• Silicon Valley Insider, Wednesday, August 22, 2007 10:45 AM

YouTube's make-or-break advertising system has finally been rolled out. Now it's time for the $1.65 billion video site to start repaying the massive fee Google paid for it last fall. So how much revenue will it generate? The answer, predictably, is not much -- not for several years anyway. However, over the long haul, the contribution could be very material, at least on the top line.

Overlays along the bottom of videos can be ignored, which makes the ads a truly opt-in experience. According to data tests cited by the New York Times, 75% of viewers presented with an ad chose to watch the whole thing. And for advertisers, the starting CPM price is reasonable at $20.

Remember, Google streams 2 billion videos per month, between 10% and 50% of those have ads, of which 33% to 75% are actually watched, with a CPM between $10-$50. With those figures, Google would generate 8 million in revenue, conservatively, or $450 million aggressively. Of course, five years down the road is more important than this year or the next, so assuming that the site grows in usage, expands its pool of ad-supported pages and keeps the same number of views, Google would make anywhere between $200 million (conservative end) and $13 billion (aggressive end). However, its net income would be significantly lower than for other ad formats; serving a video ad is far more costly than text.

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