Why Are YouTube CPMs So Low?

Millions of YouTubepreneuers complain that despite their great content and massive audience, they are struggling to earn their fair share on the world’s largest video sharing site. Not only do they have to give up 45% of their ad earnings to YouTube, but the average CPM rates are so low that most creators earn pennies on the dollar compared to other online video destinations. I’ve heard horror stories of well-known YouTubers and popular musicians earning less than a dollar for every thousand views generated.

The fact is YouTube has struggled with low CPM rates since the inception of its monetization program. Of course, ad prices vary across verticals and fluctuate based on seasonality, content popularity, and dozens of other factors, but ultimately, YouTube CPMs are significantly lower than the competition. In 2014, YouTube’s average CPM of $7.60  (gross earnings before YouTube takes it cut), is less than a third of the online video average of $24.60. More mature video mediums like television, which receives an average $24.76 per thousand impressions, and upmarket online video destinations like Hulu garner even higher ad rates (see Figure A).

FIGURE A: Average CPM Rates by Platform (2014)

Screen Shot 2014-09-05 at 3.18.59 PM

Why, then, are ad rates on YouTube so low? For one thing, there is so much content on the platform, that supply is virtually unlimited. With 100 hours of video being uploaded to YouTube every minute, there is more content than necessary to meet advertiser demand. YouTube is trying to fix this through its Google Preferred program, designed to curate pre-roll ad buys across the top 5% of YouTube channels, but whether this initiative creates real scarcity or just the illusion of it remains to be seen.

When it comes to competing for high video ad rates, YouTube is also hamstrung by its enormous size and the nature of its creator community. Nike and P&G don’t exactly want to run their ads before that handheld video of your nephew’s first birthday party that only has 12 views. And they definitely don’t care to pay for views from Guatemala or Liberia where the audience can’t afford to buy $100 running shoes and the stores don’t stock Pampers.

Video portals like Hulu, on the other hand, are bolstered by paid subscriptions (something YouTube has tried without much success) and high ad frequency for free viewers. They can also carefully curate their content offering to justify high CPMs and block viewer access in countries where there isn’t much advertiser demand. Despite this success, Hulu still hasn’t seemed to figure out ad relevance or frequency capping, but I digress…

Another challenge is brand safety on YouTube. After the highly publicized Nissan beheading pre-roll and several similar incidents, advertisers are justifiably worried about where their video ads are running. They want to reach their desired audience in a carefully controlled environment that will reflect well on their brand. As a community-moderated platform, YouTube has weak enforcement of already lax upload policies, which does not facilitate the premium experience advertisers are looking for. This situation, however, is unlikely to change as it would be impossible for YouTube to manually review the years of footage added to the site every day. Perhaps an even bigger hurdle is that fact that such action would open YouTube up to a whole host of legal liabilities and run contrary to the platform’s core philosophy of open video sharing.

Of course, professionally produced, brand-safe content does exist on YouTube, but finding and then executing an effective media buy against such content is like finding the proverbial needle in a haystack for advertisers. Luckily, Bent Pixels and others are helping to solve this problem through big data analysis and technology. By identifying high quality channels and optimizing media buys, these third-party service providers can help YouTube advertisers steer clear of copyright violators, poor production value, and competitors’ content, not to mention offensive, obscene, and otherwise inappropriate videos.

Finally, and this is a bit of educated guesswork in evaluating the macroeconomic advertising landscape, YouTube’s inherent complexity as a social network, video sharing site, search engine, and content portal all rolled into one has made it difficult for advertisers to understand the best way to leverage YouTube. For many years, YouTube was seen as predominantly a social channel in competition with Facebook and Twitter for ad dollars. This has recently begun to shift in large part due to YouTube’s efforts to educate the market and develop an ecosystem of third-party partners and service providers. Now video ad spending on YouTube often has its own line item in media plans or is a key pillar of content marketing strategies for big brands.

But even after advertisers and their agencies have begun to harness YouTube as a marketing channel, some have been deterred by the fact that YouTube, as part of the Google family, is largely a closed ecosystem. For a long time, YouTube did not accept third-party ad tags or tracking pixels, even for ad verification services like ComScore or Double Verify. Even today, YouTube does not support third-party data sets, with the sole exception of Neilsen’s GRP data segments that mimic TV ad buys. These limitations have made some advertisers reluctant to commit major media spends to YouTube, resulting in a greater supply-demand imbalance that may have negatively affected CPM rates on the platform.

So what does it all mean? Will YouTube always have lower CPM rates than other online video destinations? Likely yes. Is this a bad thing? No, not necessarily. Cheaper ad prices come with the territory when there is so much supply, the bulk of which is uncurated and unregulated, but YouTube can make up in volume what it lacks in margin. Ultimately, YouTube may even be ahead of the curve. After all, rates tend to decrease as ad formats mature, and the rapid growth of programmatic buying may make it difficult for other online video destinations to justify high CPMS as the exchange system enables the market to set prices. For now, YouTube should continue to focus on simplifying the value chain, connecting creators and advertisers in such a way that enables seamless, straightforward transactions.

by James Creech

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