So, Google’s YouTube will finally sell video ads. How much revenue will they generate? Most likely, not enough to materially affect Google’s overall revenue for at least a year or two. Over the long haul, the contribution could be very material, at least on the top line.
Let’s run the numbers.
- YouTube is testing overlay ads that run along the bottom of videos. If viewers click on these ads, the videos they are watching will pause, and the ad will launch.
- YouTube will only run ads on videos from signed content partners (for now).
- In tests, approximately 75% of viewers presented with an ad chose to watch the whole ad.
- Google plans to begin by charging a $20 CPM.
Combining this information with Comscore’s finding that YouTube streamed 1.7 billion videos in May, we can construct a basic range of revenue estimates. What is important here, moreover, is not how much revenue YouTube can generate today, but how much it can generate in, say, five to 10 years, when video is many times more popular, other ad formats are in use, and the company has many more content partners. So, we’ll also run a range of estimates based on possible traffic in five years.
For our initial scenarios, we make the following assumptions:
- Google streams 2 billion videos a month (up modestly from the May numbers)
- A sub-set of this group are from content partners and will eventually have ads (we’ll run a range of 10%-50%)
- A sub-set of this group will have ads that are actually watched (we’ll run a range of 33%-75%. In tests, 75% of videos were watched, but this was likely heavily influenced by the curiosity factor. In the early banner ad days, banner click-through percentages were high, too).
- The ads will be highly targeted, full-motion video, and should therefore command a high CPM (we’ll run a range of $10-$50).
We ran five scenarios, from Conservative to Aggressive (please see this page for details). In the Conservative scenario, YouTube generates about $8 million in revenue, less than 1/10th of one per cent of Google’s overall revenue ($16 billion). In the Aggressive scenario, the company generates about $450 million of revenue–enough to make a meaningful contribution, but barely.
FIVE YEARS FROM NOW
We also ran scenarios using a far higher number of monthly streams (range: 10 billion to 50 billion), a greater percentage of ad penetration within videos (range: 50% to 70%), and a similar percentage of ads watched as in the above scenarios (range: 33% to 60%). Here, the revenue is far more meaningful. In the Conservative scenario, YouTube generates $200 million of revenue: nice, but nothing to write home about. In the Aggressive scenario, however, the company generates $13 billion of revenue–closing in on Google’s current revenue today.
In short, YouTube’s revenue won’t likely be material to Google for at least a year or two and possibly more. The impact on the bottom line, moreover, will probably be even less pronounced: Serving a video ad, even for Google, is far more expensive than serving a text link. At a $20 CPM, the gross margin on such ads will likely be well below Google’s current margins.
After the jump: More details from the WSJ story
In this spreadsheet: Detailed assumptions and results.
Several readers weighed in with sharp comments (see below). We’ve incorporated some of this feedback into our model and revised the estimates accordingly. The overall message doesn’t change, but the changes have modestly reduced revenue in most scenarios.
From the WSJ:
Resembling a popular ad model cropping up on a number of other video sites, YouTube’s new format is a semitransparent ad that appears on the bottom 20% of the video. The ad shows up after a video plays for 15 seconds, and disappears 10 seconds later if the viewer doesn’t click on it. Viewers can either click to close the ad right away or to watch the commercial. If a viewer chooses to watch the ad, the main video pauses until the commercial stops.
YouTube plans to sell these ads only on videos from its content partners, whose original videos include a variety of genres and include professionally produced clips and user-generated content. The partners will earn a share of the ad revenue. The system is similar to that used by Google’s AdSense network, which matches ads to the content of a network of Web sites, and gives those sites a cut of the profits. YouTube has established revenue-sharing deals with more than 50 partners, including Ford Models and Warner Music Group Corp. YouTube declined to say what percentage of videos on its site comes from its content partners.
YouTube started testing its in-video ad format in June and July on more than 200 videos from 20 content providers, and found that 75% of viewers watched the entire ad. The ads had five to 10 times greater click-through rates than standard display ads that appear on Web sites,
With 55.1 million unique visitors who spent an average of 49 minutes and 59 seconds on the site during July, YouTube is the most popular online video site, according to Nielsen/NetRatings NetView. YouTube has spent months testing different ad formats to figure out which models wouldn’t alienate its viewers. It found that viewers abandon videos that include pre-roll ads at a rate of more than 70%, so it ditched pre-roll commercials.