TikTok Is Making YouTube Change Its Game — and It’s Costing Alphabet Huge Money

With more than one billion monthly active users, TikTok has exploded in popularity over the last two years and forced established social media players to pivot to keep up with the newcomer. And a new report from the media analysts at MoffettNathanson shows that the game of short-form catchup is costing YouTube. As briefer videos cannibalize the viewership (and creation) of longer ones, commercials are being sacrificed. MoffettNathanson now expects YouTube will miss out on $275 million in previously-estimated ad revenue this quarter.

The researchers had previously expected YouTube’s ad revenue to grow 9 percent this quarter to $7.49 billion. But after accounting for the hit that YouTube will take as usage trends toward its harder-to-monetize Shorts feature, MoffettNathanson now forecasts YouTube’s overall ad revenue to grow just 5 percent. YouTube’s huge user base gives it a leg up, but as short-form becomes the form for social video, what was once the only cell-phone game in town is also facing stiff competition from Meta’s Instagram and Facebook. Both of those Mark Zuckerberg-controlled platforms boast a solid track record of successfully monetizing new features.

Released worldwide last July, Shorts differ from normal YouTube content in that videos are limited to 60 seconds, presented vertically, and play for users in an endlessly scrolling format. You know, kind of like TikTok. Instagram Reels and Facebook’s short-form video features are similar.

While YouTube is experiencing a real “Skip Ads” moment, analysts were pleasantly surprised on Wednesday when the platform reported that more than 1.5 billion people watch Shorts every month. (TikTok hasn’t updated its user count since the fall, but recent third-party estimates place it as high as 1.6 billion.)

With MoffettNathanson estimating YouTube’s total monthly active users at 2.9 billion, Shorts has an impressive 50 percent penetration — giving YouTube the lead over its competitors’ TikTok copycats. Snap Spotlight reaches an estimated 30 percent of its 612 million monthly active users and Instagram Reels are accessing 43 percent of the app’s 154.9 million U.S. user reach.

But that’s just one metric. YouTube might have better penetration compared to Instagram, but MoffettNathanson believes that Instagram users spend more time on the app’s short-form videos than YouTube users.” With an average view likely lasting only a few seconds, we estimate that this viewership accounts for only a small fraction of the over 1 billion hours consumed on YouTube daily,” the report reads.

In the effort to keep their status as social media kings, YouTube and Meta are forced to think as much about viewership as they are about penetration, which together would show that users are able to get the content they want in the endlessly bingeable, bite-sized way they want to watch it. TikTok’s popularity shows that users have embraced short-form videos, and if YouTube is unable to offer them that as an alternative to the site’s longer clips, it risks losing its dominant position in the social video space.

Meta and Alphabet executives both warned in recent earnings reports that going short is going to cost their companies. It was more reflective in Meta’s bottom line last quarter, because it had already started mixing Reels in with traditional Instagram posts and Stories, whose monetization is more mature. YouTube’s recent decision to prominently place Shorts right next to the Home button on its app is part of the reason why analysts are expecting the short-form hit to come for Alphabet this quarter.

Compared to Instagram Stories, Reels serve just one-tenth the number of ads. TikTok videos come with a third of the number of ads as Instagram Stories. And on YouTube Shorts? Ads are “seemingly nonexistent,” MoffettNathanson wrote, as YouTube appears “to be just testing advertising solutions at the moment.”

This isn’t the first time big social media players have been forced to pivot. When Snapchat’s 2013 Stories feature quickly surpassed the popularity of its original messaging function, Instagram made its own copycat in 2016. Facebook introduced its version the following year. They needed to introduce the features in order to compete, but Meta had to scale user engagement before it could more fully monetize them.

“The pain Meta and YouTube are experiencing today largely mirrors the pain the former experienced several years ago as it transitioned to Stories. It took time for advertisers and advertising demand to adjust, but those few quarters of turbulence have since paid many returns,” MoffettNathanson wrote.

Even for short-form leader TikTok, analysts note that monetization is in the early stages. Advertising on the platform requires brands to create ads that differ from those they use on existing platforms, thanks to TikTok’s novel format. Still, MoffettNathanson notes that TikTok shows three times the number of ads as Reels.

Analysts expect short-form ad-load to ramp up over time on YouTube, Facebook, and Instagram. But they note that Meta has a key advantage: Meta Ads Manager allows advertisers to turn their existing News Feed or Stories ads into a Reels ad at the click of a button. Your move, YouTube.

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