YouTube is the world’s most popular video sharing platform. It receives billions of visitors per day and boasts a ton more in views. When Alphabet (GOOG, Financial) (GOOGL, Financial), then Google, acquired YouTube for $1.7 billion in 2006, many believed it was a magnificent deal for the world’s largest search engine. Very few understood how Google planned to integrate YouTube into its impressive business model.
The integration was not as smooth as the acquisition, at least not from the point of view of making money for the giant search engine company. Alphabet’s advertising business model, which splits revenues received from advertisers between Google and content creators, is not the best in terms of profit margins.
With content creators getting as much as 55% from ads displayed in their videos, there is little left for YouTube to cover other forms of costs. This is perhaps why it took the video streaming platform nearly 10 years to finally break even.
So aside from the fact YouTube's profit-sharing model does not leave it with a lot of cash to cover for all the other costs, what are some of the main challenges that the video sharing platform has been facing over the years?
First challenge: Where does the viewing take place?
To begin, YouTube has tried to eliminate the need for video downloads by enabling people to share their videos easily on the web and through various mobile applications. However, as per critics, this feature has somewhat denied the platform the ability to generate repeat views once a user views a video.
This is because, while those who view the videos from YouTube’s platform can easily see suggested videos on the right sidebar, when you view them from a third-party platform it’s easy to decide against viewing any other suggested videos on the embedded frame.
Now, the main issue with this fact is that as per 2015 reports, The Wall Street Journal’s Rolfe Winkler wrote, "People close to YouTube say the site still struggles to attract users directly rather than via links."
This means that YouTube could be making a lot more in revenues if it weren’t for the ability to view videos on third-party platforms. However, a YouTube spokesperson refuted those reports telling Business Insider that "the majority of watching actually starts on YouTube, not from links or embeds on other sites."
Whichever the case, it still means that it could have been making more if all views took place on YouTube as this would increase the number of views per visitor.
Second challenge: You can still download YouTube videos to watch offline
Since the emergence of smartphones, people have become innovatively crafty and now, they have a solution for roughly any niggling issue as far as mobile applications are concerned. YouTube only allows users to download some videos, in which case, a download icon is displayed below the video.
However, some people want to download everything to be able to watch even when they are offline. As such, developers have come up with apps that help them to download any video they like on YouTube to their phones. For instance, if you are using an Android phone, then you can install the YouTube downloader for Android to be able to download videos for which YouTube has not provided the download option.
This affects YouTube’s revenues because if you are watching a YouTube video offline, then you are denying the company and content creators the opportunity to make money from your views. The weird thing about this fact is that somehow YouTube does not forbid this because of the fact that in its terms of use it allows video downloads as long as they're for personal use.
Third challenge: Competition
The other thing of which YouTube should be wary is competition. The company’s business model is unique, but this does not necessarily make it the best. YouTube is facing a tough challenge from video streaming players like Netflix (NFLX, Financial), which rather than relying on advertising revenue has developed a model that generates revenues from monthly subscriptions. This makes it a better platform when comparing the profits.
Other companies like Hulu, Amazon (AMZN, Financial) and several TV networks have also launched their own video streaming services. In addition, when it comes to smartphones, there are numerous apps that people are using to record, share and view videos. As such, the playground is now getting crowded and YouTube, although still the world’s most popular video streaming platform, may not have the best business model from the perspective of profits.
How much money does YouTube really make?
As of 2014, YouTube was reportedly making just $4 billion in revenues, in which case it was only barely breaking even given the amount it paid to content creators and other costs. Its 45% revenue share from the platform/content creator split has not been enough to cover operating costs, but based on recent reports, it looks as if YouTube is finally living up to its billing.
According to this 2016 article, YouTube apparently made $9 billion in 2015 thereby netting Alphabet massive profits for the first time since it was acquired by Google in 2006. The company then paid up to $5 billion to content creators thereby generating net sales of about $4 billion.
Conclusion
YouTube still has mountains of challenges with which to deal, but after netting its first gigantic profits since its acquisition by Google in 2006, things are finally looking good for one of Alphabet’s largest networks.
YouTube is finally proving its worth in the company’s impressive array of businesses.
Disclosure: I have no position in any stock mentioned in this article.
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