September 27, 2016 by Paul Dughi
YouTube, now 11 years old, has made a huge impact in bringing user-generated content to the masses. It has yet to make a profit.
According to various reports, YouTube’s revenue was pegged at just north of $4 billion dollars in 2015. Sounds great until you put it up against the annual cost of running YouTube. Investment banking and asset management firm Needham & Company estimates the cost of running YouTube is $6.4 billion dollars year.
If these numbers are accurate, this implies that YouTube loses money as a business, with profit margins of negative 60%. – Needham Insights, September 2016: The Future of TV
That’s despite attracting one billion users each month.
Google bought YouTube in 2006 with a price tag of $1.65 billion. It only started making money in 2010 when it started displaying skippable video ads. Since the advertiser only pays for the ads that are actually watched, and users have the ability to skip out after a few seconds, it seemed like a good situation for both. It did grow revenue quickly and it’s been growing every year since.
But the growth of advertising has been hampered in the past because of the very content it promotes. Some were simply too short, and others were deemed risky for brands. The advertising dollars generated have always been limited since as much as 45% of all ad revenue is shared by the content creators.
The revenue growth may also have slowed. eMarketer shows YouTube revenue growing at 41% in 2015, but slowing to 21% in the first two quarters of 2016.
After 10 years, YouTube represents about 9% of the US TV ad revenue, according to eMarketer, and 4% of total TV revenue. Even with the projected growth of $1 billion dollars in revenue at YouTube in 2016, national TV advertising in the US is expected to dramatically outpace that growth by growing $2 billion dollars in 2016.
“This implies that the economic gap between linear (TV) and YouTube will widen in 2016.” – Needham Insights, September 2016: The Future of TV
All of this is based on revenues of $4 billion. Some say it’s much less. An April 2016 article, YouTube’s quest for TV advertising dollars, in The Wall Street Journal put the 2016 revenue projection at $2 billion with YouTube’s market share of video ad buys shrinking to 20%.
There’s also increased competition from the likes of Facebook, Instagram and Twitter and partnerships such as the one between Twitter and the NFL to air football games on the social media service… not mention Netflix.
YouTube’s made a few aggressive moves in the past few years, including launching YouTube Red (a subscription-based service), spending $100 million dollars on unique content creation, and partnering with YouTube and other video influencers. The $100 million dollar investment in content creation, given to some big name celebrities and Hollywood types wasn’t exactly a success. Few of the channels created ever gained any audience and fewer still exit today. Likewise, none of YouTube’s top influencers and “stars” have been able to cross over into the TV world or mass audience.