YouTube Google’s Phantom Loss Leader
YouTube as a millstone around Google’s profitability is a mirage. Contrary to Credit Suisse’s estimates of a $470M annual loss, Google is more likely losing a fraction of that amount, due to peering for 73% of its traffic, buying bandwidth from some of the lowest-cost Tier 1 providers, using unprecedented bulk purchasing power to secure very favorable wholesale rates, and running data centers far away from expensive locales. RampRate estimates that, based on our experience working with other top Internet, e-Commerce, and media firms, Google’s maximum loss is no more than $174M without challenging Credit Suisse’s revenue assessment. Far from being an infrastructure money pit,
YouTube is key to reducing operational costs for other Google initiatives while also allowing Google to catch up to the superior network performance of competitors like Microsoft, which currently boasts 10 times as many peers and 17% fewer hops to remote reaches of the Internet.
Google is no doubt thrilled to let YouTube be known as a financial folly. In the dangerous waters of online content, a whiff of potential profit is an irresistible lure for predators such as copyright lawyers circling user generated content monetization and content partners that are all too ready to turn on their distributors in a feeding frenzy.
YouTube is a turnkey solution to a highly profitable content monetization strategy that can be unleashed as soon as Google gains stronger control of its content partners. On this point, we agree with Credit Suisse: the unit economics work. We’ve researched and launched video monetization strategies that are profitable at a much smaller scale. Forgoing investment in the online video market because of Google’s shell game with content providers is a decision that many prospective investors will stand to regret.