Monday, March 12, 2007

Why Google didn’t pay too much for Youtube. By Even Aas-Eng

Ever since the Google takeover last fall there has been a lot of talk about how you tube will make money and if Google bought the hype and nothing more. Almost all debates have centered around video ads and how to create a sustainable business model without interrupting the fragile feelings of the you tube community!

And yes, there are a lot of uncertainties and a lot of trouble with regards to copyright issues and how to monetize video ads, so lets just forget all that for a moment and look at some figures instead.

According to Google, you tube had 133 million users in February. According to Alexa a you tube user sees 12 pages on an average visit. That means that you tube has around 1,6 billion page views every month. That again means around 19 billion page views in a year. You tube are experiencing a substantial growth so lets assume that the yearly number of page views are 15% higher than that. That gives us a total number of 22 billion page views per year.

So, can you make any money on 22 billion page views? Obviously but the question is how much.

Before the Google buy out You tube was running Google text ads through their AdSense system. Rumor has it that they made 15million$ in 2006. Keep in mind that this was before the takeover and that Google also made money on these ads. Lets assume that the split was 50/50, that would mean that the total ad revenue in 2006 was 30 million $. But still the price of 1,65 billion $ was too high right? not necessarily...

You tube today have four times the number of users compared with 2006. Since the AdSense models only parameter is volume we can safely assume that the ad income will follow the increase in users. That gives us a total ad revenue of 120 million $ in 2007. And then the picture doesn't look that hazy anymore.

Okay, lets look even further into the crystal ball. Google started some time ago to run image ads trough the AdSense system. They are sold on a CPM basis through the normal bidding process. Just like search was a bargain in the early days so is CPM advertising on you tube at the moment. But that is changing as I wright this, the market is doing its job and adjusting prices every second.

In the Norwegian market a normal CPM price is about 25 $ and on some niche sites the price is substantially higher. Now lets assume that you tube are able to sell all their page views to one advertiser at the average Norwegian price of 25 $ per CPM. That would generate 550 million $ worth of ad revenue per year. There will be some cannibalization here towards text ads but lets say the the total ad revenue potential is somewhere in the range of 700-900 million per year. Then it looks like a rather good takeover, doesn't it?

This wont happen this year and not in 2008 either but they will get there. And this is before they have solved the video ads puzzle. The only threat's I see for you tube success is competing sites. Traffic is the only road to success in this business model and that's why you tube want take any chances on loosing users by fiddling with the actual videos.


Anders said...

Lush life liker bloggen din. Så vet du det!

Philip said...

I agree:) Great blog entry. The TV-advertising market will explode when local advertisers can afford to advertise on TV in their local areas.

There are several innovation streams that indicate that this will happen:

- Flat screen TV sales are high
- Apple TV will make it easier to watch "the internet" on the flat screen
- TV Shows are available online through iTunes and Youtube,
- More and more advertisers are moving online.
- Google Local is on its way to Norway
- Google Adwords has introduced video ads

And many more....

Bjørn A. Solstad said...

Your calculation looks pretty likely to me. I believe Google got YouTube for a correct price if your calculation is not to far away from reality.

Pablo Martín-Francés said...

Mmm... As usual I like your thoughts, but some correction on the data is needed.

1) I guess the 133 million users of Youtube may visit more than once a month the video monopoly. That means the calculation is 133 x 12 x (nº visits) = xxx, but much more of 1,6 billion probably

2) If there is something that sucks even more than Nielsen... that is Alexa! Alexa is really guiding the experts tendencies, not the average people's tendency. According to Alexa, our web has not grown more than 10% in the last year, and the reality is 100%... Average pageviews/visit in Alexa for is 10,5, and reality is around 40. We are a big site (240 million pageviews/month), and Alexa is measuring us really bad...

3) CPM prices are right now crazy in Scandinavian countries, specially in Norway... but much cheaper in the rest of the World. Spain may average 2 € CPM, with up to 10 € in very niche sites... France, Italy... are not much better than us

Even Aas-Eng said...

And as usual you busted me Pablo! Alexa stinks but its very country dependent. It’s totally unreliable in Norway and apparently in Spain but it works better in the US. If you have another tool you use to seek similar information please send it to me! When it comes to CPM prices running wild in Scandinavia we are entering a very interesting discussion and I will write another post in stead of answering that here.

And we all know that you have “googlephobia” Pablo so you want it to be bad buy :)

take care mate

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