YouTube IS Wildly Profitable - No Doubts About It posted by froosh
YouTube cofounder Chad Hurley is looking to pull a Google on the $75 billion TV ad industry by introducing contextual ads. Hey, crazier things have happened, and if any one online video company can make it happen, it just might well be Steve Chen and Hurley’s brainchild, YouTube.
The popular file sharing service sells its home page ads for nice $175,000 for 400,000 viewers, according to the already-venerable Paidcontent.org. That is per day, so times 30, the main page drives revenue of some $5.25M, assuming it can sell out every day, and judging by the site’s daily updates, there is no reason to think it does not.
At monthly revenues of $5M per month just for the main page, methinks that YouTube is already profitable and is probably trying to be coy about its financials, with its monthly bandwidth costs rumoured to be in the region of $1 million each month. Call me crazy, but that means that just with its main page alone, YouTube more than covers its bandwidth charge… of course, there are more to costs than that, but if those numbers are right, its revenue run rate is starting to look pretty, which is why Hurley said the site won’t need any more funding, though he wouldn’t say if the site is in the black.
It is, in case you forgot to do the math… because YouTube not only generates cash from its main page, but it has no compunction about running display banner ads on its pages. If the site serves 100 million video streams a day, then it generates 100 million pageviews a day. Judging by the site, it serves 1 ad impression per page, so it can estimated that it serves up 100 million ad impressions per page. Looking at the kind of clients I see, and the CPM these garner, it is reasonable that YouTube can make - every day - anywhere from $50K to $200K (assuming $0.50 to $2 CPM). Realistically, I would bet their ads yield $0.75 CPM, or roughly $75,000, but of course, who am I?
Oh, that’s right, I did work for 6 years in online advertising and worked with Fortune 500 advertisers, global agencies and small and large ad networks alike. So if YouTube generates $75,000 per day in display ads, and $175,000 from the main page, that is about $250,000 per day in ads, times 30 days, that’s a nice, cool $7.5M per month in revenues, excluding pre-roll ads!
Note that not surprisingly, YouTube stopped running Google or Yahoo’s text ads, which suggests that on social network and file sharing sites, CPC style ads do not make sense (and why Google probably overpaid by shelling out $900M for News Corp’s FIM’s properties, though that was a defensive move to counter MSFT and Yahoo’s aspirations in search).
Not only is YouTube wildly profitable, but it is - much like Google - keeping mum because if content owners knew just how profitable, they would think twice about giving YouTube content, pro bono. (Note that many websites lost their marbles when they say that Google makes money off their backs, that’s nonsense, since they cannot both welcome and love the traffic and complain that Google serves ads alongside links to their sites on its search results page.)
Is YouTube the next Google?
This begs the question… let me skip the question and get right to the answer: no, YouTube is not the next Google, it can conceptually be the same for its sector: ie. video, in the sense that much the same way that Google successfully indexed the world wide web’s text content, YouTube can index the world wide web’s videp content, but video, despite all of the hoopla (and I am Chief Hoopla Office as Executive Producer of Web TV producer WatchMojo.com) is not a market nearly as large as search advertising. Online video advertising might be worth $1 billion by 2009 - or $2.3 billion by 2010 according to eMarketer - but search advertising is already a $5 billion industry…
“We’re not even thinking about being acquired or going public” states Hurley.
Indeed, the reason for that the former entails a large company taking on massive legal risk - much like Bertelsmann did with Napster - while the latter entails them opening their books, which will literally piss off record labels and film studios…
Remember one thing: Napster irritated the record labels but only in the sense that it cost the labels money (tons of it). Considering YouTube’s [potential] revenues, content owners would be shocked to see what they are passing up. [Please do not misjudge this post as sour grapes, by the way: yes, WatchMojo.com is a content owner, but we are web content producer and see no cannibalization when we send YouTube our videos, to us, YouTube is a great partner that has put online video on the map.]
So, YouTube is the next…
It’s hard to both write this blog and be a Web entrepreneur. I see a lot and hear even more and a bird whispered in my ear that some in the company’s circles consider the Skype sale to eBay as a worthy comparable. Skype sold for obscene multiples to eBay (about $2 billion, with incentives pulling the price tag to $4.1 billion) despite having little revenues to speak of.
