YouTube Concerns Will Boost The Long-Run Outlook For Online Video Ad Spend

Poor quality inventory and lack of transparency are problems for the digital ad industry. My colleague Susan Bidel and I have recently published reports that show how the related problems of fraud and lack of viewability result in wasted spending by marketers and a lost revenue opportunity for quality publishers. For further detail, clients can read Forrester Data Report: Ad Fraud And Viewability Forecast, 2016 To 2021 (US) and Poor Quality Ads Cost US Marketers $7.4 Billion In 2016.

While not an issue of ad fraud or viewability per se, recent concern over YouTube ads represents another facet of the ad quality problem. In the past couple of weeks, large marketers like AT&T, Verizon, and The Guardian have pulled their ads from YouTube after discovering that these had been displayed alongside video content promoting terrorism and hate.

From March 17 to March 29, 2017, Alphabet’s stock has lost $14 billion from its market cap over worries that these incidents will negatively affect Google’s revenue. And any reduction in YouTube ad spending will likely impact overall display ad spending in the short term: Forrester estimates that YouTube accounted for 11% of US online display and video ad spending in 2016, including social media advertising.

However, it is not yet clear that marketers’ recent moves to pull ads from YouTube will result in a longer-term reduction in ad spending. Too much is at stake for this problem to linger. Marketers still want access to YouTube's large and growing share of online video viewer minutes, and Google is relying on YouTube to be a key driver of online ad revenue growth, particularly with the recent launch of YouTube TV.

Marketers are right to finally put pressure on Google to remedy the quality issues that are harmful not only to them but to Google as well. Google can't blame marketers for taking these actions, and its public statements indicate that it agrees that there is a problem in need of a solution — namely improved transparency and control. The pile-on by marketers is likely more about using this situation as an opportunity to gain leverage over Google than about a long-term shift in ad strategy.

While we could see short-term spending pressure as marketers extract concessions from Google, pricing should rise once the dust settles. Google’s solutions to address the problem of extremist videos should help improve the overall quality of its video ad inventory. Google will eventually be able to cite these improvements as justification for charging a higher price per ad. If Google can show that it is placing each ad impression more effectively, marketers should be willing to pay a higher price. And there’s plenty of upside for online video ad prices: Our calculations based on Forrester Data’s Online Display Forecast and Consumer Technographics North American Online Benchmark Surveys, 2016 show that video ad spend per viewer hour for online video trails offline video by 62%. Improving ad quality will help close this gap and prompt a rise in online video ad spend.

Markets are often good at self-correcting. In this case, the long-term pricing benefits of an improvement in quality have the potential to outweigh the short-term harm from a reduction in ad buys.

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