Hello and welcome to the state of the online video world. If you would like to skip this post and jump right to the point, this is your lucky day because the conclusion is right here:

YouTube has literally DESTROYED – with a capital DESTROYED – the video ad market. What started out as a standard and relatively reasonable benchmark of $25 CPM (FYI, CPM is the cost to an advertiser for 1,000 views of an advertisement) for both broadcast sales and online video sales just a few years ago, is now down now to around a $2 take home this year.

But we’re not done yet!

If you’re part of a new Multi Channel Network (aka MCN), take off another % for the network. If you signed up through a third-party to be part of that network, go ahead and (in most cases) cut out another % to hand over to them.

Now, joining an MCN might make you rise to popularity more quickly, and there are ways in which it can lead to greater revenue, too. And, sure, you can potentially have some fun collaborating with others in your network, but for the vast majority of people and businesses, the end result will be that you’re taking home pennies on the CPM for advertising that runs against your content.

With all that in mind, from a business standpoint, YouTube today can best be understood as a marketing tool. From a “YouTuber” business standpoint, it’s a way to work at Google, just without the desk.

On the flip side of the online video landscape, there are emergent successes already happening with other established companies with huge and growing userbases. Netflix and iTunes, for example, both have models to support much greater business opportunities online, leading to content that can afford to be created with larger groups of talented minds and resources, leading to much greater revenue potential. All of which is being supported by the people, sans advertising.

The Good that Came From Video Advertising

Perhaps YouTube aggressively adopted online video advertising because it needed to, to afford its massive scale. Nonetheless, thanks to the inspiring efforts of YouTube, the moving image is quite thoroughly democratized.

That was the original vision of Chad Hurley and Steve Chen. And if there is anything good that has come from the consolidation of the web over the last decade, YouTube is right up there with the best. These guys should be highly commended for sticking to their guns, doing an enormous amount to defend fair use, backing international rights, fighting for and against the established media, and brokering deals that helped the world meet in the middle.

From evidence of atrocities at war to educational resources, the medium is available, in the hands of so many, so easily, only because of YouTube.

This cultural good from YouTube is far more valuable than any discussion of industry politics, CPMs and business models for marketers, brands or YouTubers who are trying to make a living off of the site. I’m excited to say that I lived in a time when the moving image became democratized, for it’s the most powerful medium we have yet as humans to communicate the state of our own lives, dreams and aspirations.

So, if you are not interested in any of the internal politics and business models of online video at the moment, no need to carry on from here. Just rest assured that the democratization of the medium is beyond its tipping point, and that all is well.

The Degradation of the Video CPM

And if you are trying to understand the online video business landscape, you may be asking yourself, “Is there any hope CPMs might go back up from a couple of bucks?” The answer is, “No, not really.”

From the perspective of an advertiser looking to sell their wares, they have a few options to reach their target consumers online. They can find you in many different places, for example, on Facebook, Twitter, or on YouTube. Does it really matter where they find you? A little bit. But not really. It’s all about the same when it comes to justifying a value.

Two major forces have been driving down CPM’s:

1. Bulk sales.

YouTube monetizes literally billions of video views per week and is thus naturally incentivized to grow their ad sales volume by providing discounts when advertisers purchase in bulk.

If a major brand decides to put up a pre-roll on YouTube, YouTube can certainly offer more impressions than the advertiser could ever afford. So, in an effort to get the most money possible from the advertiser, especially when competing for sales with AOL, Facebook, Yahoo and Twitter, for example, YouTube can drive down the price to give the advertiser such a good deal, the advertiser will want to spend it all on the world’s largest online video platform. It doesn’t cost YouTube much more to do so.

As a result, CPMs have been driven down so low, they have become almost worthless to anyone who is not generating top view counts. Fred Wilson explained this market tendency many years ago.

2. The YouTube business model has led to YouTube becoming little more than a social media content platform.

YouTube has used its Next department (originally Next New Networks) to establish a single style-guide and creator playbook for any-and-all serial content creators in the world. The book is almost completely devoid of suggestions for content design, and almost entirely based on “audience development” tricks. Thus, the top YouTube channels are not necessarily at the top because they are masters of video content, but rather, masters of audience development.

There is no need to belittle or underestimate the power of top audience development masters, especially when those masters are young, talented groups of people who tend to spread a great spirit and inspire and influence so many others.

My point here is simply to say that this particular style of environment – this stage known as YouTube – is limited and not necessarily a healthy one in all cases, for either the producer or the audience. There is little incentive offered to take the art of production further, to the kind of depth that goes into shows like House of Cards, a series that spent $100 million on just two seasons. Certainly, there are some top YouTubers who are constantly trying up their levels of production, but they are the exceptions, not the rule.

