How Does YouTube Make Money? Business Model of YouTube


How Does YouTube Make Money

YouTube is a popular video sharing platform where anyone can watch or upload content for free. The company has a wide variety of revenue sources.

YouTube primarily makes money via advertisements. The company also makes money from YouTube Premium subscriptions, channel memberships, Superchat donations, YouTube TV, and merchandise commissions.

Founded in 2005 by Steve Chen, Chad Hurley, and Jawed Karim, YouTube was created as a platform where anyone could share videos for free. The founding trio came up with the idea for YouTube after they realized how difficult it was to find and share videos online. In April 2005, Jawed Karim uploaded the first video to YouTube titled ‘Me at the zoo,’ which now has over 243 million views.

The platform was purchased by Google in 2006 for $1.65 billion.[1] At that time, YouTube only had a total of 65 employees. Within one year of its YouTube acquisition, Google started rolling out ads on YouTube.

What is YouTube & How Does It Work?

YouTube is the world’s most popular video sharing platform. It provides both individual content creators as well as companies with a means to publish their content and have it viewed by a global userbase. YouTube allows creators to monetize their content by displaying ads.

Content viewers visit YouTube to access the world’s largest on-demand video sharing platform. They host millions of videos spanning a wide variety of categories from health and fitness to entertainment and education.

Based on 2022 data, YouTube has over 2.5 billion active users.[2] India has the largest YouTube audience, with 467 million users.[3] Each minute, over 500 hours of content is uploaded to the platform with a daily viewing average in excess of 1 billion hours.[4]

To access the hundreds of millions of videos on YouTube, all a user needs is an internet connection and device. That can be a desktop, laptop, mobile device, or smart TV. The YouTube application is available across a wide range of platforms and doesn’t require users to register in order to view content.

However, registering will help YouTube better curate and personalize content based on analytics and tracking data. The process is extremely simple and only requires a Google account with an email address. Over time, YouTube collects usage data and optimizes its automated recommendations to maximize watch time and satisfaction.

At the very top of each YouTube window is a search bar that allows users to type in whatever they are looking for, with support for voice commands. On the homepage, right underneath this search bar, is a scrolling bar. It contains video categories featuring the types of content users might find interesting.

Items on this bar are dynamically selected by the algorithm based on recent activity and perceived interests. The presence of every single user on YouTube is contained within their unique ‘channel’, which can be thought of as similar to a social media account. Each time someone uploads a video, it is done via their channel.

Users can subscribe to channels for content they find interesting. Which then allows YouTube to provide them with notifications every time the channel uploads a new video. Subscriptions are free of charge and only require users to click a single button.

And they help creators promote their content since the algorithm prioritizes videos from channels with higher subscriber counts. Subscriptions are a way for viewers to support their favorite content creators, completely free of charge. Users can also like the videos they watch, and the number of likes are displayed by a counter under the button.

A high number of likes indicates that the video was positively received by the community. It provides the creator with positive feedback and helps new viewers make a guess on whether they should devote their time to watching the video. Often, new viewers will also subscribe after watching a video if they find it entertaining or informational.

One of the major strengths of YouTube is that it acts as both a video sharing platform and social media site. Every channel functions as its own self-contained community, whether it has a few thousand subscribers or several million subscribers. The comments section of YouTube is truly unique.

It brings together people from all over the world to share their thoughts and interact with each other. Due to the sheer size and reach of the platform, anyone can immediately interact with people from a multitude of nationalities and cultures. They can compare their viewpoints, provide feedback to the video creator, and engage with each other in other ways.

Value is further added to each interaction by a viewer when someone else likes their comment on a video. It’s similar to the Karma system on Reddit or the Like function on Twitter. People engage with the creator and each other in fun and creative ways.

YouTube is all about empowering its creators and providing them with every tool they need to develop a successful channel. Analytics, channel customization, monetization, playlists, and various other helpful tools are built into the creator dashboard. No other video sharing platform provides this level of utility to its creators, which is why YouTube is loved by so many people.

Using the tools provided to them, creative content creators can generate professional-tier content that attracts millions. They can also make a decent bit of money from it. YouTube announced in 2021 that they had paid out over $30 billion to content creators over a period of 3 years.

In 2021, YouTube celebrity MrBeast was estimated to have generated $54 million in revenue.[5] At the time of writing this article, he has 103 million subscribers. He regularly gets over 50 million views on his top videos.

 

Business Model of YouTube

The business model of YouTube centers around getting people to use their free video sharing platform, which hosts the largest and most diverse range of user-created content of any such platform on the internet. Then, they monetize this userbase through ads and various freemium services that are obtained within the app.

