Why YouTube Can’t Cost $1.65M a Day
I know I’m a little late on the bandwagon, but I’m sick of seeing articles claiming Google is losing so much money from YouTube. They’re based on estimates that I find a little absurd.
Let’s take just one example - http://www.internetevolution.com/author.asp?section_id=715&doc_id=175123&:
Disclaimer: I’m going to use low-ball estimates to guess where Google stands. I am by no means a professional when it comes to estimating this, or even educated in such things, but I feel like Google has so many tricks up their sleeves that I have only slightly less credibility than Credit Suisse or Bear Stearns. I repeat: I am making up numbers
Bandwidth
Maybe I’m not understanding something here, but from what I know a mutually beneficial peering agreement doesn’t require paying for anything other than labor or hardware. ISPs don’t want to provide users with fast internet without having it bounce around too many places, as does Google. Assuming Google has a datacenter close enough to every major ISP to just peer to them (not unreasonable), their only potential non-labor cost is communication between their datacenters. But wait! Hasn’t Google been buying up dark fiber left and right? That means their costs are adding additional capacity and redundancy, plus network maintenance (hardware and labor). Like I said, I’m not a hardware guy, but knowing people who owned datacenters, this is how I understood it. Please call me stupid if I’m wrong, but I’m going to cut this down to $10,000 (~$3.5M/year).
Revenue Share
This one’s just BS…they’re counting “making less money” as an expense. Sure, it’s less money, but that’s a little misrepresenting, no? Plus, I assume the estimating companies already took this into account. $0
Content Acquisition
Google isn’t dump…I doubt they’re putting themselves in the red solely on content costs. Media companies also get a huge amount of exposure from being on YouTube that they can’t get anywhere else (Excluding TV shows and Hulu, but YouTube mostly deals in music videos anyway). So let’s cut this in half and say $360,000 (~$131/year, a lot of clams, and generous in my opinion!).
Hardware
“Given market estimates of about $2 per gigabyte”. Really? Google is famous for using off-the-shelf hardware. I can buy a 1TB HDD for $100, and I’m not buying a million of them. I’m not saying this quote isn’t accurate when you account for electricity, cooling, redundancy, etc, but Google is far above the average for all of these, so I feel like using a market estimate is unfair. I’m gonna cut this in half, so $18,000 (~$6.5M/year).
New Results
Let’s calculate Google’s break-even point for YouTube:
| Bandwidth | $10,000 |
|---|---|
| Content Acquisition | $360,000 |
| Revenue Share | $0 |
| Hardware | $18,000 |
| Subtotal | $388,000 |
| Administrative Costs | 38.4% |
| Math! | x*(1-.384)-388000=0 |
| Break-even Revenue | x=$629,870 |
Now I’m not saying that Google is definitely making money off of YouTube, but $630K/day is less than Credit Suisse estimates Google’s daily revenue at, so it’s entirely possible they’re in the black.
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Peering arrangements require symmetrical bandwidth exchange. When these exchanges stop being symmetrical the parties start charging. YouTube is about as unsymmetrical as you can get. No one is peering with them for free.
@Jon Smirl: Thanks for the clarification. I was thinking more along the lines of ISPs peering to Google itself. I realize that YouTube tips the scales strongly in the “sending” category, but I figured Google could make a strong argument for peering for the sake of user experience (i.e. “Well Verizon is peered to us, don’t you want the same speed for your customers Comcast?”)
I find these arguments frustrating too. NOT buying YouTube would have been a huge mistake. Google controls text search and discovery on the web, and for a small percentage of their valuation they had the opportunity to control video search and discovery, and they took it.
Why is everyone in such a hurry for Google to monetize YouTube — when Google isn’t. Yes it would be nice but the current the ad market for video is centered around TV (macro deals built on handshakes and phone calls, that don’t scale down to the micro level). Likewise there’s little incentive for anyone to invest in building the micro-targeted ad system of the future for video until the dinosaurs go away, or at least until the market becomes fragmented enough that the inefficiencies of large media buys become too much to bear.
Many people forget that Google didn’t make any money as a search engine for a long time, until suddenly they did with Adsense/Adwords. Google certainly hasn’t executed perfectly with YouTube, but the current obsession over YouTube’s day-by-day or month-by month bandwidth costs is either mediocre link-bait journalism or analysts missing the much bigger picture, or both.