For better or worse, most big-budget content studios today, even when they are blatantly overspending and antiquated with their cost structures, or not, see the business of re-tweets, Facebook likes and views on YouTube as belonging to the same domain – the domain of social media marketing.

In other words, marketers and advertisers see YouTube as just another element in the Social Media Package. They don’t care what your video really looks like and who is in it, they just want to know the makeup of your audience and what you are going to do to get their brand’s message across so they can sell some more stuff. If you do that by producing a five minute video, or do it with just 140 character text messages, it’s now similarly priced and more about your audience than you or your medium.

The advertising industry has taken full advantage of this already. In a discussion on Twitter the other day, I asked the Global Head of Social Media at Ford, Scott Monty, about this photo with a group of YouTubers and other budding high-net follower-count folks.

They have each been given use of a free car and gasoline for six months (along with other perks including networking opportunities), but no money in exchange for promoting the car to their audiences, typically across their social media networks. They seem to be enjoying themselves, too.

I think Scott is brilliant and I have followed him for years. He understands best how to utilize the medium to integrate his car into the conversation and this is an ingenious initiative (unless of course, deep down inside, the people in that photo don’t really care about which car they promote, so long as it’s free, and would do the same thing for a Toyota – that would obviously not be very good). For advertising, this power of recommendation may ultimately be a lot more important than product placement or an unrelated pre-roll ad thrown in at the beginning of a YouTube video. It’s also, in this instance, a lot cheaper.

This kind of sponsor activation has a direct impact onto the various branches of ad sales that come into play when content is ad supported. In particular, it’s harming the revenue potential of integrated advertising dollars for top YouTubers (seemingly too big and valuable now to consider such a freebiee). If advertisers can find a way to hit targets on YouTube without paying, this obviously drives down the price they will need to pay to integrate with talent who is more influential.

The Stage

Have you seen any of the new “TV shows” produced by Netflix which are distributed exclusively online, but have the best qualities of any traditional TV show? How about House of Cards or Orange is the New Black?

Stop for a moment and consider what would happen if one of these shows were released on YouTube instead of Netflix.

What if Breaking Bad – a TV original – was released on YouTube? Do you think it would have become as impactful and influential to mainstream culture, or as big of a monetary success story? I don’t. Not at all. Not even if the economics were able to work out so Breaking Bad’s costs (of around $3M per episode, while the top two actors were paid $225k and $180k per episode, or $3.6M and $2.8M each for the last 16-episode season) could be substantiated by distributing the series online.

YouTube is simply not the right the stage for this kind of content.

When Netflix brought back Arrested Development, it was a hit for Netflix TV fans who loved the show, having seen it before on TV. Contextually speaking, the audience was prepared for this and it was available on the right stage. I can’t emphasize enough the idea of the right stage. Imagine The Walking Dead on YouTube. What if it was released for the first time ever as a new show on that platform? I think it would have absolutely flopped. There are countless examples of amazing works on YouTube that will never be discovered by the mainstream because they are not on the right stage.

If you are still not clear on this idea, consider it from the perspective of a musician who plays on different stages, like in a subway, a bar, a concert hall, or a stadium. If you put the same musician on each of these different stages, they will tend to feel differently, and be perceived and valued differently by the listeners of each stage who have preconceived notions and expectations for how to interpret what they are experiencing.

YouTube seemed to be aware of this in one regard when they helped designed VEVO, with a “special look-and-feel” to the page layout that’s normally “exclusive” to “big-name” bands. This is the reality of the stage. If YouTube had not worked with major music companies on this special stage for the top music video producers, they would be out of the picture completely.

Of course musicians see VEVO mostly as a promotional tool, not a sales point. They use videos to sell songs, albums, and merchandise to their audiences.

The Business Model of the Media Is Shifting Away From Advertising

Consider where the momentum is right now online for the industry.

  1. What is the best monthly subscriber platform that is winning by providing access to ‘the best comprehensive selection’? Netflix, which has no ads.
  2. What is the best pay-per download platform for TV shows in demand, on demand? iTunes, which has no ads.
  3. What is the best independent crowdsourcing way to fund? Kickstarter and Angel.co, which both have no ads.

I’ll spare you the details of what could come if each of these models pan out. Though there is one obvious, glaring, staring-at-you-right-in-the-face thread that is the takeaway here:

All three of these large-scale, progressive market movements involve the audience paying for the content. None of them are free, and none are based on advertising.

(Author’s aside: Hulu, by the way, is floundering. That’s why they’ve been for sale multiple times and can’t find a buyer. And lo and behold, the majority of their revenue is driven by ad sales.)

