Early this week YouTube’s Head of Monetization quits the company to work at a smaller company that presumable might be easier to monetize. Since Google Inc. (NASDAQ:GOOG) purchased YouTube for $1.65 Billion in October 2006 the issue of monetizing video content has been a major issue for the company. Even though YouTube has yet to become a cash cow for Google it has become an online phenomenon and traffic powerhouse. According to Compete.com YouTube has captured a 50.4% market share of the online video market. That equates to a market share increase of 2.4% from March 2008 and 12.3% when compared to April 2007.
In terms of market share Google blows away the competition with the closest competitors being Yahoo and Fox Interactive Media which each have less than 10% of the market according to Compete.com. However even with 64 million monthly visitors (source comptete.com) YouTube is having trouble converting these videos (and eyeballs) into dollar signs. The much smaller video site Hulu.com seems to be doing a much better job monetizing their content with revenue estimates of $25 million on less than 1% of the market.
YouTube Revenue Valuation Based on Zero Costs
Bear Stearns estimates that 2008 revenues for YouTube will be $90 million, of which $22 million comes from InVideo advertisements. Using the Bizak Business Valuation Calculator (right) we can get a rough estimate of YouTube’s revenue valuation and EPV (Earnings per Visitor), which is the amount of money earned from each visitor to the site.
If you divide the yearly revenues by 12 you get a rough monthly revenue estimate of $7.5 million. We then enter these numbers into the calculator. At this point we’re assuming YouTube has zero costs but in actuality we know this to be false. We’ll factor in the enormous bandwidth costs of video hosting in the next section.
Based on the Bizak calculations YouTube has an EPV of $0.12 and a Bizak Estimate (business valuation estimate based on revenues) of $360 Million. This valuation is obviously a lot less than the $1.65 Billion Google paid for YouTube, however YouTube is a premium brand that must be (and was) factored into the purchase price.
YouTube Revenue Valuation Including Costs
Back in July 2006 it was estimated that YouTube’s bandwidth costs were $1 million per month, which was based on 12.9 million visitors per month. Today (according to Compete.com) YouTube receives 64 million monthly visitors which is 3.5 times the amount it saw in 2006. If you estimate YouTube’s monthly costs on my very unscientific method that would mean their bandwidth costs them $3.5 million dollars every month.
Entering these calculations into the business valuation calculator gives you some major changes to the estimates. First off YouTube’s EPV has been cut in half to just $0.06 per visitor. This means that YouTube earns just six cents for ever visitor who goes to the site – this number is very low. The Bizak Estimate has also dipped to $318,000,000 compared to the $360,000,000 above and $1.65 Billion purchase price.
Hulu.com Estimates
If you remember Hulu.com makes $25 Million in revenues per year on just 821,899 monthly visitors, according to Compete.com. If you compute these estimates (without costs) into the Bizak Calculator you get an EPV of $2.53 and a Bizak Estimate of $99,999,984. This Hulu.com EPV (excluding costs) is comparable to YouTube’s $0.12 EPV. Lets factor in costs since they too host video which is costly. We’ll error on the high end and estimate that it costs Hulu $1 Million a month ($12 Million/Year) to host their videos. Even with these costs Hulu does a better job monetizing their platform with an EPV of $1.32 compared to YouTube’s $0.06 EPV.
CPV – Costs per Visitor
The YouTube calculation (after costs) has monthly earnings of $4 Million and a CPV (costs per visitor) of $0.06. For ever visitor to the site YouTube spends 6 cents in the form of server costs rather than advertising. With Hulu their CPV is much higher at $1.21 with earnings of over $1 million per month. (Both of these estimates are based on costs estimates which could be higher or lower than actual costs.)
Forbes YouTube Revenue Estimates
The calculations above are based on the Bear Stearns revenue estimate of $90 million. Forbes estimates that YouTube will bring in $200 million in revenues for 2008. Plugging those estimates into the business calculator we get an EPV of $0.21 and a Bizak Estimate of $758,000,016 – considerable better than the $0.06 EPV and $318 million valuation (on $90 million revenues) but lower than the $1.65 billion purchase price.
