How Does YouTube Make Money?

In contrast to Android, we do not have an angry law suit to help us at get to the bottom of how much money YouTube is making. Estimates for 2015 revenues vary from six to nine billion dollars. That’s wide enough to drive YouTube’s old acquisition price through. Twice.

How does youtube make money

Image: Travis Wise via Flickr Commons

Google are the experts in making us all smarter by organizing knowledge. They also know that they have contributed to the destruction of the dollar value of that knowledge by making it so accessible.

The converse of this is that keeping knowledge secret happens to be the best way to preserve its value. And that covers their disclosure policy regarding subsidiaries like YouTube.

To be clear, dollar value and social benefit are two completely separate things.

Despite this ambiguity, a variety of sources indicate that YouTube is only break even in terms of profitability. Technically, it is not making any money.

The internet has been great for consumers, and terrible for content creators. Video is one of the few places they have retained some value – and that is why YouTube, strictly speaking, is struggling to keep hold of the dollars it brings in. And what’s bad for YouTube, is great for content owners. Though not enough to make Taylor Swift Happy!

The Rise and Fall of Content

Imagine the water pipe to your house. That was your telephone line and your TV signal in the 1980s. They were virtual utilities on a par with the real actual pipe that allowed you to flush your toilet.

How does broadband make money

Image: bluesbby via Flickr Commons

You had to pay whatever the water and telco companies told you to pay. The pricing power on phone lines was so enormous the Government had to step in and split up the original AT&T into the Bells. Can you imagine that, actually waiting at home by your phone for that call from your latest crush? That was the 80s baby.

The water in the pipe was content, and as long as it could justify being in the pipe, it was extremely valuable. Outsiders did not get a look in.

Why YouTube Had to Sell

Google bought YouTube for $1.65bn back in 2006. They were buying 100m video views a day from 72m monthly unique visitors.

Today YouTube have over a billion users.

Video a decade ago was the rare competency where Google simply could not compete. YouTube made something extremely difficult look easy: they appeared to be the only guys who could stream videos, over stone age broadband, without freezing.

Click here to check out Blinkist YouTube had to sell out because copyright owners were sharpening their pitchforks. In theory YouTube could try and defend themselves using the Digital Millennium Copyright Act, which provides tech companies a ‘safe-harbor’ (read liability pass) for content that users upload to their servers. As long as they removed said content on request. But it is useful to remember that the other side of that multi-billion-dollar valuation was a mere 67 employees and no revenues to speak of.

Google had the resources to deal with the law suits that rapidly rolled in, from Viacom to the New Jersey Turnpike Authority. Even more importantly Google were able to build a copyright claim system that let content owners mark out their videos and choose to either have it removed or to take THEIR cut of any advertising revenues the video generated.

How YouTube Videos Show Adverts

How adverting can be unpopular

Image: believekevin via Flickr Commons

Google are top dog in advertising monetization. YouTube’s halcyon ad free past are but a distant memory. Now when I go to watch a video, it starts immediately with a small overlay banner that I can X-out if it gets in the way. At the same time a display advert appears on the right. Minimal intrusion and I get to watch my video.

Moving on to my second video viewing, I get to YouTube’s core product. The TrueView video ad precedes the video I want to watch. As you will have seen, after 5 seconds, you can skip the advert. The display ad to the side disappears allowing more space for related and sponsored videos.

Watch enough videos, skipping each time, and sooner or later YouTube will take away the skip option and you are finally forced to watch an advert in its entirety.

The sequence I have described won’t be the same for everyone, but it is beautiful in its execution.

YouTube are systematically eliciting how much you care. For new users, it is deploying straightforward A-B testing. If bounce rates, e.g. people immediately leaving YouTube’s site, are low, it shows a little more advertising. If bounce rates jump, then it shows less. YouTube have access to all your interactions and can learn their way around your habits and tolerances.

If you are getting too many adverts it is partly because of how much you want their videos.

How TrueView Makes Money

Display ads, search ads, overlay banners – advertisers pay up according to views and clicks. But TrueView is cleverer than that. They only charge when somebody doesn’t skip and watches over 30 seconds. What’s so great about that?

  • People who decide not to skip have almost twice the engagement level.
  • Advertisers get thousands of partial views and clicks for “Free”.
  • YouTube incentivizes advertisers to make their content better. The advert needs to persuade users to keep watching.
  • YouTube makes it easy for users who hate advertising to avoid it, reducing bounce rates.
  • And critically, these thirty seconds of video can sell for over $30 a go.

