In November 2006, almost two years after its founding in February 2005, Google acquired YouTube for a then-hefty price of $1.65 billion.
In Feb 2020, Google reported that YouTube generated $15 billion from advertisements alone in 2019 ( Youtube has various other income streams, which we will discuss below ), contributing 10% to Google’s total 2019 revenue.
Youtube has, undoubtedly, been one of the most remarkable acquisitions in the history of tech. It is the second most popular website in the world after Google.
Source: Similar Web
But when it comes to engagement metrics like avg visit duration, pages per visit & bounce rate, Youtube is second to none — not even Google.
YouTube has an avg visit duration of 21.56 mins, with users viewing 9.16 pages per visit and a bounce rate of 25.29%.
On the other hand, Google, YouTube’s parent company has an avg visit duration of 11.26 mins, with users viewing 8.69 pages per visit and a bounce rate of 28.76%.
Over the years, YouTube has evolved significantly, both in terms of functionality and income streams.
In this blog, we will dig deeper into how YouTube makes money, but before that, let’s find out YouTube’s founding story, which is as interesting as a startup founding story can get.
How YouTube Started
Like many other startups, the original idea of YouTube was way different than what it has grown to become. Initially, the platform was supposed to be an online dating site.
Started by three ex-paypal employees — Chad Hurley, Steve Chen, and Jawed Karim, YouTube pivoted to becoming a user-generated video-sharing after the original dating site idea failed to get traction.
Years later, Jawed said that two disparate incidents — Janet Jackson’s infamous wardrobe malfunction & Indonesian Tsunami had triggered the idea of YouTube.
Although everyone was talking about these incidents and plenty of videos were shot, it was impossible to find any video clips online because it took hours to upload videos on the web at the time.
Chad & Steve, however, have a different story to share — one that has been often repeated in the media.
According to them, the idea for YouTube came after a dinner party at Chen’s apartment in San Francisco, when the duo experienced difficulty in uploading videos they had shot.
To this, Jawed’s response was that not only did he never attend the party, but it also never occurred.
Steve later acknowledged that the idea that the notion of YouTube being founded after a dinner party “was probably very strengthened by marketing ideas around creating a story that was very digestible.”
Due to the discrepancy between the stories shared by the founder, we can never really know how exactly the idea of YouTube came to be but Wayback Machine’s first captured screenshot of YouTube confirms the fact that it was originally supposed to be a dating site, not a user-generated video platform.
Anyways, moving on from that, the first video to be uploaded on the platform was a 19-second clip titled ‘Me at the Zoo’ (watched over 100 million times now), uploaded by co-founder Jawed Karim in April 2005.
The first video to go viral and achieve the one million views landmark was a Nike ad, featuring former Brazilian player Ronaldinho in November 2005.
In the same month, Sequoia Capital invested $3.5 million dollars in the platform.
Youtube launched officially on 15th December 2005, prior to which it was in Beta. By launch time, the platform was receiving 8 million views in a day.
Youtube grew from strength to strength thereafter but growth came with its own set of challenges.
The platform would frequently run out of storage capacity, forcing the company to buy more and more of it.
To top that off, the company also had to allocate finances to litigation, as many media companies discovered that some of the videos uploaded contained copyrighted material.
With continuously growing costs and limited success in monetizing the platform, YouTube began looking for a buyer.
Google’s video platform launched in 2005 had failed, so they company decided to buy YouTube for $1.65 billion in November 2006.
After the acquisition, YouTube expanded to the UK & 8 other countries in 2007.
Its mobile version was launched in the same year as well, letting smartphone users access the platform on a mobile-optimized site.
In 2009, the company launched full HD, which helped proliferate its journey to achieving the milestone of one billion daily views.
YouTube achieved yet another milestone in December 2012, when ‘Gangnam Style’ became the first video to reach one billion views.
Fast forward to 2020, over 2 billion logged-in users visit the platform every month, watching over a billion hours of video daily.
So how Does YouTube Make Money in 2020
If we were to explain it in a sentence, Youtube makes money mainly through advertising and subscription revenue. But to develop an in-depth understanding of YouTube’s business model, let’s have a look at its 5 revenue segments individually.
Some wise guy once said, “If You’re Not Paying for It, You’re the Product“.
Most of us (non-subscribers) can watch videos on YouTube for free because it monetizes our attention by selling it to eyeball hungry advertisers.
A portion of the ad revenue is paid to video creators who join the YouTube Partner Program, incentivizing creators to keep creating and uploading videos on YouTube.
