This is the most exuberant article I’ve read so far about YouTube: YouTube IS Wildly Profitable – No Doubts About It.
Particularly this quote:
If the site serves 100
million video streams a day, then it generates 100 million pageviews a
day. Judging by the site, it serves 1 ad impression per page, so it
can estimated that it serves up 100 million ad impressions per page.
Looking at the kind of clients I see, and the CPM these garner, it is
reasonable that YouTube can make – every day – anywhere from $50K to
$200K (assuming $0.50 to $2 CPM). Realistically, I would bet their ads
yield $0.75 CPM, or roughly $75,000, but of course, who am I?
This really reminds me of so-called Chinese math, the type that venture investors often see. You know, the "if we could get 2% of the total Chinese market, then we’d have billions!" top-down modeling that goes on.
Now, what *is* true is that YouTube makes $0.75 CPM on some of their traffic. The problem is, at the traffic levels that YouTube puts out, they will also get a lot of 7 cent traffic. Why is that? Well, the advertising ecosystem looks like a pyramid. At the top, you have a small number of advertisers (typically premium brand guys) that are willing to pay $15 for good space (like on their homepage) and they are willing to buy X impressions. At the next level, you have other brand guys that will pay $5, but they are only willing to buy Y impressions. This goes down a couple more levels. Then, there’s a huge amount of inventory to be had at $1, which usually go to ad networks, and then at the very bottom, there lots of impressions, in the hundreds of millions for sites like YouTube, which monetize at pennies per thousand. Each "layer" of the pyramid is structured based on CPM, and things like frequency caps that the advertisers impose. Once the publisher gets big enough, they start busting through the layers, hitting diminishing returns at each level.
If you’re a small site, you can actually get a high overall CPM since you can directly sell to endemic advertisers at $15. But the larger you get, the more "layers" of advertisers whose budgets you exhaust, until at the very end, you have a couple billion ad impressions that you hand over to CPA ad networks.
So for YouTube, the author is correct that they probably get $175,000 for the homepage. But do they get that every day, at that CPM? Maybe, but maybe not. And he’s right that YouTube sells a bunch of other inventory $0.75. But all of it? Absolutely not. Instead, the calculation is much more complex, and wholly dependent on how many premium advertisers they can get to make up the top of their advertising pyramid.
All in all, I would guess that YouTube monetizes, on average, much closer to 10 or 15 cents overall CPM. You’d want stats around user impression frequency, what percentage of their site is ad networks versus direct selling, etc., to really model it out. But my guess is, based on experience with other ad networks, that they’d be lucky to get it consistently into the double digit CPMs.
These are some of the unique dynamics of very large publishers, but also specifically of user-generated content sites which have special characteristics like huge user frequency (100+/day for some), lots of homogenous inventory, and poor user intent. If you don’t factor the above points into your calculation, you’ll be trying to sell BMWs into China expecting a market of 1.2 billion people without realizing that over 700 million of those people make $10/month.