YouTube’s value proposition to advertisers is that it provides a targeted audience of their choice with a never-ending stream of on-demand video content. There is a wealth of content on YouTube that caters to an extremely large and diverse group of consumers from all age groups. All of it is supplied to viewers via a dynamic algorithm that constantly monitors usage data and curates content recommendations to optimize view time.

No other video sharing platform has access to the kind of technology, scale, and userbase that YouTube has, which makes it uniquely suited to advertisers who wish to reach the largest audience possible within their particular niche. YouTube has highly active channels with millions of videos for everyone from gamers to investors.

YouTube has several competitors, but none of them can match it in size or scope. One of these competitors is BitChute, which is an alt-tech alternative that champions freedom of expression and minimal data collection as some of its core values.

However, its lack of any proper curation or analytical algorithms means that users find it much harder to view content that is relevant to their interests. The platform has also garnered a reputation for hosting fringe communities. It is mostly populated by videos catering to the political commentary community.

As a result, advertisers and brands will find that their options are far more limited on a platform like BitChute. Some advertisers might not wish to associate their image with the type of content being produced on BitChute since it has no restrictions on profanity or misinformation.

Vimeo is another competing platform, but it restricts free members to just 500MB of storage. In contrast, YouTube places no restrictions on the size, number, or length of videos that creators can upload. Vimeo charges users on a monthly or annual basis if they wish to access better content creation features.

It features a paid subscription model to provide additional hosting capacity and customization options. As a result, the platform caters to a very specific group of professionals who are willing to pay for these benefits. The benefit core is that Vimeo doesn’t have any ads.

YouTube has significant operating costs. These include hosting, research and development, staffing, and general administrative costs. YouTube’s parent company Alphabet doesn’t release any specific details on its subsidiary’s operating expenses.

But their 2019 financial statement shows that Alphabet spent $26 billion on R&D alone.[6] Sales and marketing comprised over $18 billion in expenses, while general and administrative expenses took up another $9.5 billion.[7]

Since YouTube is such a large contributor to Alphabet’s revenue, it likely takes up a significant portion of those operating expenses.

 

How Does YouTube Make Money?

YouTube makes money from six different revenue streams. These are advertisements, YouTube Premium, channel memberships, Superchat donations, YouTube TV, and merchandise commissions.

Alphabet Inc., YouTube’s parent company, separates their ad revenue from all other revenue streams in its annual report. In 2021, Alphabet generated $28.8 billion in advertising revenue.[8] That’s an increase of $9.1 billion from 2020 or nearly 46% year-over-year (YoY).

YouTube’s non-advertisement-related revenues are consolidated in Alphabet’s financial data alongside Google Play store purchases and hardware sales. In 2021, this segment brought in $28 billion in revenue.[9] That was an increase of $6.3 billion over its 2020 results.

Advertisements

Advertising is YouTube’s primary revenue stream and generated $28.8 billion for the company in 2021.[10] YouTube’s ad revenue has been steadily growing over the years. This growth is driven primarily by improvements to their ad delivery formats and an increase in the number of users.

Currently, YouTube offers five kinds of ads:

  • Skippable In-Stream Ads: These ads play before a video starts or during the video. The user is provided with an option to skip the ad after 5 seconds. Such ads can be used to generate leads or increase website traffic.
  • Non-Skippable In-Stream Ads: Users can’t skip one of these, and they typically last 15 seconds or less. Non-skippable ads are ideal for generating brand recognition and reaching a wide base of viewers.
  • In-Feed Video Ads: In-feed ads don’t appear within videos. Instead, they show up on the homepage of YouTube’s mobile app or next to search results for relevant videos within a browser. They can also appear on the user’s feed, next to video recommendations.
  • Bumper Ads: A shorter version of the non-skippable in-stream ads, bumper ads are used to deliver a quick, catchy message. They can appear at the start of a video, during the video, or after another video.
  • Masthead Ads: Masthead ads appear at the top of the homepage and support widescreen formats. These are video ads that come in under 30 seconds and are muted by default. Users can click on them to be redirected and watch a full version of the ad.

YouTube splits the revenue made from ads with its content creators. Generally, the split gives 45% of the Revenue to YouTube and 55% to creators.[11] Payments are calculated on a click-per-mille (CPM) basis. That means the advertiser pays out a certain amount based on every 1000 views.

How much an advertiser pays to YouTube can vary depending on the geographical location of a channel, content type, demographic, and various other factors.

