Last month, YouTube quietly began showing ad-supported movies for the first time, giving viewers access to Hollywood titles including "The Terminator" and "Legally Blonde" for free.
The platform started promoting the free feature-length films in the movie section of the site in October, where it has sold movies and shows for years. Consumers could buy the latest blockbusters and prime-time TV programs through YouTube as they might on Apple iTunes and Amazon Prime, but there was never a free option to watch the movies in exchange for commercial interruptions.
"We saw this opportunity based on user demand, beyond just offering paid movies. Can we do ad-supported movies, free to the user?" says Rohit Dhawan, director of product management at YouTube. "It also presents a nice opportunity for advertisers."
Dhawan would not disclose the terms of YouTube's deals with studios or how it splits ad revenue with them. YouTube serves ads to the movies from its usual pool of advertising demand that courses through the platform to its 1.9 billion monthly active users.
Eventually, there could be a way for advertisers to pay to sponsor individual movies, giving users complimentary views and exclusive screenings, Dhawan says. However, that all pretty much depends on how studios evolve their businesses to account for these new digital streaming windows that are opening up. Movies typically go to theaters, then DVD, then TV, and the place for digital is still up in the air.
That's likely the reason there are only about 100 movies available for ad-supported viewing on YouTube so far, and many of them are middling Hollywood pictures like Kevin James in "Zookeeper" and "Agent Cody Banks." There are some classics like "The Terminator" and "Rocky," however, and Dhawan said the selection will be expanding.
The ad-supported video-on-demand market is heating up with companies like Tubi, which has a free app distributed on connected TV devices, such as smart TVs and Roku. There's also Vudu, an ad-supported TV and movie app owned by Walmart. And Amazon is developing an ad-supported video-on-demand app, according to advertisers familiar with that offering, who have spoken on condition of anonymity.
"Ad-supported video is a huge market," says Farhad Massoudi, CEO of Tubi. "There's a lot of consumer traction and I expect all the major companies will jump in at some point."
The Walt Disney Co., for instance, is a traditional television network getting ready to release streaming-video apps, some of which are expected to serve advertising breaks. Hulu is another major player in the space.
YouTube has invested in original programming, some of which is ad supported, while some is developed for paying subscribers and is commercial free. For instance, its hit show "Cobra Kai," based on "The Karate Kid," is exclusive to YouTube and open only to subscribers who pay $10 a month. Other shows, like Will Smith's "The Jump," where the celebrity bungee-jumped from a helicopter into the Grand Canyon, are available to all YouTube viewers, but supported by ads.
YouTube needs more premium videos to offer advertisers, which have grown concerned that their ads will run near objectionable content if they don't control the environment. Last year, YouTube was under a microscope after major brands were alerted to their ads running inside offensive videos, some with terrorist propaganda and hate speech. Advertisers also learned that a program called Google Preferred, which was supposed to direct ads to only the best videos on YouTube, was filled with content of questionable quality.
Google, which owns YouTube, has been trying to get a handle on how it delivers ads on the platforms and tap into more secure ad inventory—the kind that could be found in Hollywood movies.
"This is a huge business opportunity," Massoudi says. "Low-quality, low-production video is predominantly what's available on the web, and advertisers have seen a lot of issues with that. They don't want to be associated with that type of content."
People are increasingly watching YouTube on smart TVs, where free movies could be a welcome offer. Almost 20 percent of YouTube is watched on TV sets, according to recent stats released by YouTube, and that's its fastest-growing medium. YouTube even recently gave advertisers the ability to target their ad campaigns only to people watching on TVs.
The company is expected to generate almost $9.5 billion, a year-over-year increase of 22 percent, according to eMarketer.
YouTube has an advantage over many rivals in digital advertising because of its ability to target ads and all the data from Google. It can offer a TV-like advertising product backed by the targeting and measuring only available online, according to Tal Chalozin, chief technology officer at Innovid, a video ad technology platform.
"They are now a TV network," Chalozin said. "They bring the audience and the distribution. And with better programming they can increase the ad prices."