YouTube EPV of $0.50 = $1.65 Billion Purchase Price
Based on all the estimates outlined above (and they are estimates) YouTube needs to earn fifty cents for every 64 million people who visit the site monthly in order to have a $1.65 billion valuation. An EPV of $0.50 equates to monthly revenues of $35,300,000 ($423,600,000 yearly revenues) which then give them a valuation (according to the Bizak business valuation calculator) equal to their purchase price.
Monetizing YouTube
YouTube currently generates about a quarter ($22 million) of its revenues from InVideo Advertisements. The remainder of their sales come from front page ads ($175,000/day) and branded YouTube channels which go for $200,000 each. If YouTube was only concerned about dollars they could easily expand their InVideo Ads, however this would definitely hurt their market share. Clearly Google and YouTube are treading lightly.
The InVideo Ads are very unobtrusive but I find them ineffective. I go to YouTube to watch videos, not to click on text ads. Text ads are for Google.com. YouTube is for videos. I have no problem watching advertisements as long as they are in video format.
The other 75% of YouTube’s revenues come from corporate partnerships and advertising from deep pocket companies. This is definitely essential for revenues, however I feel YouTube is shutting out the small business owners and individuals who would pay for better placement of their videos. Adwords didn’t generate billions for Google by focusing only on big business. Rather Google Adwords allows anyone with a website to place a text ad on their site. Why can’t I do the same with my videos?
We’re all familiar with the right hand column of Google that’s reserved for sponsored advertisements. Google is about textual content and so are these ads – they fit. Since I go to YouTube for video why can’t I bid my video to be placed along this familiar right hand column? Except this time on YouTube and instead of small text ads it’s a small picture of my video. As a small business owner who relies on internet traffic I would be more than willing to pay extra to have my video be seen by more people. Users would still have the option to upload videos for free but now they would also have the option to pay for additional exposure.
If only 5% of the 46 million monthly visitors opt to use this service then that equates to over 2 million people per month. If they average a monthly advertising budget of just $50 then that’s an additional $100 million+ per month. That’s a lot more than the big boys are currently generating for YouTube.
Posted by Internet, Technology & Web 2.0 Business in Boston, Massachusetts « Tom O’Keefe on June 5, 2008 at 7:07 pm
[...] This post is sponsored by local startup Bizak.com. To the left is their business valuation calculator which in this example is monetizing YouTube’s estimated revenues. [...]
Posted by Facebook’s Revenues « Tom O’Keefe on June 6, 2008 at 7:36 pm
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Posted by Jesse on June 9, 2008 at 5:42 am
Excellent post and fair calculations. It seems that the reason that Hulu does a better job than YouTube at monetization and EPV is due to the quality of the content. Hulu content is professional content, whereas, the majority of YouTube content is produced by amateurs.
I think that as YouTube gains more professional content licenses that we may see better EPV. For example, what if the major sports teams put all their archives of all their games and videos on YouTube directly from TV broadcasts (which would include full television ads or new ads). That could be a potential for a lot of money.
Posted by Tom OKeefe on June 10, 2008 at 6:26 pm
Great feedback Jesse!
Thank you,
Tom O’Keefe
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Posted by Viral Video Marketing « Internet. Business. Ideas…Tom O’Keefe on June 22, 2008 at 5:21 pm
[...] Video Marketing Posted on June 22, 2008 by Tom OKeefe Even though YouTube’s revenues are still relatively low, a lot of its users are finding [...]
Posted by Totally Infected on June 24, 2008 at 1:44 am
wait, wait… you are honestly trying to use the ratio of You Tube visits to Hulu visits to determine the cost of serving these two sites up? They serve very different content… I imagine the average Video served up each month on You Tube is probably 3 minutes or something… and maybe that average visitor watches two each visit. That’s 6 minutes per visit. Hulu is serving up half hour and full hour TV programs (22 & 43 minutes actual) in addition to full length films. Their inventory of short clips is directly related to longer length programming and I don’t imagine visitors watch the clips without watching the shows and films themselves (except for trailers perhaps). I would be blown away if You Tube’s costs per visit were anywhere near Hulu’s. I’m just saying, those are some wild cost assumptions being made in the article. That ‘costs’ also doesn’t take into account that Hulu isn’t being given free content like YouTube. One of their costs is the profit sharing with the content owners. But Regardless of whether Hulu’s EPV is a lot closer to You Tube’s they have a much more realistically profitable model, as their advertising opportunity is more robust and their content supply is more stable… at this point, any profits hulu sees are just gravy for the networks and studios.