How does trueview make money

Image: YouTube Optimization playbook

TrueView is a great example of not settling for the obvious and developing an outcome that addresses all parties’ needs. I can remember clearly the many commentators who believed that monetizing video would prove to be impossible. The only party left out is the user that hates advertising with a passion.

Why Taylor Swift Hates the Internet

Short answer: because the internet hates valuable content and her content is some of the most valuable out there.

In Taylor Swift’s own words:

“The value of an album is, and will continue to be, based on the amount of heart and soul an artist has bled into a body of work, and the financial value that artists (and their labels) place on their music when it goes out into the marketplace. Piracy, file sharing and streaming have shrunk the numbers of paid album sales drastically.”

Early in 2016, Taylor Swift, side by side with artists like U2 and Kings of Leon, took this war to Congress. Their open letter demanded reform of the Digital Millennium Copyright Act (DMCA), the legislation with the tech company liability pass.

Taylor Swift likes making money

Image: Rego Korosi via Flickr Commons

Death famously can multiply the price of artwork. This is not because of some art world murder fetish and it is not because of some special cachet. It is quite simply supply and demand.

End of supply equals higher prices. And dead people can’t paint.

There is no value to things that are easily copied and the internet puts digital copying in the reach of 4 year olds. Taylor Swift would very much like Google and Facebook to part the Red Sea for her economic benefit. And maybe they could for a while, but further out all you would see are more illegal platforms.

Abusing My Analogies

I started with a water pipe representing telephone lines and television. Unfortunately, the internet requires a hose scale inversion of my analogy. The pipe can still be your broadband, but the water becomes user traffic. So what then is the internet? It is your lawn, with each blade of grass a web page or piece of digital content.

The search engines are sprinklers, directing traffic to where their algorithms consider the most meritocratic blades of grass.

Why search engines are sprinklers

Image: shaylor via Flickr Commons

Google, Baidu and Facebook should not be as valuable as they are. Because frankly what we care about is the content. We want to connect to our friends in real life, listen to great music and read amazing interesting stuff.

The content, like webpages and friends and news and music, should be where the value resides. But the internet changed all that. It collapsed barriers to entry, allowing anybody to write their views or publish their music. Dropped them even lower than in the food business. It made it distressingly difficult for artists to control their music.

And that played into the hands of networks and platforms that could connect users to content. The value moved from control of content to control of users. After collapsing the value of content, the internet gave most of the remaining cards to tech giants like Google and Facebook.

Verizon, AOL and Yahoo

This is just a short aside into Verizon’s recent acquisition spree, where they have added Yahoo to its existing AOL business. Verizon are trying to buy up the lawn for cheap. The more of the lawn they own the less dependent they are on the sprinkler, as they drive traffic from around their own sites.

It is an interesting strategy and I look forward to seeing it develop. We are in a golden age of TV and Netflix have proven that people are willing to pay for video content.

Verizon are putting big bucks into proving that website content is far from dead.

Why YouTube Video Creators Are Unhappy

I have touched on how YouTube video uploaders can get over $30 for each advert associated with their video. What have they got to complain about?

stock market dollar into binary

Image: famzoo staff via Flickr Commons

I have to introduce an acronym here. CPM is Cost Per Metric. I am going to use it the way creators use it, which is broadly how much money they make per one thousand views.

As a sample of how I’m going to abuse this metric, let’s start with cinema. I looked up the movie Deepwater Horizon showing in a Brooklyn multiplex. Its $15 a ticket with roughly a 100-minute running time.

So grabbing a thousand cinema goers, that’s $15,000 of revenue. That works out at a CPM of $150 per one thousand users per minute.

Nielsen Research have reported in the past that a 30 second advert on TV might cost $25 per thousand viewers. Naturally the range is wider than that. In the United States you typically get 16 adverts against 22 minutes of actual entertainment (so as to make up 30 minutes of TV). 25 multiplied by 16 divided by 22 is $16 per 1k views per minute of content.

First thing to note is that TV advertising is a tenth as lucrative as charging up front. Advertising models revolves around getting tens or hundreds of times more viewers for your content. Sometimes that is possible and sometimes it is not.

So how does YouTube’s CPM compare? According to Hank Green, (his YouTube channel is vlogbrothers), he made $2m from the billion views he garnered over the eight years. That’s $2 per CPM.

$2 million is not to be sniffed at but how can he not be pissed off when he would have made $16 million on TV and $150 million with a cinema type model.

YouTube make money statistics

Image: Jay Turner via Flickr Commons

There is an easy come back on this. The fact that anyone can put up a YouTube video is why CPMs on the platform are so much lower than for TV. Supply and demand. But that does not stop you dreaming.

