How YouTube Found Itself Producing Original Content

By Markets Fool.com

YouTube is stepping up its original content production in a big way. The Google subsidiary recently announced partnerships with five of the top content producers on its platform: Smosh, the Fine Brothers, Prank vs. Prank, Joey Graceffa, and AwesomenessTV, which is owned by Dreamworks Animation and is on tap to produce feature-length films for YouTube.

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The announcement came right before YouTube's annual Brandcast event, where it pitches its product to advertisers. In large part, these productions are what YouTube is using to sell ads to big brands. However, it's also sending a signal to content creators that the company is willing to pay for top talent after other companies like Vessel and Facebook have wooed some of YouTube's most popular channels with upfront payments.

YouTube isn't the only online entertainment option anymore
YouTube got a head start in the online video space, and it reaped the benefits of that fast start, as well as the financial support of Google after it acquired YouTube. Google has been able to negotiate licensing deals with several media companies whose videos attract tons of viewers to the website every day. YouTube says people watch hundreds of million of hours on YouTube every day and 300 hours of video are uploaded to YouTube every minute. Meanwhile, hundreds of personalities have blossomed on the platform as it became the de facto source to upload and watch video on the Internet.

However, the landscape is rapidly changing. Facebook started pushing into video heavily, and it now claims its users watch more than 4 billion videos per day. Hulu offers free ad-supported episodes of recent television episodes. And the recently launched Vessel offers a premium subscription service for early access to videos from some of YouTube's top content creators.

YouTube relies on keeping the attention of its users. The more options users have for entertainment, the fewer opportunities any single one of those platforms has to display advertisements. And while YouTube claims it's seen an increase in site visits of 40% year over year, it faces more competition than ever to keep them coming back and staying on the site.

This is a lesson the TV industry has seen affect its business already. Nielsen ratings have steadily declined as more entertainment options have cropped up, including YouTube and other online video sites. Some television networks are fighting back, however. HBO recently acquired the rights to Vimeo's original series High Maintenance.

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Getting serious about content
YouTube has worked with its creators in the past, offering free studio space in select cities around the world. But paying content creators upfront to make new videos with exclusive windows on YouTube is a big step.

The Wall Street Journal reported in February that, despite generating $4 billion in advertising revenue last year, YouTube still wasn't profitable as a stand-alone entity. Investing more in content will continue to put pressure on YouTube's ability to turn a profit.

The most interesting partnership YouTube announced is with Dreamworks' AwesomenessTV. Dreamworks purchased AwesomenessTV in 2013 for $33 million. The purchase already seems to be a smart investment with continued growth in viewership, and now this content deal with YouTube.

YouTube is commissioning the release of several feature-length films from AwesomenessTV during the next two years. The films will premiere exclusively on YouTube, and they'll star homegrown YouTube talent. YouTube believes that these releases "will become a new distribution paradigm for years to come." YouTube will benefit from those talents promoting the films to their individual audiences, as well as easy targeting for promoting the film. Whether YouTube will put the films behind a paywall -- like it does with other feature films -- or support them with advertisements is unknown.

Grabbing users attention
The key to these deals is that YouTube becomes the exclusive home for certain content. That will attract a certain audience to YouTube, and keep them coming back on a regular basis. In the meantime, YouTube is able to serve up millions of hours of user-generated content, as well as licensed content like streaming music.

As the number of people uploading and viewing content on competing platforms like Facebook increases, YouTube will have pay to keep its top talent exclusive to its platform. While that could impact profitability, it increases the amount of data Google is able to gather on its users. And that's where Google really makes its money -- by targeting Internet users all over the web, not just on YouTube.

The article How YouTube Found Itself Producing Original Content originally appeared on Fool.com.

Adam Levy owns shares of Apple. The Motley Fool recommends Apple, DreamWorks Animation, Facebook, Google (A shares), and Google (C shares). The Motley Fool owns shares of Apple, Facebook, Google (A shares), and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.