YouTube, you lose?
23 June 2009
The more successful YouTube is, the more it costs parent company Google a fortune. How long will the accountants wait before pulling the plug?
Consider one of the latest web crazes: the life and songs of Susan Boyle, which have been broadcast to more than 102 million YouTube viewers. Anything in the media world with over 100 million viewers would have to be considered a huge success. But there are three gaping black holes in this scenario: the person behind this wonderful content, Susan Boyle, doesn’t earn a penny; the media company behind the TV show that gave her the platform for success also doesn’t earn a dime from YouTube; and YouTube pays for the data storage and bandwidth but delivers this content for free to the public.
Now, without clairvoyant skills or a doctorate in maths, I’d rather bet on a cane toad crossing the Hume Highway than buy shares in YouTube.
If you believe the Google insiders, Google will sustain YouTube indefinitely. The main argument in its favour is that the cost per impression for ads will gradually increase, making YouTube a more sustainable business. Also, YouTube has truly amazing brand recognition and is a daily necessity for many people, especially younger ones.
But as we have learnt with anything American, the accountants control the future.
According to a report by Credit Suisse, YouTube is on track to lose roughly $470 million in 2009. No matter Google’s $117 billion market cap: a half-billion dollar loss on a single property, even one as large as YouTube, is one hell of a bitter pill to swallow.
Google CEO and chairman Eric Schmidt, speaking to The New York Times about the YouTube acquisition, was quick to say that Google would in future “be more careful with potential large expense streams, which are of uncertain return”.
Credit Suisse estimates YouTube will manage to rake in about $240 million in ad revenue in 2009, against operating costs of roughly $711 million, leading to a shortfall of just over $470 million. This half-billion-dollar loss comes after continual experiments with more various forms of advertising, partnerships, licences and even cross-product embedding.
I’m sure YouTube is adamant that it will find a way to make advertising work; being unprofitable is certainly not trendy in Googleplex. But looking at the maths I can’t see how.
Ads on Google’s content network are cheap, sometimes as low as 10–20c CPM. If that sounds low, you need to consider the limited value for advertisers of being visible on user-generated, unbranded content sites. But to be profitable, YouTube would have to achieve $9.48 CPM for every video impression shown.
While there is some very entertaining content on YouTube, the majority of user-generated content is absolutely uninteresting and unwatchable, or it infringes copyright and shouldn’t be there.
For YouTube to have any chance of covering costs, it will need to accumulate masses of advertiser-sponsored content, but will people want to watch it?
With the unstoppable growth in the site’s popularity, Google is going to bleed substantial dollars on this channel for the foreseeable future. Advertising in itself can’t solve the problem and with the world in recession, what would you expect the accountants to be thinking? Is YouTube’s future in doubt?
Stephen Murphy is head of search at payperclick.net.au
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u r sooo wrong in your view that YouTube is a white elephant... they are already [or about to very soon] sell pay per view like the iTunes store. Micro payments is the future for all these types of endeavours. It doesnt make money now but PPV and embedding YouTube browsers inside LCD big screen TV's (which they are starting to do) equals huge success imo.
Hi
I see adds on sites " we have 100 000 hits a day " advertise here for 49.00 a month, now a site that has 100 000 000 hits a day, why is advertising on youtube not comparable ?? Makes no sense to me?
It is a hard thing, if people had to pay to host their videos - major drop off
Russell, the big difference is that YouTube has TBs of data literally flooding in and out of its servers every second of every hour of every day. Your average site is primarily static. Built well, each page should be not more than a few hundred kb. So not much strain on the servers.
Figure the average YouTube clip of up to a 100 or so Mb, firstly uploaded then downloaded millions of times then multiply it by what Bigpond charges per gig for monthly data overruns.
I simple example: A single 100Mb file watched 10,000 times (there's plenty of them). That's a Tb of data even before you start to include back traffic, or the data centres, or the growing amount of data storage, backbone requirements, yada, yada yada.
The amount of traffic is truly staggering. It is why a free, open system could not survive in Australia and why CS is saying that the bigger it gets the more it bleeds.
The YouTube concept was actually built and operating from Adelaide two years before YouTube was a spec in the garage of middle Californ-I-A. It had a simple monthly payment system, all of the community structure and clients. Paying clients. It's only fault? Ahead of its time...this was up before broadband existed in this country.
Not everything on the web needs to be free nor should it be expected to. It would be nice though to have the $2b in Google shares that the YouTube guys got...
There's something to be said for timing...
p.s. we do run a profitable streaming business, no, unfortunately we're not the example that I mentioned above. However we have corporate clients with specific target markets that are very happy to pay for a service.
Quite honestly, we don't need videos of school yard punch ups clogging our systems or the country's data infrastructure.
Cheers
I run a Online Video Platform Consulting service, and there are plenty of business's there now start to understand the need to use a highly professional product; If you need a custom-made Flash Player, API integration, Analytics, Advance Encoding, HD Quality Video or just want to show a highly professional product (which YouTube is not) a White-Label Video Platform is the only solution.