Why YouTube May Not Be Profitable

Adverts on search are hyper profitable. Adverts on Facebook are joyously lucrative too. So why is YouTube falling behind?

If you put up a video and it goes viral, YouTube takes 45% of the ad revenue. We’ve already covered the point regarding YouTube’s relatively modest CPMs.

Lots of videos are also flagged up as risky for advertisers, who may have no interest in being placed side by side with a penis joke. But things like female educational videos also get flagged, which reduces the total advertising opportunity.

But the gorillas in the room are Music Videos. Music, as noted by Ms Swift, has been particularly hard hit by online. CD sales have been nuked. iTunes sell unbundled songs for 99 cents, so no more purchasing of album filler for the same price as the hits. Spotify and Pandora pay in fractions of a cent as well.

How does cpm make money

Image: seosmarty via Flickr Commons

If you use YouTube, you will have seen the name Vevo in front of many music videos. They are a partnership between two of the biggest distributors in Music, Universal and Sony.

Vevo represents 38% of YouTube’s views. Warner Music is another 20%. That’s three out of every five YouTube views going to two major players. And the music industry knows how to negotiate.

Vevo and Warner Music could arguably destroy YouTube. That type of dominance is what you call suppliers with bargaining power.

I strongly doubt they are passing 45% of any ad revenue to YouTube. In video at least, content is still worth something. Vevo and Warner cannot increase the value of online video content. But they more than likely ask for every penny coming in.

YouTube’s business model is potentially based on only keeping $20 of every $100 of advertising they bring in. It is easy to imagine that getting sucked up in infrastructure costs.

Democracy Makes Less Money

And that’s a good thing. Unless you are a money making machine.

How else would PewDiePie, a young Danish man, make $12 million dollars a year pre-tax from a channel where he is “playing video games with your bros”. Or the Fine Brothers, who do a selection of channels including React, where they film people’s over the top reactions to videos from PewDiePie and Nicki Minaj, pull down over $8 million a year.

How does PewDiePie make money

Image: PewDiePie, camknows via Flickr Commons

YouTube is not yet the perfect business model for its owner, but they are working on it. YouTube is democratic capitalism in action. You will not like all it throws up, because it encourages maximum views, minimum quality content, but it is amazingly effective at what it does. Can it be made better?

Probably. But that probably involves persuading consumers to pay a dollar for the 6-minute video you just produced.

The most interesting way this is happening so far is to simply ask for it through Kickstarter or Patreon.

I have definitely gone back to Postgraduate studies now, so I apologize as things slow down on this blog. Here is the link to the Blinkist app if you want short reads that will make you smarter.

Take care and see you soon!

Yuen Lo

2 Comments

  1. Another fun read! To me, Youtube is Google search in slow motion. When people search on Google, the ads sell like hotcakes, because the process is instant, that is viewing text ads. However, on Youtube, it takes a long time because the adds are not text but banner images and videos, which take much more time for consumers to consume. Youtube is fighting with one arm tied behind its back when compared to traditional Google search ads. So, Youtube should have lower ad profit expectations, that is, unless they are able to take a bigger cut of the overall ad revenue. Finally, not every product needs to be a profit blockbuster as some people insist. In the portfolio of revenue streams, some products will do better than others, and that is alright. Finally, there is also the point about residual profit from keeping consumers in a particular ecosystem. If Youtube helps consumers stay in the Google ecosystem/portal then that will also increase overall profits. I don’t know if this value can be easily measured. On a side note, the Microsoft ecosystem is quickly deteriorating due to failing on mobile. Microsoft is still operating on the old 90’s business model, that is, for a fee you get service, and that service is too complicated and robust for most consumers. That is outdated. Google disrupted this by giving you free simple services, with some ads, and figuring out how to monetize it later. Is this business model guaranteed to be successful? Not for Twitter. But many other companies are disrupting and growing on the free/premium model. All the best with your studies!!!

  2. I hadn’t thought about the time aspect so much, though its certainly real. It sounds like you are like me, somebody who prefers reading, but there are many, like my wife who much prefer a video! Your comment on network value is spot on, and kinda explains why Google had to develop both Chrome and Android. I have to say I almost don’t understand the Microsoft situation, by which I mean they really should have been more successful in both browsers and mobile. I therefore guess it as something people (e.g. poor management) driven, and outside the scope of industry drivers and barriers to entry etc…Thank you! I’m still intending to write on the blog, but it’ll be hard to write 2k words here when I have to write 5k words for each of my courses! Hope all is well with you and speak again soon

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