Despite reaching over a billion unique viewers, YouTube only broke even on the bottom line in 2014, according to The Wall Street Journal.
To make matters worse, Facebook (NASDAQ:FB) surpassed YouTube for the most desktop video views per month last year. Between June 2013 and August 2014, Facebook's monthly video views in the U.S. skyrocketed from 700 million to 12.3 billion, according to comScore. During that period, YouTube's monthly video views dropped from 15.7 billion to 11.3 billion. However, Facebook's numbers include views of auto-play videos for three seconds or more, so the actual rate of engagement is debatable.
To prevent YouTube from falling behind Facebook as an advertising platform, Google recently announced "TrueView for shopping," which adds "buy" buttons to its video ads. Can these new ads curb Facebook's alarming growth in video?
What Google thinks
Google claims that while testing out the new buttons, furniture retailer Wayfair's (NYSE:W) revenue per impression tripled in comparison to older YouTube ad campaigns.
Investors shouldn't confuse the new TrueView ads with Google's new buy buttons for mobile search ads. The TrueView buttons on YouTube lead to third-party sites where the transactions are completed, whereas users who click through a mobile search buy button can complete the purchase within Google's ecosystem. TrueView is designed to deal with Facebook, while mobile ad buttons are meant to boost its relevance in product searches against Amazon.
Letting viewers buy what they see on the screen instantly isn't a new strategy. In the 1990s, "interactive" web-enabled TV platforms like WebTV, AOL TV, and Time Warner's Full Service Network flirted with the idea of putting overlays over shows and commercials.
Unfortunately, none of those platforms ever gained mainstream acceptance. More recently, Samsung tested in-app ads for its smart TVs, which were tremendously unpopular with consumers.
TrueView is an improvement over those previous efforts for two reasons. First, users are already accustomed to seeing YouTube ads. Second, buy buttons for those ads are small and aren't as jarring as clickable ads on living room TVs.
However, three serious problems make YouTube an uneven platform for advertisers.
First, YouTube's active viewer base is much smaller than it seems. According to Pivotal Research analyst Brian Weiser, just 9% of YouTube's "one billion" viewers account for 85% of all video views across the network.
Second, those regular viewers tend to be very young. Research company eMarketer reports that 82% of U.S. teens watch YouTube regularly, compared to 54% of adults over the age of 35. The same survey found that 64% of U.S. teens normally use Facebook, compared to 77% of adults over 35. This means Facebook is more popular among older individuals with more spending power, which could make it a more lucrative platform for marketers.
Lastly, both Facebook and Twitter recently launched their own video hosting platforms. This means their users could upload more videos directly to the social networks instead of embedding them from YouTube. Both social networks are encouraging their users to embed those videos on third-party sites, which could slowly steal viewers away from YouTube.
How TrueView could work
Despite those weaknesses, TrueView buy buttons could work well with people who use YouTube to find product reviews. For example, if a viewer searches for a review or an unboxing video of a new smartphone, he or she could click the button to make a purchase.
According to Google, nearly two-thirds of brands see Google searches rise as much as 13% after viewers watched an ad on YouTube. Therefore, an ad eliminates the need for a follow-up search or a visit to rivals like Amazon. If these efforts pay off, Google might use TrueView ads to promote its Google Shopping site or Google Express same-day deliveries.
The effort also complements Google's buy buttons for mobile ads, since a quarter of all YouTube views are made on mobile devices. This could curb the growth of Facebook, which eMarketer estimates generated more than three times as much U.S. mobile display ad revenue as Google last year.
The key takeaways
In my opinion, the new TrueView buy buttons could attract marketers by creating targeted ads based on user data and the content of the underlying video.
However, Facebook's video ads, which have an audience of 1.44 billion monthly active users, can use just as much (if not more) user data to craft targeted ads. Therefore, the arms race between YouTube and Facebook videos is likely to escalate in the near term, as both tech giants unveil more features to attract advertisers.