Content creators must meet a minimum set of criteria in terms of subscribers and watch time before their channel is monetized. If a video doesn’t meet the advertiser’s preferences, YouTube can demonetize it. Some content creators can make a significant amount of money from ad revenue.

 

YouTube Premium

It’s a subscription service that gives users access to ad-free viewing on YouTube and the ability to download videos for offline viewing. YouTube Premium users also get ad-free access to YouTube Music. Premium members can also view YouTube Originals series free of charge as soon as they are released.

YouTube Premium subscription prices are localized. That gives greater accessibility to users from all over the world based on the relative value of their regional currency. Mobile users with a Premium membership can switch to another app and still have the video play in the background.

 

Channel Memberships

This is a feature similar to the subscription system on Twitch, where fans can pay a monthly fee to support their favorite content creators. In exchange, they receive unique member-only perks such as badges, emojis, and more. Other users can see when someone is a member — which motivates more users to join the party.

Channel memberships come in tiers, with up to five levels in total. Higher tiers provide additional rewards in exchange for a more expensive subscription fee. Things like member-only streams, community posts, shoutouts, and exclusive videos can be adopted by creators to reward the purchase of higher tier memberships.

 

Superchat Donations

Another feature that’s inspired by Twitch and its live-stream donation system. With Superchats, viewers of a livestream can gain access to exclusive messages that are highlighted and stand out from the rest. Streamers often prioritize engagement with Superchat donators over regular viewers.

It’s a great way for viewers to directly interact with their favorite content creators and get a shoutout at the same time. Superchats also reward the donator with a special sticker that shows up next to their name. And their donation amount or message remains highlighted at the top of the chat window for a while.

 

YouTube TV

For now, this is a US-exclusive subscription-based premium television service. It gives members access to over 85 channels covering entertainment, news, sports, and more. Users don’t need a set top box or digital video recorder (DVR) functionality. Unlimited storage across six unique accounts is included within the plan.

 

Merchandise Commissions

YouTube content creators often partner with third party sites such as Teespring or Shopify to sell their exclusive merch. They can also set up a direct store shelf on their channel that links to the off-site merch store. Viewers can scroll through available products right underneath the channel description.

The proceeds from merch sales are passed in their entirety to the content creator. But YouTube has partnerships with third party stores that pay the site for integrating their API. As a result, YouTube gets a commission every time a product is sold via these partnered stores.

 

YouTube Funding, Valuation & Revenue

YouTube is a subsidiary of Google, which itself is owned by Alphabet. It is one of the ‘big five’ Silicon Valley tech firms alongside Apple, Microsoft, Amazon, and Meta. Alphabet (GOOGL) trades on the NASDAQ exchange and had a valuation as of September 2022 of $1.41 trillion.

A 2018 estimate puts YouTube’s valuation at $160 billion.[12] YouTube generated $28.8 billion in ad revenue alone in 2021, which is an increase of 46% YoY from 2020.[13] But it’s hard to judge its total revenue since Alphabet doesn’t provide specific details on non-advertisement revenue streams.

Alphabet has been steadily increasing its earnings. The company generated $257.6 billion in revenue in 2021. That was up from $182.5 billion in 2020 and $161.8 billion in 2019.[14] The company generated $76 billion in net income in 2021.

YearTotal RevenueNet Income
2019$161.8 billion$34.3 billion
2020$182.5 billion$40.2 billion
2021$257.6 billion$76 billion

 

Is YouTube Profitable?

YouTube is likely profitable for Alphabet since the company has been reporting consistent revenue growth in a market with minimal competition.

Granted, it also has significant operating expenses that involve technology costs, R&D, staffing costs, and server costs. YouTube ad revenues have increased by $9.1 billion from 2020 to 2021.[15]

Their non-advertisement revenues are reported to form a significant portion of what Alphabet terms ‘Google Other’ revenues within their 2021 annual report. This revenue bucket increased by $6.3 billion from 2020 to 2021 and has shown consistent growth in the past.[16]

 

Conclusion

YouTube has come a long way since it was first founded in 2005. The platform has grown from being a simple video sharing site to an entire industry with its own set of rules that are constantly changing.

Its business model is very similar to those of other social media platforms like Facebook, Instagram, and Twitter; however, YouTube has its own unique features that make it stand out from the crowd.

As you can see, the business model of YouTube is constantly evolving. But one thing is for sure: the video-sharing site has become a major player in the world of online video, and it will continue to be an integral part of our daily lives for years to come.

We hope you’ve found this article helpful, and if you have any questions or comments, please feel free to let us know. We’ll keep you posted on any updates on how YouTube makes money as they come along, so be sure to check back here for news on changes to their business model!

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