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Business - Written by on Thursday, April 23, 2009 17:41 - 22 Comments

YouTube bleeding cash: Is Google trapped?

Earlier this month, a report from Credit Suisse analysts speculated that Youtube is on track to lose $470 million in 2009.  Wealthy as they may be, this has to represent big problems for Google, who paid $1.65 billion for YouTube back in 2006.  Unlike many companies reporting recent losses, YouTube’s main problem isn’t poor market conditions, but rather, the high cost of maintaing bandwidth.  Playing host to the world’s home videos is expensive, and the long tail (see:  Denis’s previous blog on this topic) means that the vast majority of videos lack potential to generate ad revenue. 

YouTube has also run into trouble over expiring licensing agreements, with music companies seeking better terms for their contracts (essentially, more money from YouTube).  As one example, Warner Music removed its Youtube videos back in December amidst an impasse in negotiations.  Music videos and other mainstream tv/film clips, Youtube’s premium content, represent the one area where YouTube could generate more revenue (operating more like Hulu), but maintaining favourable licensing agreements is difficult.

Recently, Google’s top brass have been trying to point out optimistic trends.  In an interview with MacLean’s on Tuesday, Google CFO Patrick Pichette maintained that advertising models will support YouTube in the future.  He might have a case – YouTube announced earlier this month that they had reached an agreement with Universal Music to create Vevo, a seperate video site.  YouTube is also working on the launch of a specialized portal to accomodate tv and film content, hoping to compete with Hulu and generate more ad revenue.  Google CEO Eric Schmidt recently stated that YouTube has been making “good progress” in negotiating with small- and medium-sized studios for this purpose.

But even if YouTube can profit off of their premium content, will they be able to earn enough revenue to offset the massive cost of hosting the world’s home video library (for free)? 

I’m skeptical on this business model.  Let’s assume for a moment that Google can’t find a way to stop bleeding cash through Youtube (which, I think, is a safe assumption for the near future).  What are they to do?  Here’s 4 possible directions:

1)  End the free ride and start charging users.  I’d wager that Google will do anything to avoid this- with over 100 million YouTube viewers in the US alone, and the role it now plays in society, the backlash against Google for ending the free Youtube era could be fierce.  This would be a major controversy, and would probably be a last resort.  A middle ground, however, might be to have some videos “expire” at a certain point.

2) Invent their way out of this mess.  If Google could figure out a way to substantially lower the cost of bandwidth, the problem would be solved.

3)  Maintain YouTube as a cost center.  For now, they might be stuck with this option. 

4)  Create new revenue streams.  To their credit, they are working on a few options  that show some potential, but still, I’m not sure that these fixes will offset their growing costs.

YouTube (and Google) are staring at a problem that’s likely to get worse.  As more and more people worldwide become Web savvy, the number of YouTube users uploading content will grow, with growth in bandwidth costs continuing to outpace growth in ad revenues.  Eventually, Google’s going to be faced with some tough decisions, as option #3 becomes less attractive and #4 falls short (*fingers crossed for #2*). 

Forget the monetization of Twitter for the moment – it’s YouTube that needs a business model.



22 Comments

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Joseph
Apr 24, 2009 9:32

This report is wrong; the analysts and prognosticators need to talk directly to the technical folks who operate the backbone of the Internet or at least dig around and read up on “peering” to determine what YouTube’s actual bandwidth costs likely are.

I happen to have a friend who works at that level, directly with Google and others, and he’s laid out in no uncertain terms that Youtube is not paying near what the analysts say.

Alex Marshall
Apr 24, 2009 11:28

Joseph, thanks for providing the counterpoint. If you have any links to provide more detail on that front, I’d love to see them on here.

Based on your information, how far off do you believe the Credit Suisse report to be?

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Apr 27, 2009 1:23

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charles
May 6, 2009 16:21

Google is bleeding cash, but Microsoft bled cash for years with the Xbox platform before they eventually monetized it. Bandwidth costs are quickly falling and Google is at the forefront of getting the lowest cost. Within a few years, I suspect Google will breakeven with youtube, yet even if they don’t, it’s part of a larger platform of social networking.

Google wants Facebook 2.0 and has a better platform to get it than any other market player. Information is king in such an arrangement and youtube provides an enormous amount of information about its users. Sometimes you have to pay to play.

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May 25, 2009 14:51

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