When Google released its 2019 fourth-quarter earnings report in February 2020, the world got to know YouTube’s contribution to Google’s baseline for the first time.
Until then, Google had never officially revealed how much revenue YouTube generated.
In a span of three years, from 2017 to 2019, YouTube generated more than $34 billion, only in ad revenue, with ad earnings growing year-on-year.
In Google’s earnings call, CFO Ruth Porat said that a majority of the revenue goes to content creators.
While Ruth didn’t specifically mention how much of the revenue is shared with content creators, she mentioned that those costs belong to YouTube’s content acquisition cost, which stood at $8.5 billion out of the $15 billion revenue generated in 2019.
At $15 billion, YouTube’s advertising revenue is almost one fifth the size of Facebook’s advertising business, which made around $69.7 billion in 2019.
2. YouTube Premium
Youtube premium, formerly YouTube Red, is a subscription-based freemium service that bundles the following together:
- Ad-free Youtube access, downloading videos for offline viewing & watching videos in the background while using other apps.
- Ad-free access to millions of songs on YouTube Music, downloading music for offline listening & playing songs in the background while using other apps.
- Ad-free access to YouTube kids and offline viewing.
- Access to Google Play Music in select countries, where the service is available.
In USA, the YouTube Premium service is available at $11.99/month.
YouTube Music is also available separately for $9.99/month, a price at which it makes less sense to buy the service individually.
Pricing for YouTube Premium & YouTube Music differs as per the country.
In Google’s 2019 Q4 Earning call, Sundar Pichai, Google CEO, disclosed that YouTube Music Premium and YouTube Premium had 20 million subscribers in total.
3. Channel Memberships
Launched in January 2018, Channel Memberships is a Patreon like feature, which allows viewers to become subscribing members of YouTube channels they want to support.
At the time of writing, the membership is available only to channels that are a part of the YouTube Partner Program & have more than 30000 subscribers.
For YouTubers, memberships provide an additional source of income apart from the advertising share they receive from YouTube.
In exchange for subscribing, channel supporters get access to perks like Member-exclusive posts, Loyalty badges & Exclusive Emoji.
The most basic channel membership costs $4.99 in the US, with upgrades available to higher tiers, which have more perks and higher pricing.
With regards to membership revenue split, YouTubers receive 70% of the membership funds & YouTube takes 30% for playing the role of an intermediary.
4. Superchat, Superstickers & Merchandise
Superchats, superstickers & merchandise give YouTubers an alternative source of income generation, similar to channel memberships.
Using Superchat, viewers can pin their comments at the top during live streams. The more the views pay, the longer their comment gets pinned.
Superstickers are animated graphics that users can purchase to comment during live streams.
Whatever extra money YouTubers make from superchat and superstickers, YouTube keeps 30% of it and gives the remaining 70% to the channel owners.
In case you’ve not seen them, here’s how superchat & superstickers look.
While selling merchandising by redirecting users to their merch store has been a part of YouTube creators’ monetization sources for a long time, what YouTube merchandise does is that it supports displaying products on a shelf directly below videos.
YouTube has partnered with several online stores like Teespring, DFTBA, Shopify for enabling merchandise sales.
In the case of Teespring, the company takes a fixed price per item sold, but the creator can set any price he wants for the product.
YouTube receives a small commission from Teespring for every sale, which YouTube then returns to the creators most of the time so that they earn more money than would by operating their store, incentivizing channel owners to sell through YouTube.
5. YouTube TV
A US-exclusive subscription-based, live TV streaming service, YouTube TV bundles together content from 70+ top channels like ABC, FOX, NBC, ESPN, CNN & many more.
At $49.99/month, YouTube TV comes with 6 accounts per household & unlimited cloud storage.
The service had 2 million subscribers, as per the official information revealed by Google in the 2019 Q4 earnings call.
The annual revenue run rate for the aforementioned subscription services and non-advertising revenue was $3 billion, but content acquisition costs were higher.
Is YouTube Profitable?
Nobody knows if YouTube is profitable as an independent entity, except of course the high tier folks at Google.
While Google did reveal YouTube ads earnings ($34 Billion from 2017 to 2019) for the first time in their earnings report, there was no profitability breakdown for YouTube.
YouTube’s other revenue sources, the ones we discussed, were also bundled under other bets, making it difficult to determine profitability.
Thank you for taking the time to read the entire article.
If you liked it, you might also like our article on WhatsApp’s Business Model.