YouTube makes money based on advertising revenues and paid memberships. 

Founded in 2005 by former PayPal co-workers (Chad Hurley, Eric Skaggs, Jawed Karim, Martin Pauer, and Steve Chen) YouTube was acquired for almost $1.7 billion in 2006 by Google. We don’t know how much revenues it makes, although it might be a $15 billion per year, based on advertising and paid membership. YouTube is the most popular website on the planet, after Google.

YouTube origin story

Going back and look at the YouTube story might be a good exercise to understand the wild success it experienced in a short period and how 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, 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 which 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 regards 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.”

How much money does YouTube make?

As part of Goole’s (now Alphabet) financials, we don’t know the revenues for the video-sharing platform. Back in 2006 Google announced YouTube revenues as “not material” (in short, they are not required to shot them on the books). However

Since its acquisition from Google, YouTube revenues numbers were not disclosed, but according to Business Insider YouTube might be a $15 billion money-making machine in 2018.

That means the YouTube acquisition has turned to be a very successful one so far, as the company might be worth anywhere between $50-100 billions (depending on the multiple you might apply).

Is advertising the right business model for YouTube?

As explained on Google 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.”

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 drivers 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 in a fully operating advertising machine, which doesn’t look, so far, that far from how Google monetizes its pages.

YouTube subscription-based business model

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.

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?

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 the YouTube originals, the video-sharing platform might well be able to compete with Netflix, Spotify and others media companies running on top of the subscription-based business model.