The Business of Youtube

A platform which needs, no introduction, but we will start from the beginning anyways.

YouTube is an American online video sharing and social media platform owned by Google. The company's user count of 2 billion+ places it second on the list of most-used social media platforms, only after Facebook. An average visitor spends 16 minutes and 44 seconds per day on YouTube.

Google acquiring YouTube is proving to be one of the best business acquisitions in history.

Found History

YouTube was founded by Steve Chen, Chad Hurley, and Jawed Karim, three former employees of PayPal. They built the website on the idea that ordinary people can share their “home videos” and entertain. Soon after the first test release in May 2005, the website was attracting around 30,000 visitors daily. By the time YouTube was officially release on December 15, 2005, number of video views had reached over 2 million. By end of 2006, YouTube was serving more than 100 million videos per day.

With the rapid growth in traffic, YouTube faced many challenges. The company has to continuously purchase computers and equipment to maintain the website. In addition, it faced potential litigation, as some videos that were uploaded to YouTube had copyright issues. Therefore, YouTube began looking for a buyer and Google Inc. was the one who purchased the company later.

On October 9, 2006, Google Inc. (GOOG) has agreed to acquire YouTube, the consumer media company for people to watch and share original videos through a Web experience, for $1.65 billion in a stock-for-stock transaction. Following the acquisition, YouTube will operate independently to preserve its successful brand and passionate community.

Business Model

YouTube primarily earns its revenue through advertisements and its premium subscriptions. The company also has additional income stream such as channel memberships, Superchat, Superstickers & Merchandise, and YouTube TV.

Advertisements

YouTube monetizes the videos on its platform through inserting advertisements throughout the videos. 55% of the ad revenue will be paid to video creators, incentivizing them to create more interesting content. The remaining is taken by YouTube as a cut.

YouTube Premium

YouTube users could purchase YouTube premium, a subscription-based service, in exchange of ad-free YouTube access, ability to download videos and music, background playing and more. YouTube premium not only opens up a new income stream for the company, but also provides a stable recurring revenues. As of September 2021, YouTube had 50 million in premium subscribers.

Channel Memberships

Channel memberships at YouTube works similar to Patreon. Viewers can pay a membership fee to support their favourite YouTubers and at the same time get access to exclusive contents. YouTubers will receive 70% of the membership fees and rest is distributed to YouTube.

Superchat, Superstickers & Merchandise

In YouTube live streaming, viewer could pay to pin their comments and send animated graphics. The channel owners will receive 70% and give the remaining to YouTube. In addition, YouTube also earns revenue through earning commission on merchandises sold on the company's partnered online stores like Teespring, DFTBA and more.

YouTube TV

YouTube TV, a live TV streaming service, bundles together content from 85+ top channels like ABC, FOX, NBC and more at $64.99/month.

Tremendous Growth

Even with the intense competition in video sharing platforms, YouTube was able to survive and standout. Its brand name and established platform keep attracting content creators, building a moat for potential competitors. Moreover, YouTube strategically shares its ad revenue with content producers to encourage them creating more contents. It builds the network effect that more content creators will attract more viewers and more viewers ultimately will then attract more content creators.

As a result, YouTube has grown rapidly over the past decade. YouTube users grew from 0.8 billion in 2012 to 2.3 billion in 2020, an increase of 187.5%.

Its premium users grew from 1.5 million in 2015 to 30 million in 2020, an increase of 1900%.

YouTube also excels financially . Its revenue grew from $0.8 billion in 2010 to $19.7 billion in 2020. In its most recent quarter (Q3 2021), it reported a quarterly revenue of $7,205 million. The growth was mostly driven by brand advertising products and the company’s direct response.

The Bottom Line

Even as a mateur platform, YouTube is growing faster than ever and creating massive profits for Google parent company, Alphabet.

Moving forward, YouTube will continue to be increasingly relevant and important in the creator economy.

From the $1.65 billion purchase in 2006, it is also proving to be one of the best acquisitions in business history.

To learn more about the parent company, Alphabet we have a deep dive into the business here.