Could YouTube Be Doing $7.5mm per month in revenue?

This time I didn't do the math.

This blogger did.

And it's not crazy math.

Comments

[Dossy Shiobara]

It's not crazy math, just likely incorrect math. See the comment I left on the blog entry you linked to.

[y]

It sort of is crazy math. The author neglected to apply any discounts to the advertising estimates (to allow for courtesy discounts or sales commissions) and neglected to assess any operating costs beyond bandwidth.

I'd slice the advertising estimates in half and look to peers to derive an better estimate of either the operating expenses or the ratio of bandwidth costs to operating expenses.

[AlFromChicago]

Numbers make no sense -- if I do the math right, that would be a $438 CPM on the home page ad - TV only gets $18-$20 CPM.

Not saying YouTube isn't worth a lot of money, and isn't valuable -- just saying those numbers aren't right. Track the conversation at http://www.buzztracker.com/category/youtube

[rob]

even if their revenues are 1/5 those reported and their costs are double the estimate then it's already becoming an interesting case.....i may have to swallow my opinions and give a major mea culpea....i may :)

[AlFromChicago]

But what if revenues are 1/16th of that?

[Andrew]

Here's the analysis I posted on my blog:
http://andrewchen.typepad.com/andrew_chens_blog/2006/10/irrational_adve.html

This really reminds me of so-called Chinese math, the type that venture investors often see. You know, the "if we could get 2% of the total Chinese market, then we'd have billions!" top-down modeling that goes on.

Now, what *is* true is that YouTube makes $0.75 CPM on some of their traffic. The problem is, at the traffic levels that YouTube puts out, they will also get a lot of 7 cent traffic. Why is that? Well, the advertising ecosystem looks like a pyramid. At the top, you have a small number of advertisers (typically premium brand guys) that are willing to pay $15 for good space (like on their homepage) and they are willing to buy X impressions. At the next level, you have other brand guys that will pay $5, but they are only willing to buy Y impressions. This goes down a couple more levels. Then, there's a huge amount of inventory to be had at $1, which usually go to ad networks, and then at the very bottom, there lots of impressions, in the hundreds of millions for sites like YouTube, which monetize at pennies per thousand. Each "layer" of the pyramid is structured based on CPM, and things like frequency caps that the advertisers impose. Once the publisher gets big enough, they start busting through the layers, hitting diminishing returns at each level.

If you're a small site, you can actually get a high overall CPM since you can directly sell to endemic advertisers at $15. But the larger you get, the more "layers" of advertisers whose budgets you exhaust, until at the very end, you have a couple billion ad impressions that you hand over to CPA ad networks.

So for YouTube, the author is correct that they probably get $175,000 for the homepage. But do they get that every day, at that CPM? Maybe, but maybe not. And he's right that YouTube sells a bunch of other inventory $0.75. But all of it? Absolutely not. Instead, the calculation is much more complex, and wholly dependent on how many premium advertisers they can get to make up the top of their advertising pyramid.

All in all, I would guess that YouTube monetizes, on average, much closer to 10 or 15 cents overall CPM. You'd want stats around user impression frequency, what percentage of their site is ad networks versus direct selling, etc., to really model it out. But my guess is, based on experience with other ad networks, that they'd be lucky to get it consistently into the double digit CPMs.

These are some of the unique dynamics of very large publishers, but also specifically of user-generated content sites which have special characteristics like huge user frequency (100+/day for some), lots of homogenous inventory, and poor user intent. If you don't factor the above points into your calculation, you'll be trying to sell BMWs into China expecting a market of 1.2 billion people without realizing that over 700 million of those people make $10/month.

[ashkan karbasfrooshan]

My, my... who knew YouTube would get so many people excited, if you would like a breakdown of how we derived the $0.75 CPM, voila, enjoy:
http://www.watchmojo.com/web/blog/?p=504

[Erik Schwartz]

I am seeing one run of network "house ad" for a YT promotion running on the site.

They've got to sell the ads somehow. YT either need a self service ad sales program (ala google) or they need a vast army of ad sales people (neither of which I believe they have).

No one is arguing the potential for YT to make money, but I think the idea that YT is currently profitable is naive.

[steve]

Occam's Razor: If YouTube is so profitable, or even profitable at all, why did Chad Hurley waffle and equivocate when asked that very question by Saul Hansell in his recent NYTimes piece on YouTube?

Because YouTube is not even remotely profitable.

Otherwise, why hide your light under a bushel?

[Jack42]

A good product always make money. Google is a woinderful product and youtube too. They can live togheter in the market because it´s enhoug big for both companies. The same happen with Consultancy Companies. Axpe Consulting, the consultancy where i work is very competitive but it has a lot of competitors to figth with. Axpe Ingenieria is a wonderful solution that offer Axpe, but others companies do it too.

[Steve]

"Me thinks" youtube is going the way of freindster. I've commented on youtube on Fred's blog way back before it was the word dujour, and I said it then, and I'll say it again... youtube is not a wise investment. Take away their copywritten content and you're left with a glorified version of ebaum's world. The big winner out of all of this is Revver, b/c it keeps on getting mentioned in all of this media coverage of youtube. If you are in the New York City area, I suggest you pay a visit to the Producers Guild of America and listen to the mutterings of the people there. Their main gripe is why and how does youtube get away with allowing all this copywritten content to be posted on their website without the proper clearances and rights secured. Professional filmmakers are thwarted many times by dealing with rights clearances and the insane amount of money and resources needed to get clearances. You have a site like youtube who throws their cares into the wind and gets away with allowing anyone to post anything and everything without fear of reprisal. Digital media is here to stay but the way Youtube has positioned itself, is in my opinion, a wrong one.

By the way Fred, I sent a friend request to you from facebook and it hasn’t been approved yet.

-Steve (from boston)

[Think]

Not crazy math?

AlfromChicago is right - $175K per 400K views is a $437.50 CPM. The ad gets viewed 400K times, that's not how many impressions are being bought.

Actually the bloggers math is nothing but crazy. An average $0.75 CPM for all 100MM impressions? They may get that for some percentage of their impressions, but the vast majority will be sold to an ad network as remnant inventory at a much, much lower cpm rate. I seriously wonder where he worked for 6 years for him to come up with numbers like that.

I really think people should stick to what they know.

[Mr Wave Theory]

Fortune magazine recently reported that YouTube is selling homepage placement for $175,000 per day. You got that right - it's per day. That home page costs mucho mulah. From that homepage ad alone, YouTube is making major profits.

In fact, extrapolating that to 365 days with simply multiplication, YouTube is making:

$175,000 X 365 = $63,875,000 million in annual revenues

Read more

[Chris D]

Sorry, Fortune never reported that YouTube is getting $175k/day for homepage placements. If anything it was pure speculation.

Sorry, you are all whipping yourselves into a froth here. Any initial "deals" that YouTube did were on high discounts or good faith. In fact, an NBC exec said that they were not paying *anything* to YouTube, it was a pure cross-promotion deal without any cash changing hands.

These YouTube blogs discussions are getting absolutely pathetic.

[Unsubscribed]

Fred,

I think that readers need to have a certain amount of trust for the bloggers that we pay attention to, since they can affect how we think about issues.

This post was just irresponsible.

Anyone who knows anything about online advertising would clearly see that it was crazy math.

Your logic, smarts, and "expertise" in digital media/Internet are seriously called into question with this.

Unsubscribed.