Now, it’s interesting to bring up Skype, since Skype was founded by the same two gentlemen who founded Kazaa, the P2P file sharing site that took over Napster’s place after Napster got RIAA’d. You see, it’s interesting to note that Chad Hurley and Steve Chen are masterfully learning from history: both Napster’s, Google’s and Skype’s.
Here is how: they know that like Napster, they are one massive legal setback away from being shut down. The reason no one is going after them is that the content owners have learned that thinking too defensively will cost them more in the long run than thinking offensively and creatively, like Warner Music has.
In fact, from a liability perspective, YouTube is far more of a legal risk than Napster ever was:
1- Napster only violated the copyright of record labels, much of YouTube’s content violates all forms of content.
2- Napster never hosted the content, it provided a conduit for the file sharing; YouTube hosts all of the content. It is not only an accessory to the crime, it is the principal player and beneficiary.
3- YouTube benefits directly - and good for them, Steve and Chad financed the project on credit cards, they got the VCs to back them and are now in the lead…
[EDITOR’S NOTE: A Reader did email me with the following, correct observation: it is definitely true that Napster - and its maverick pioneer CEO Shawn Fanning - gave the labels the one-finger salute and sought to take record labels down. Napster essentially allowed users to download and “assume” ownership of the files in question… YouTube, on the other hand, it must be stressed, keeps the files on its servers to ensure that if needed, they cannot remove them, as they did when NBC asked YouTube to remove the Lazy Sunday clip. Instead of telling NBC off, YouTube did act as good corporate citizens, promtply removed the content and extended an olive branch… This is just another example of YouTube’s founders learning from history and avoiding Napster’s mistakes. In other words, it can be said that for every similarity between Napster and YouTube, there are at least two differences. It not only reached out to NBC, but it probably helped secured the Warner deal by providing copyright protection tools as well.
And, the fact that YouTube kept the files on its servers now translate to giving it traction online, but initially, it simply meant that its costs would far outrun its revenues, at the founders own risk - they did use their credit cards initially, hence why they deserve all of the potential windfall that will come their way]
Which also explains how they have learned from Google. Google - like their deal with Yahoo! to get Yahoo! to feature Google’s search engine showed - played it coy. Everyone downplayed Google as a one-trick pony, but by the time they had to open up their books to go public, people were shocked and in awe of their degree of financial leverage. YouTube is borrowing from that playbook: by keeping mum on revenues, it is not drawing the ire of competitors and content owners.
What they are doing now, and this gives Steve and Chad all of the credit in the world, is proverbially changing the jet’s engines at 30,000 feet (for others who have made such maneuvers, click here): they are methodically swapping out suspicious content with legitimate content. All of the talk about their different ad trial and error is, in my humble opinion, a smokescreen for the real trial and error tests: to swap out the copyright violated content with legitmate ones, and by signing up partners who realize that YouTube cannot be ignored anymore.
Are there any threats to YouTube?
When a company earns abnormal profits, competitors pay attention… or so goes the economic theory. Anyway, of course it is true that when Google Video, MySpace and Yahoo! try to take you down, that is a threat. And naturally, when an upstart like Revver pays content providers, that is a threat too. With time, YouTube will adapt, but what I suspect, is that the same way new social network sites no longer talk about replacing Myspace but complementing it, most people in video realize that YouTube has charged out of the gates, leveraged a perfect storm of sorts and will be hard if not impossible to catch.
But this begs the question, will YouTube get Skype-like dollars? Listen, nothing will make me happier, cause it will be yet one more shot in the arm of online video, a segment I have invested in. But, Skype was a tool that helped eBay increase conversions to its core business and help eBay get into a new field altogether. YouTube does not really provide - under its current denomination - that kind of solution to any would-be buyer…
And in the event of an IPO, well, YouTube carries way too much legal risk for any serious investors to bite. And, let’s face it, YouTube’s founders have yet to fully undergo the cleaning of their libraries to finally divulge to the media powers that be how profitable they actually are.
Vijay M. Veerachandran
"I am a dreamer. I believe nothing is impossible. If we can picture in mind,