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After years of experimentation, Google appears to be inching closer to turning YouTube into a profitable business. The company said on its Q309 conference call that it is now monetizing about 15% of its video streams, which we estimate is about three times what it was only a year or two ago.
Still, many see video search as the untapped revenue stream that will drive Google-like revenue at YouTube. After all, YouTube is now the second largest search property online (second to Google) with about 3.5 billion searches during September 2009, according to Comscore. However, while search could help make YouTube a solid, profitable business, it won’t move the needle for overall Google revenue.
- click-through-rates (CTR) would be too low.
- Cost-per-click would also be below average.
- Estimated search revenue from YouTube would increase overall Google revenue by only about 2% to 4% – not much to write home about
PROMOTED VIDEOS BRING IN SOME SEARCH REVENUE FOR YOUTUBE
Google already sells search-related ads in some form. A few months ago the company started selling “Promoted Videos” ads to content producers on its site. Like AdWords, producers bid for CPC prices on certain keywords in order to have their videos placed next to search results for that keyword.
For example, a search for “CSI” finds ads from The City of Las Vegas, Rock Star Games, and Lion’s Gate next to the search results (the producers pay for this placement):
A survey of searches done on YouTube indicate an average of about 2 Promoted Video ads per search. We believe CTR and CPC are lower for these ads than regular web search ads (see explanation below). As a result, assuming a 0.5% CTR and $0.40 CPC, the new Promoted Videos service would generate about $166 million in annual revenue for YouTube given current search volume.
TEXT SEARCH ADS COULD MATERIALLY HELP YOUTUBE BUT WONT BOOST OVERALL GOOGLE REVENUE MUCH
Industry sources indicate that click-through rates for text ads run along searches on video sites are way below those experienced alongside searches on web search engines. For example, a major video aggregator and video search engine pulled its text search ads after CTR were incredibly poor. This makes sense since users searching on a video site are looking for videos, not text links.
The average CTR on a Google search is about 3% according to Accuracast. We believe video search CTR would likely be below 1% given the surfing behaviour cited above. In addition, we estimate cost-per-click (CPC) would be below average as well – in the $0.50 range on average. Why? Because users are searching for entertainment not information or products, so any incidental click-throughs likely wouldn’t result in as high a conversion rate as web searches.
This leads us to believe that given Google’s current monthly run-rate of about 3.5 billion searches per month, running text ads would add anywhere from $250 to $650 million in revenue.
Here is how we get there:
Bottom Line: We estimate that video search on YouTube could generate between $400 and $900 million annually at current search levels. This is a windall for YouTube, but a drop in the bucket for overall Google revenue, which currently is above $20 billion annually.
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