How Ads Work on YouTube

Google owns the two biggest search engines in the world: #1 is their very own Google.com search engine, which they created. And #2 is YouTube, which Google purchased in 2006 for $1.65 billion USD. In other words, there’s a heck of a lot of folks who use YouTube to find information.

In retrospect it was obviously a smart idea for Google to buy YouTube. But it represents an even bolder vision when you realize that when they shelled out $1.65B to make the purchase, YouTube wasn’t making any money. In fact, it was losing a ton of money (worse than owning a boat). And furthermore, YouTube wasn’t anticipated to make money for years.

How many of us can see the value of something that’s losing money and then buy it anyway, only to pump tons more cash into building it before it could become profitable?

Having said that, I guess anyone who buys a fixer-upper house knowing the potential for the basic structure and property is exercising a similar investment savvy, albeit on a smaller scale. However, there is this distinct difference: buying and selling fixer-upper homes to make money is common. What Google was attempting to do with YouTube had never been done previously and there were some enormous technical challenges ahead of them to make it successful.

Of course, the money that Google does make via YouTube is from advertising, which is Google’s cash cow. So it wasn’t truly a long stretch of their imagination to envision that what they needed to do was convert all those viewers into revenue from advertisers. And even though they’ve certainly accomplished that; it took over a decade.

Google wasn’t keen on formally noting exact YouTube revenue figures until February 2020 as part of its 2019 financial report. It was then they made the numbers available to the world by stating that YouTube had made $15.1 billion USD in ad revenue in 2019, up from $11.1 billion in 2018 and $8.1 billion in 2017. (And that’s only a small part of what they make compared to Google.com).

Having said that, even in the earlier years, once it became obvious that YouTube was part and parcel to the entire worldwide web experience, most interested individuals could readily envision that the platform would eventually become profitable. It was just a matter of time.

YOUTUBE ADVERTISING ECOSYSTEM

The above video outlines the relationship between the three primary vested interests in the YouTube advertising ecosystem:

  • viewers
  • creators
  • advertisers

Basically speaking, advertisers want to get their messages in front of viewers. But the viewers don’t visit YouTube to see ads; they visit to see entertaining and/or informative videos from the content creators.

YouTube makes money from the ads and they share some of the revenue with the content creators.

However, what the above video does not go over is how much money content creators make.

YOUTUBE AD REVENUE IS INSUBSTANTIAL

The truth is, unless you’re the owner of a very popular YouTube channel, you won’t be making much money. The most successful channels do generate significant revenue, but the vast majority of YouTube channels do not.

If your videos generate many thousands of views a month (which is above average), those views will generate very little revenue. The pay you receive for the work you invested to create the videos and get the views may work out to be a few pennies per hour of labor.

In other words, except for the most successful content creators, YouTube ad revenue for content creators is insubstantial.

Yet it can be a great platform to promote your business, when you let go the concept of making money via ad revenue.

YOUTUBE VALUE FOR YOUR BUSINESS

The fact that so few content creators make real money from YouTube underscores that its value for businesses is elsewhere. The two biggest opportunities for businesses via YouTube are:

  1. Become an advertiser
  2. Be a content producer (but not to make money from ads — see caveat below)

Opportunities to promote your business via video advertising are the most obvious benefit. When considering the three key players in the YouTube ecosystem — viewers, creators and advertisers — it’s the advertisers who have the most to gain, at least from a cost-benefit calculation, especially compared to other ad platforms this year. (However, ultimately YouTube itself is the biggest winner.)

Right now, YouTube is still in the early phase of its trajectory to make as much ad money as Google. Just like Google ads were dirt cheap back when they started (pennies per click), YouTube ads are currently undervalued and they will be going up further in the future as advertisers start pouring even more money into the platform. And of course, YouTube has the built-in advantage of being video-centric, which is the most powerful of the primary online advertising mediums of text, pictures and videos.

In other words, there’s a lot to gain as a YouTube video advertiser.

YOUTUBE CONTENT CREATION CAVEAT & OPPORTUNITY

If being an advertiser has the greatest cost-benefit, why create content at all?

Creating a YouTube channel and ongoing content will not be a productive endeavor for all businesses — especially if you are tentative about the notion — because it does take ongoing labor and commitment.

And the primary caveat is that your videos will most likely ‘not’ be viewed if you aren’t promoting them.

However, from a business perspective, YouTube is hosting videos for no cost and YouTube is making the videos available for others to potentially see, at no cost. The fact that most videos are not actually going to be seen is remedied by taking the additional step of paying to advertise the videos. Which can be done with a small investment.

And if your content is valuable enough, viewers will share it and if they do so in sufficient volume, YouTube’s algorithm will notice and start promoting it for you (at no cost).

It’s a virtuous circle, but not one that should be viewed lightly. Creating ongoing, regular content is a bunch of work.

YOUTUBE AS A MARKETING AND ADVERTISING CHANNEL

YouTube, as a marketing and advertising channel for businesses of every size, offers the potential to get one’s message out to the world in a meaningful way — when done effectively.

But to keep things real, do be aware that like other social media channels, the way to get seen is to pay to play.

And yes, it’s true that there are a number of videos that have experienced phenomenal viral success. But for businesses, in particular, that’s rare and should not be contemplated as a sound strategy. It would be like including in your revenue projections the hope of winning the lottery. Some lucky few do win lotteries, but that’s not likely for the vast majority of us and it’s highly unpredictable.

Hence, the biggest advantage that YouTube offers to businesses is the opportunity to post content videos that educate and inform viewers and provide real value to viewers.

You can also describe your products and services and advertise them to make people aware of your offerings and to invite them to buy your products and services.

Best of all you can tell stories that relate to your products and services that inspire more viewer engagement with your business.

Pay-per-click (PPC) video advertising is where some of the best advertising opportunities currently reside. And it offers even greater advantages if you are also a content creator (but not to make money from ad revenue).