YouTube: how does it make money?

I was wondering how much a masthead (a rich media 970×250 panel) on YouTube would cost the other day.

According to this Business Insider article, the cost for a day is $375,000, based on 45 million views a day. Which makes cost per impression about 0.1 cents. There’s no room for a profit mark-up there, in my opinion, unless you don’t use the CPM calculation criterion.

The company made $1 billion in revenue in 2010, which was up seven-fold from 2007, and 5 years on from its acquisition by Google for $1.65 billion is finally close to breaking even (this recent Fast Company piece is very detailed). I wonder if the $375,000 number factors in the cost of people working on an ad at YouTube (design/coding), because if so that would affect the profit figure (assuming they are by now making a profit). As a colleague of mine said today when we were discussing it though, YouTube gets 45 million views a day irrespective of whether people or brands advertise on it or not, so in a way all of it is profit.

It’s an interesting model. Brand channels, for example, are free, but brands have to spend a minimum of $40,000 (£25,000) on advertising on the site (there are different ways to split this cost: advertising on AdWords and the Google Display Network for example).

Also, there must be a tiered way of calculating the cost of an ad depending on the size of the ad and its location on the page, just like, for example, a mall would charge different stores based on whether it’s in a prime location in the front or tucked away at the back.

It really looks like the monetization team at YouTube is hard at work behind the scenes though. Today, they’ve announced YouTube Next and Next New Networks to drive profitability as much as they can through partner relations, and just a couple of weeks ago, there were rumours (promptly quashed) that they were planning to test a movie-streaming service in the UK.

I’d love to look at the operations from the inside!

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