How does YouTube make money off of your videos? And does it make money at all—at least in terms of profit versus revenue? Once you consider the rising payouts for content, the cost of hosting all those videos, and the fact that YouTube gets paid according to how much of an ad is viewed, the conclusion could be that YouTube is struggling to make a profit.
Indeed, at a Fortune magazine summit in October 2016, YouTube's CEO Susan Wojcicki stated that YouTube was "Still in investment mode;" implying the company is still figuring out how to be profitable.
In this article, we’ll look at how YouTube revenue is currently being captured and how this part of the 'Googleverse' is planning on profiting in the future.
But don't get the wrong impression that the site is struggling. In 2017, YouTube reportedly earned $9 billion in advertising; however, since 2017 Alphabet (Google and YouTube's parent company) no longer breaks out its sales individually so it is more difficult to gauge the impact of YouTube on revenue.
- YouTube, like most other Google properties, earns the bulk of its revenue through advertisements.
- YouTube is able to embed targeted advertising directly into the video clips that its users watch, as well as promoting featured content.
- Since 2017, Alphabet (Google's parent company) no longer breaks out revenue by its individual segments so it is unclear how much money YouTube brings in—although in 2017 it did generate $9 billion in revenue.
AdWords and Video Advertising
The bulk of Google's revenue is owed to its proprietary advertising service, Google AdWords. When you use Google to search for anything from financial information to local weather, you’re given a list of search results generated by Google’s algorithm. The algorithm attempts to provide the most relevant results for your query, and, along with these results, you may find related suggested pages from an AdWords advertiser.
AdWords advertisements integration touches almost all of Google’s web properties. Any recommended websites you see when logged into Gmail, YouTube, Google Maps, and other Google sites are generated through the AdWords platform. To gain the top spot in Google advertisements, advertisers have to outbid each other. Higher bids move up the list while low bids may not even be displayed.
For YouTube, Google embeds targeted video ads directly into the clips that its users watch.
Advertisers pay Google each time a visitor clicks on an advertisement. A click may be worth anywhere from a few cents to over $50 for highly competitive search terms, including insurance, loans, and other financial services.
In the Beginning...
YouTube was a long way from making money when Alphabet Inc. (formerly Google) (GOOG) purchased it in 2006. Google didn’t buy the company for its revenue. Google purchased YouTube because its online video offering was struggling and YouTube’s traffic was through the roof.
When Google took over YouTube, the popular opinion was that the copyright issues would be sorted out and advertisers would quickly join. The copyright discussion is still a pressing issue 10 years later, but advertisers did come on strong in the beginning.
Then, with user-generated content flooding in daily, advertisers began to see too many videos of the wrong type of content. Ad rates dropped as advertisers went back to search ads that reached the consumer when they were researching a purchase rather than watching a random video.
Moving to Break-Even
Despite the bleak profitability outlook, Google kept investing in YouTube. There were the operational investments that were needed to deliver all that content at speed, and there were payments to the content creators in the partner network. Soon, every uploader could have a cut of the ad revenue a video might produce. With the lower ad rates and people’s propensity to skip ads, most YouTube videos made little to no money.
The advantage for Google was that the user-uploaded content really only cost the company in terms of infrastructure maintenance. The idea seemed to be that the cost of maintaining YouTube would drop as technology improved and more video content could be monetized through ads and market pricing.
Thanks to some innovation within the ads themselves, the market for the ads has improved. YouTube overlays allowed ads to populate videos at different points of the viewing rather than just having a pre-roll ad, and they followed the embedded video around the web. Even with better ads, however, as of May 2015, the revenue was still not enough to pay for the site.
YouTube approaches video advertising through an opt-in ad program named TrueView. TrueView includes two types of ads: in-stream and video discovery. With in-stream ads, the viewer only has to watch the first five seconds and then can skip the rest of the ad. The supplier pays only in case the user watched over 30 seconds or clicked on an entity on the screen related to the ad. Video discovery ads are advertisement videos listed on the page along with other content and charged for only when the user clicks on them.
According to a 2017 Alphabet financial report, TrueView ads were one of YouTube's revenue growth drivers for the quarter. YouTube is not selected as a separate reported entity in the company's reports and is a part of Google websites segment.
The Plan Going Forward
Google has a few different options for expanding YouTube. One is a monthly subscription to view an ad-free version of YouTube with additional exclusive videos that non-paying users can’t access. In Autumn 2015 the company rolled out YouTube Red—a subscription service that allows watching ad-free videos and listen to music without interruptions for $9.99 a month.
YouTube Red that was probably intended as a competitor to Netflix, also includes original shows and movies. Around the same time, the company launched YouTube music app, which is free with ads, but offers an enhanced music experience if a consumer is simultaneously subscribed to YouTube Red.
Another move is to crack down on in-video sponsorship, which gives YouTube no revenue. The site is hoping to force brands into existing ad channels rather than have their YouTube stars work outside deals with the brands directly. This is a risky move that could push some content creators to rival platforms, but it does close a loophole in YouTube’s advertising offerings.
The big challenge for YouTube seems to be getting more people to use the site directly. Too many viewers are apparently watching embeds on other sites or dropping in for the odd video without clicking around and browsing further. To combat this, YouTube is trying to build a destination site that people will visit, giving Google more chances to monetize the video’s page.
The Bottom Line
All this is not to say that YouTube is in trouble. Revenue is growing even if the profits aren’t increasing at the same pace, and growth is better than nothing. There are also some secondary benefits to YouTube for Google.
The company pulls in more user data the longer users stay in the Googleverse, which includes YouTube, and that data helps it market more efficiently across all its platforms. Google can afford to be patient while YouTube figures out how to make a profit.