how-does-youtube-make-money

How Does YouTube Make Money? YouTube Business Model In A Nutshell

YouTube was acquired for almost $1.7 billion in 2006 by Google. It makes money through advertising and subscription revenues. YouTube advertising network is part of Google Ads, generating more than $28B in revenue by 2021. YouTube also makes money with its paid memberships and premium content.

YouTube origin story

Going back and looking at the YouTube story might be a good exercise to understand the wild success it experienced in a short period and what the YouTube business model might look like in the future.

YouTube start: It all began at the San Diego Zoo

April 23rd, 2005, Jawed Karim, a German-born boy, who moved to Minnesota with his family in 1992, uploaded a video entitled “Me at the zoo:”

This was the first inaugural video taken at the San Diego Zoo for YouTube, the video-sharing platform that would become the most popular website after Google in a decade.

As reported by AdAge back in July 2006:

The popularity of YouTube is growing at an astronomical rate, as web traffic to the video-sharing site grew 75% just in the week ending July 16, from 7.3 million to 12.8 million unique visitors, according to Nielsen/NetRatings. Traffic to the site has grown nearly threefold — 297% — since January, making it the fastest-growing site online.

YouTube copyright issues and how it dealt with them

As growth picked up right away, problems for copyrighted content loomed ahead.

YouTube founders sat down with media executives to convince them of the value, in terms of business, for them to be featured on YouTube.

The same AdAge reports – in regard to the YouTube business model:

Still in the process of building its advertising model and sales team, YouTube is experimenting with a number of sponsor partnerships. Last month, NBC struck a deal with YouTube to promote its fall TV lineup just months after ordering the site to take down the copyrighted video. Under the terms of the agreement, NBC is creating an official NBC Channel on YouTube to house its fall preview with exclusive clips to promote shows such as “The Office.” And earlier this month, Walt Disney tapped YouTube to promote “Pirates of the Caribbean: Dead Man’s Chest,” with rich-media banner ads.

Google acquisition of YouTube for $1.7 billion in less than two years

YouTube founders managed to survive and thrive until, in 2006, the big hit arrived. Google purchased YouTube for almost $1.7 billion.

As reported by NBC News back in 2006,

“Internet search leader Google is snapping up YouTube for $1.65 billion, brushing aside copyright concerns to seize a starring role in the online video revolution.”

And it goes on:

“The price makes YouTube Inc., a still-unprofitable startup, by far the most expensive purchase made by Google during its eight-year history. Last year, Google spent $130.5 million buying a total of 15 small companies.”

The deal was announced with such excitement that Sergey Brin also said “It’s hard to imagine a better fit with another company,” during a conference call after the purchase. “This really reminds me of Google just a few short years ago.”

Explosive growth: how YouTube got to over two billion views by 2010

By 2010 YouTube recorded over two billion visits per day.
 
Just five years before, YouTube’s founders and former PayPal co-workers were sitting the whole night to go through the test and preparation of the video-sharing platform that would be acquired by Google, just 19 months after that night!

At that point, YouTube already had over 2 billion daily views, way more than combined US networks.

By 2012 YouTube would double that number. In 2012 YouTube kept consolidating its massive international expansion.

YouTube is still among the most popular sites on earth

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youtube-traffic

According to Similar Web estimates, in the period going from March-May 2022, YouTube is the second most popular site in the world, right after Google. And it has stunning engagement metrics.

With almost 30 billion total visits per month, an average visit duration of over 21 minutes, and over 12 pages visited per session; YouTube is incredibly sticky!
 
That is also why YouTube is such an important part of the Google Business Model.
As the search engine evolves from serving more and more types of content.
 
That makes YouTube the most valuable product within Google, today.

YouTube mission statement

As explained on the YouTube website:

We believe that everyone deserves to have a voice and that the world is a better place when we listen, share, and build community through our stories.”

How much money does YouTube make?

In 2021, YouTube generated over $28 billion in advertising revenue alone. 

This represented a 45% growth compared to 2020.

Just in 2017, YouTube generated less than $10 billion in ad revenues. 

Yet, as Google ramped up and fully integrated YouTube into its advertising machine, its revenues skyrocketed.

In addition, YouTube also generates additional revenue through YouTube Prime, the subscriber’s service, for users that want to enjoy a version of YouTube without ads. 

That means Google’s YouTube acquisition has turned out to be a very successful one so far, as the company might be worth anywhere between $300-500 billion (depending on the multiple you might want to apply based on the market context).

Is advertising the right business model for YouTube?

As explained in Google’s annual report:

As interactions between users and advertisers change and as online user behavior evolves, we continue to expand and evolve our product offerings to serve their changing needs

Over time, we expect our monetization trends to fluctuate. For example, we have seen an increase in YouTube engagement ads, which monetize at a lower rate than traditional desktop search ads. Additionally, we continue to see a shift to programmatic buying which presents opportunities for advertisers to connect with the right user, in the right moment, in the right context. Programmatic buying has a different monetization profile than traditional advertising buying on Google properties.

The number of paid clicks through our advertising programs on Google properties increased from 2016 to 2017 due to growth in YouTube engagement ads. The decrease in cost-per-click was primarily driven by continued growth in YouTube engagement ads where cost-per-click remains lower than on our other advertising platforms.”

youtube-advertising

The advertising business model for media is not new, and it represents the primary driver for Google’s revenues today, and we can well hypothesize that it will be the primary driver for both Google and YouTube in the next years.

As explained in Google’s annual report “We also experienced growth in YouTube revenue driven primarily by video advertising across TrueView with a growing contribution from ad buying on DoubleClick Bid Manager, as well as improvements in ad formats and delivery.

The advertising business model is not the only possible.

As Netflix has been able to grow into a multi-billion dollar company with its subscription business model, also YouTube is experimenting with that.

