YouTube yearly revenue potential: Fred says $150M a year, I say $20M.

Fred does a great post on YouTube’s revenue potential. He takes the premise that if you put a 10 second pre-roll video on every video at a $15 CPM and split the earnings in a Google Adsense way you would wind up with a $150M a year business.

It’s a great read, but there are a couple of issues.

1. A $15 CPM for 10 second preroll on unqualified video is not gonna happen. It would be more like a $2-3 “junk” CPM like you see around the web today. $15-25CPMs are reserved for *qualified* videos with a high editorial benchmark. If an advertiser is going to break the $5 CPM barrier they are going to want to know what type of video is on the other side with very rare exceptions. Real branding folks do not just throw their advertisements on content. They want to be associated with high-quality editorial.

2. The second YouTube starts putting ads in front of content they are gonna get sued. Howard Stern was talking about YouTube today and was upset that they had his stuff up there. The reason YouTube has dodged a bullet to date is because of three factors: low quality video, lack of monetization on their part, and the 10 minute length. They put a pre-roll ad in front of Lazy Sunday or the Emmys (which I watched on YouTube exclusively!) and they are done–like done, done.

3. They are not going to sellout their inventory. When you have as much ad space as YouTube or MySpace you are never going to have any scarcity, and that is what drives high CPMs. Niche properties get the $15-25CPMs because they are sold out. YouTube’s flood of traffic is not going to sellout.

Fred comes to a $150M *potential* number. I think they could do 10-20% of that number today, and over time they might get to half the $150M number *if* they get video owners (think SNL) to hand over archives. However, these folks are going to want a floor CPM.

If I was a video holder I would go to YouTube and say you can have all our stuff for an $8 CPM and you keep all the upside and we want an upfront, non-refundable advance of $3M a year.

If YouTube did that they would be a real business. Of course, of other folks tried that and never got there.

In the past I’ve said YouTube is not a real business. I think YouTube is now half of a real business, and that half is people sending dorky, but entertaining, video messages to each other. These dorky videos are never going to get major advertisers on them, so YouTube needs to find a way to work with the professionals (without stealing their stuff) if they are going to make a business out of this.

Also, I don’t think YouTube is gonna get bought at this point. This is the hottest M&A market *ever* for Web companies. Just look at Viacomm firing Freston over losing MySpace to Fox and bringing in a new guy who’s focus is to find the next MySpace earlier. Whoever buys YouTube gets left holding the lawsuit bag–just like Napster. I wouldn’t touch it with a Yahoo’s 100 foot M&A pole!