Would You Spend $1.65 billion Dollars for $54 million/Year in Revenue?

YouTube was purchased by Google for 1.65 billion dollars.

Much has been made of number of users, and videos viewed on the site. On December 11th, 2008, the New York Times even reported that YouTube content creators are making six figure salaries by posting videos on the site.

However, very little is known about how much money YouTube actually makes.

My theory is, not very much at all. Here is my logic.

ASSUMPTIONS FOR US REVENUES:

3% of all videos on YouTube carry ads (from NYT article)
5 billion videos are streamed on YouTube every month (estimate pulled off of website)

Therefore:

150 million videos per month carry ads. With this assumption, here are some different revenue scenarios based off of a range of CPMs:

CPM Rev/Month Rev/Year
Low 5 750,000 9,000,000
Mid 10 1,500,000 18,000,000
High 20 3,000,000 36,000,000
Very High 30 4,500,000 54,000,000

So let’s just say that YouTube gets a pie-in-the-sky $30 CMP from the 3% of videos that carry ads. That means 54 mm in revenue, out of which must come all YouTube expenses and revenue split with content creators (as per the NYT article, it looks like YouTube isn’t taking the typical conglomerate v independent producer stance and "strong arming" -- aka f@?!ing -- its content creators). Assume they have pie-in-the-sky 40% margins, this leaves them with a $21.6 million profit/year.

So in a wildly optimistic, best case scenario:

21.6 million/year = 1.65 billion purchase price…? Possible, but that leads to a discount rate of .0144%.

In October of this past year, Google announced it would start selling search ads on YouTube. So maybe in the long run, Google just looks at YouTube as another place to sell text ads. Short of that, it seems highly unlikely that a site with mostly user-generated content will ever come close to generating enough revenue to justify the billion-dollar plus price tag. Even if text ads were the plan all along, you have to wonder why Google couldn't have just contracted to be the search ad provider for YouTube, and not plunked down 1.65 billion of shareholder money for something they could have done for free.

It will be interesting to see in the coming quarters if Google follows EBay’s lead in the Skype purchase and writes down this purchase.