Posted by Comparing Startup Performance « Internet. Business. Ideas…Tom O’Keefe on September 5, 2008 at 2:32 pm
[...] is obviously easy to find. Via my blog I’ve analyzed some of the big players including YouTube, Facebook, MySpace, and for [...]
Posted by Twowan on November 6, 2008 at 9:52 pm
To make money with YouTube, this is what Google has to do…
On the most viewed clips (clips with, let say, already 1000 views) (doesn’t matter who posted them) YouTube automatically implements a 5 seconds overlay ad that appears over the player and blocks out (darkens) everything else. (It gives a bit of time for the clip to load in the background as well).
This overlay is a 5 seconds spot (can’t be longer than that and it doesn’t link to a company website if you click on it. It’s like a really, really short TV spot. It can be a still picture for outfits with very little budgets…)
Now, people don’t like ads… but they like GAMES and they like to COLLECT stuff.
Each overlay ad is a mini 5 seconds GAME. You have three colored dots on the overlay. The viewer clicks on ONE of them. One is a winner, two are duds. If you’re lucky to pick the winner (you only have one chance) during the 5 secs, you receive a TOKEN that is automatically added to your YouTube account. (It encourages you to stay registered…)
Now, you COLLECT these tokens. If you win a certain number of similar tokens, you can EXCHANGE them against full-length HD Hollywood Films or TV shows on YouTube. The fun part could be that you have different categorires of tokens. (Some would be for specific film genres or just for one TV show and some could be really hard to find, worth maybe ten tokens, etc.) (Tokens are generated randomly by the system.)
Now, you have the problem of guys posting shows and seeing Google make money off their film. Well, they need to be rewarded too. For a succesful posting (ie lots of viewers) they also receive TOKENS… to be exchanged to watch high-quality HD movies or TV shows.
Now, these HD movies or TV shows in the “HD Theatre section of YouTube” can also be sponsored with a longer lead-in spot… That’s even more money for Google.
Now, we have the problem of big brand names not wanting to have their spots stuck on “Jimmy and his weird cat”… Well, they could “control” where their 5 Secs. spots go by teaming with content suppliers through YouTube. Example, a Coca-Cola campaign with Viacom clips… Viacom takes all the succesful shows they own like, for example, “Spongebob”. They cut out little “gems” (two to three minute clips) and they post them on YouTube to watch for free… Viacom via Google sell their 5 second spots to Coca-cola. Everybody is happy. The viewer, who enjoys these mini-clips, can even link to the full episode of Spongebob on YouTube. He can pay by redeeming TOKENS or he can pay with real money for the full episode or combine both. (It’s all streaming anyway! It’s like TV a la carte.)
Now, what about the “Jim and his weird cat” clips. Who pays for these 5 secs ads? Well, it’s like Google’s Adsense, it’s small outfits who purchase so many spots. You can buy a thousand spots or ten thousand spots to be randomly placed on clips or based on the clip’s TAGS and on the clip’s level of viewership. The outfit supplies the spot or the still and pays Google directly up front.
A system like this is not that difficult to implement. (If they’re real smart, they can have it work just the same on imbedded videos on other sites) Anyway, it’s fun for all involved and all get something out of it. Everybody is a winner especially Google who makes tons of money from the big guys but also… most importantly…from the long, long tail of all the little guys. Viewers are hooked to YouTube forever! Even if they’re just there to click on ads and forget about the clips… the most important is done. Money!
Here, you have it.
Twowan,
(If Google wants more ideas like this one, they can contact me. I’m the guy behind laboratoryfilms.com)