Analyzing YouTube's Revenue Potential

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So, Google's YouTube will finally sell video ads. How much revenue will they generate?

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.

ASSUMPTIONS
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).

RESULTS
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 percent 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.

BOTTOM LINE
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.