In other words, online advertising does not support the level of in-depth production that is in high demand, but the pay-per model does. Clearly, people who can get YouTube are still paying for iTunes and Netflix. It’s not like YouTube has more than you need, is it? It’s also not a surprise. When it comes to media of any kind, the market has traditionally tended towards a model where the audience pays for the media.

With regards to music, people pay per album, and now per song. With movies, people pay per movie. With books, people pay per book. Now with mobile software, people pay per app.

Post Napster, no one ever questioned what the business model would be for selling music online. They had fears they would lose control, they were worried their model might change to something they couldn’t imagine, but even The Beatles, the the most fearful of all for having the most to lose, joined in to seal the deal with their own archenemies because people buy music online.

iTunes is only the new Sound Warehouse and Netflix is nothing more than the new Blockbuster. Same ‘ol business model, just easier to do online. The internet, as Evan Williams from Twitter will tell you, is not magic. It’s just a means to make our everyday lives more simple. And now TV shows have joined in on the simplicity.

It was an easy transition for television because people saw it as roughly the equivalent of paying for Cable TV. Most people probably don’t remember, but TV actually started off just for “free”. There were no cable costs. All you needed to do was pay one time for a set and antenna, and then you could pick up the signal (like Aereo).

But there is a reason why TV ended up that way, whereas music, films, literature and other works were paid for: TV only had a few stations. They had created an elite platform that no one else could touch. If there are only a few stations, the kind of money people will pay to get on it is like OMFG! The same can be said for music on radio, but the music industry was all-along just using radio as a marketing tool themselves, to drive sales to their own recordings.

AMC, which hosted Breaking Bad, generated significant broadcast ad sales revenue, selling some 30 second spots during its not-on-demand season finale for $400,000 each to an estimated 10.3 million viewers, or around $25.75 CPM. That number can be multiplied by the many spots they had to fill. Of course many reports suggest finale ad spots went for as little as $200,000, which equates to around a $12.87 CPM. This is all par for the course, though, in the shifting ad dollar away from broadcast towards the internet.

What’s interesting and fresh however is that the company reported overall second quarter revenue growth of 17.5% due mostly to an increase in distribution “primarily attributable to growth in affiliate fees, as well as increases in home video and digital distribution revenues.”

What’s more is that Nielsen, Twitter, and other social media accounting platforms have been tracking TV chatter more than ever, which can lead to new ways for shows to gauge their impact on engagement, conversations, and viewership. But all of these ratings entities appear to not be very much interested in any chatter, views, or other activity related to YouTube.

The Haves and the Have Nots

There is an underlying problem that I have always feared, despite the proposition of the internet leveling the playing field for distribution and social networks leveling it for audiences. And that is, we are narrowing back into a state of “elite vs. other” where the other is perceived to be lesser, and cannot gain access.

It’s a scenario where the typical American may know a lot of what is going on with a b-list reality TV actor from The Real Housewives of Atlanta, but has never even heard of any of the people who comprise the top subscribed YouTube channels, some of which are gaining over 30,000 new subscribers per day.

So what can YouTubers and aspiring young content producers do to increase their ceiling of revenue opportunity, especially if they have an exponentially greater audience and reach than most TV shows but still make exponentially less?

Create, get-on, transition-to, include, support and be involved with the platforms that offer pay-per, licensing, fundraising, or subscription fees. It’s the long-term solution and you must be sure to position yourself on the right stage.

YouTube subscriptions or pay-per episodes? The initiative is not performing well, obviously not a top priority for YouTube, and YouTube is still the wrong stage.

You can push iTunes to get out of the free podcast section and move to the pay-per TV section (I dare you if you can). Get your top YouTuber friends together to make a movie and then distribute it on Netflix. Build a destination site that is the Angel.co for content. Get Fullscreen and Maker to make platforms that are subscriber and al-la-carte based. Knock on the doors of your local network affiliate and make a broadcast show for your town that you could sell around the country to other local TV shows while they still have all the access.

Whatever it takes to leverage your position now before the online ad market runs thinner and it becomes too late for most to sustain…

Andrew Baron is the creator and founder of Rocketboom, one of the longest running shows on the internet, and Know Your Meme, a top site for meme research. Baron has been profiled for his influence in the development of online video in countless journals across the world, including Forbes “Best of the Web” and Time’s “The Best in the Online World”. The New York Times called his work as “An informative romp through Internet Culture” while The Guardian named Rocketboom “One of the web’s pioneering video blogs”.

Baron has been formally recognized by The Vloggies, The Streamys and The Webbys but considers his greatest recognition to be from Steve Jobs, a fan who used Rocketboom to introduce the video iPod, and again when introducing the Apple TV. Click here for more about Rocketboom, and you can connect with andrew on Twitter and on his blog.