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.