In the meanwhile, Google (now Alphabet) is transforming YouTube into a fully operating advertising machine, which doesn’t look, so far, that far from how Google monetizes its pages.

YouTube subscription-based business model

youtube-paid-membership

Formerly known as YouTube Red, YouTube Premium includes features across YouTube and the new YouTube Music app as well as access to all YouTube Originals series and movies.

youtube-paid-membership-offering

What does YouTube premium comprise?

  • Ad-free videos: Watch millions of videos without ads
  • Download videos to watch offline: Save videos and playlists on mobile devices and play them offline
  • Play in the background: Keep videos playing when using other apps or when your screen is off

What does YouTube Music comprise?

  • Easily explore the world of music with the new and improved YouTube Music app
  • Ad-free music: Listen to millions of songs without ads
  • Download music to listen offline: Save music and playlists in the YouTube Music app and listen offline
  • Play in the background: Keep music playing when using other apps or when your screen is off

What does YouTube Originals comprise?

It comprises YouTube’s original series, and movies range from dramas featuring award-winning actors to comedies with top YouTube creators and documentaries covering multi-platinum artists. With YouTube Premium, you have access to all YouTube Originals, available to watch on all devices. You can find the list of movies and series on the YouTube Originals channel.

What does YouTube Kids comprise?

Ad-free and offline play in the YouTube Kids app

What does YouTube Gaming comprise?

youtube-gaming

Ad-free, offline, and background play in the YouTube Gaming app

YouTube Gaming filters videos from YouTube to give you the best experience for watching gaming videos. You’ll find everything that’s in YouTube Gaming on the main YouTube app/site, but only gaming content on YouTube Gaming.

We cannot know how many YouTube paying members there are. However, YouTube is pushing on its paid memberships.

With an ad-free and offline library, YouTube music premium, and YouTube originals, the video-sharing platform might well be able to compete with Netflix, Spotify, and other media companies running on top of the subscription-based business model.

Summary and conclusion

  • YouTube Ads machine-generated over $28 billion in revenues for Google in 2021 alone.
  • The company might be worth well over $300 billion, depending on the multiple applied.
  • YouTube it’s also diversifying its revenue streams to other services like paid memberships.
  • So far, YouTube has been one of the most successful acquisitions that Google, now Alphabet, has made.

Related Business Models Case Studies

Google Business Model

how-does-google-make-money
Google (now Alphabet) primarily makes money through advertising. The Google search engine, while free, is monetized with paid advertising. In 2021 Google’s advertising generated over $209 billion (beyond Google Search, which comprises YouTube Ads and the Network Members Sites) compared to $257 billion in net sales. Advertising represented over 81% of net sales, followed by Google Cloud ($19 billion) and Google’s other revenue streams (Google Play, Pixel phones, and YouTube Premium).

Google Revenue Model

hidden-revenue-model-google
A hidden revenue business model is a pattern for revenue generation that keeps users out of the equation, so they don’t pay for the service or product offered. For instance, Google’s users don’t pay for the search engine. Instead, the revenue streams come from advertising money spent by businesses bidding on keywords.

Google Other Bets

google-bets
Of Google’s (Alphabet) over $257 billion revenues for 2021, Google also generated $753 million from a group of startup bets, which Google considers potential moonshots (companies that might open up new industries). Those Google’s bets also generated a loss for the company of over $5.2 billion. In short, Google is using the money generated by search and betting it on other innovative industries. 

Google Organizational Structure

google-organizational-structure
Google (Alphabet) has a cross-functional (team-based) organizational structure known as a matrix structure with some degree of flatness. Over the years, as the company scaled and it became a tech giant, its organizational structure is morphing more into a centralized organization.

How Big is Google

how-big-is-google
Google is an attention merchant that – in 2021 – generated $209 billion (over 81% of revenue) from ads (Google Search, YouTube Ads, and Network sites), followed by Google Play, Pixel phones, YouTube Premium (a $28 billion segment), and Google Cloud ($19 billion). Over $31.5 billion went toward R&D (12.3% of its revenues).

YouTube Business Model

how-does-youtube-make-money
YouTube was acquired for almost $1.7 billion in 2006 by Google. It makes money through advertising and subscription revenues. YouTube advertising network is part of Google Ads, generating more than $28B in revenue by 2021. YouTube also makes money with its paid memberships and premium content.

Google Traffic Acquisition Costs

what-is-google-tac
The traffic acquisition cost represents the expenses incurred by an internet company, like Google, to gain qualified traffic – on its pages – for monetization. Over the years, Google has been able to reduce its traffic acquisition costs and, in any case, keep it stable. In 2021 Google spent 21.75% of its total advertising revenues (over $45.56 billion) to guarantee its traffic on several desktop and mobile devices across the web.

Netflix Business Model

netflix-business-model
Netflix is a subscription-based business model making money with three simple plans: basic, standard, and premium, giving access to stream series, movies, and shows. With a streaming platform, Netflix generated over $29.6 billion in 2021, with an operating income of over $6 billion and a net income of over $5 billion. 

Discord Business Model

how-does-discord-make-money
Discord makes money in several ways, from its Discord Store, where users can buy premium games, to the seller shops, which primarily work with a 90/10 revenue share for developers and game sellers. And sellers can get more visibility on the platform by adding features to the game visibility.

Twitch Business Model

how-does-twitch-make-money
Twitch started in 2007 as Justin.tv, broadcasting the life of Justin Kan, one of its co-founders, used to prove the concept of enabling anyone to broadcast their lives on the web. Once pivoted, Twitch quickly grew, and by 2014 it was acquired by Amazon for almost a billion dollars. Titch now makes money via subscriptions, bits, advertising, and merchandising.

Related business resources:

Case studies: 

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