Why YouTube’s ad revenue may be declining and what this could mean

Ethan
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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 its peak. 

graph showing YouTube revenue from 2071 to 2022


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. Ever since short-form content started blowing up on TikTok, every social media platform has wanted a piece of the pie including YouTube which launched shorts in September of 2020. 

From a market share perspective, this was very much a smart move as TikTok was starting to eat into YouTube’s watch time and user engagement. But from a more nuanced perspective, this may have actually been a massive step backward in terms of revenue and financials. And if you don’t believe me, take it from Zuckerberg himself. 

Zuckerberg confirming youtube ad revenue decline


Earlier this year, Zuckerberg confirmed that people watching Instagram Reels instead of scrolling through the 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 its own revenue with short-form content, and what does mean for the long-term profitability of YouTube? 


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THE GREAT CHASM

You’re probably thinking, there’s no way short revenue is that much worse than long-form revenue right? Well, I’ve got exact numbers and it’s bad. On one of my channels, the average RPM for long-form content is usually right around $5 meaning that 1000 views generate $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 are 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 short 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, my channel gets just over 6 minutes in average view duration. This means that 1000 views translate 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 short views translate 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 counterproductive if you think about it. 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? 


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THE SOLUTION? 

The reality is that there is no simple solution to this situation. So, YouTube is simply trying its 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 won't 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 nonskippable ads. But, starting in November, creators will only have the option to turn pre-roll and post-roll ads on or off. It will be up to YouTube to decide whether it's skippable or nonskippable 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 its best to convince advertisers to give short-form content a try. One of the main reasons that shorts ad revenue is so horrendous is that 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 cringy, braindead, useless dumb entertainment that you forget 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. 

30 second TV Ad cost by cable tv


And today, many niches on YouTube like finance and entrepreneurship demand the same CPMs as prime time television. And YouTube is hoping that with time, advertisers will realize that it's 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 is AR or VR or whatever else. And that’s precisely why YouTube is heavily leaning into strategy number 3. 


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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 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 to 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. 

Interesting YouTube Statistics 2023


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 its core user base into paid subscribers, so its 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 blocks, 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. 

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