paying ads. Ensure you are marketing and promoting the version under our account, which is considered the premium version, as opposed to a version uploaded by a user, and you could see an increase in the value of your streams by as much as 4 to 5 times.

YouTube is the #2 search engine in the world with 800 million users, and it’s a quickly growing revenue stream for all types of rights owners. Clients of The Orchard can take comfort in having one of YouTube’s premier partners manage their rights and handle the logistics, introducing them to new opportunities before the rest and navigating the complexity of this brand new industry on their behalf.