Google's Plans to TiVo YouTube Ads May Be Sign of Paid Subscriptions

Last Updated Jul 2, 2010 7:00 AM EDT

Google (GOOG) made a smart move when it bought YouTube. After five years of heavy losses, the site might break even this year, even without major television and movie programming. So why would Google plan to let consumers skip embedded video ads? Because it probably has another revenue generator -- like optional paid subscriptions -- in mind.

The ads it will allow users to skip are pre-roll, meaning video ads that run before consumers see the videos they wanted. Google has considered this move since at least November 2009:

We know what you're thinking: who would choose to watch an ad when they can skip it? Well, that's what we're trying to find out. In our previous research, we've actually seen that lots of users will watch pre-rolls. Abandonment rates are affected by several factors, notably length and creative. When a pre-roll is only 15 seconds, we see completion rates as high as 85%. Also, creative matters a lot: the quality and relevance of the ad itself seems to have 3x the influence on abandonment online as it does on TV. Viewers online tend to be much more active in making choices about what they watch.

Skippable pre-rolls have the potential to solve this problem and create a win-win-win for everyone on YouTube. For users, this format gives them more control over their experience. For advertisers, we're working toward a solution where they pay for ads that users actually watch and engage with. And for partners, skippable ads attempt to minimize abandonment rates, helping them protect the audiences they've worked hard to build. We've learned from Promoted Videos that advertisers are often willing to pay more money for an engaged opt-in view, as opposed to a forced view like an in-stream ad, so this also has the potential to increase CPMs.

I don't doubt that Google looks at whether opting out of pre-roll ads might actually increase revenue and avoid arguments with advertisers who wouldn't want to be charged for an ad that someone doesn't watch.

Google might consider some other logical options. One would be setting up a pre-roll auction. Notice how viewer choice becomes a powerful tool to increase user involvement. It would make sense to give consumers a choice of several ads. Let them pick an ad, and they're more likely to watch. Google could theoretically charge for an ad to simply display one as a potential choice, and then have the advertisers bid to appear as a possible selection. The winning ad would pay an additional amount for the view.

Another other possibility is that Google will create an optionally paid service. Users would get to skip ads, unlike Hulu's heavy-handed approach. Of course, Google would need content from movie and television producers, something that has so far been illusive. But if the company can continue to grow viewership and ad dollars, it might be able to offer a monetary cut beyond what Hulu can manage, and the studios might find it an offer they couldn't refuse.

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    Erik Sherman is a widely published writer and editor who also does select ghosting and corporate work. The views expressed in this column belong to Sherman and do not represent the views of CBS Interactive. Follow him on Twitter at @ErikSherman or on Facebook.