YouTube is the largest video streaming website in the world. Each day, active users watch hundreds of millions of hours of video on its platform. Despite the website’s popularity, YouTube has been unprofitable since its inception in 2005. YouTube is a TOM loser because the company’s operating model is ineffective at monetizing its popularity and vast content library.
The Search Engine for Videos
YouTube has a simple business model. The company operates an infrastructure that enables users to create and upload videos to the internet of any length or genre. Viewers can then search and interact with this content free of charge. YouTube monetizes its services through display or video advertisements. YouTube’s video library is incredibly diverse, with amateur cat_videos sharing space with professionally_produced_music_videos and presidential debates.
YouTube’s ecosystem hinges on its ability to offer an effective search engine that enables users to navigate its content library. The company operates the second largest search engine in the world behind Google. Its search function returns and ranks videos against a set of keywords using the following process.
- Metadata – When a user uploads a video, they must decide on a title, a brief description, and a series of “tags.” If a search term matches any of these elements, the video will rank higher on the search results page.
- Post Recency – When a new video is posted to YouTube, the website adds a “New” tag to the video. This tag lasts through the first week of publication and boosts the video’s rank to attract initial traffic.
- Watch Time – Viewer engagement is by far the most important determinant of search rank. Videos are evaluated based on the total accumulated time YouTube users spend watching the video.
The search engine is an important component of YouTube’s business model because it ensures that users get the highest quality results for their searches. In addition, this process allows viewers to act as curators for the best content, with each view acting as a vote that improves the video’s search ranking.
Making Money from Your Videos
While the company’s business model creates value for its users through access to unique content, YouTube’s operating model is ineffective at capturing value for the company. The Wall Street Journal estimated that YouTube generated $4B of revenue in 2014, but failed to generate profits after paying for content and equipment.
YouTube currently captures most of its revenue through advertising. Advertisers typically pay YouTube between $4-12 per 1,000 views, with rates varying seasonally. YouTube takes 45% of this ad revenue and shares the rest with content creators. There are four main types of advertisements that content creators can allow on their videos:
- Display ads – These are static images that appear to the right of the feature video, above the video suggestions list. (#1 in Figure 1)
- Overlay ads – These appear in front of the video player in the lower 20% of the screen. (#2 in Figure 1)
- Skippable Video ads – Skippable videos are typically 30 second video ads inserted before, during, or after the main video. The viewer can choose to skip these ads after 5 seconds. Advertisers do not pay for the ad if the user chooses to skip.
- Non-skippable Video ads – These ads are usually 15-20 seconds in length, and the user does not have an option to skip. These ads are risky. Users typically find these ads intrusive and often choose to watch another video rather than watching the ad. This reduces the video’s favorability in the search engine algorithm.
YouTube is creating substantial value for its users by offering a low cost platform to distribute media content to a wide audience. YouTube allows its content community to capture a large portion of this value; some content creators make six figure salaries through their YouTube accounts. However, generous payments to its content providers drains the company’s operating margins, leading to annual losses.
Developing the right revenue model that links the company’s business and operational practices is challenging. YouTube needs to create a model that adequately benefits the company, the advertisers, and the content providers while preserving its core competitive advantage, its vast content library. The stakes are high for failing; Facebook and Twitter now offer competing video services through their flagship social networking sites which are picking up steam. If YouTube doesn’t move quickly, it may watch its company become obsolete.
Barr, Alistar. “YouTube Creates Stars. Can It Keep Them?” The Wall Street Journal. 24 Jul 2015. http://www.wsj.com/articles/youtube-creates-stars-can-it-keep-them-1437768942
“Interview with YouTube Co-founders.” Charlie Rose. https://www.youtube.com/watch?v=7E6E9q8Jebw
Winkler, Rolfe. “YouTube: 1 Billion Viewers, No Profit.” The Wall Street Journal. 25 Feb 2015. http://www.wsj.com/articles/viewers-dont-add-up-to-profit-for-youtube-1424897967
YouTube Press Statistics: http://www.youtube.com/yt/press/statistics.html
YouTube Advertising Formats: https://support.google.com/youtube/answer/2467968?hl=en