Google's ownership of dark fiber, cost-efficient data centers, and use of peering agreements may be cutting the video site's losses close to zero, a new report finds.
YouTube may not be the money pit market watchers believe it to be. In fact, it may be approaching profitability.
Beloved by users -- what's not to like about free video hosting? -- YouTube has been depicted as a financial millstone around Google's neck, the sort of investment that could drag the company underwater. Beyond operating costs, there's also the potential cost of liability for copyright claims.
Last August, Google CEO Eric Schmidt acknowledged that his company was still trying to figure out how to make advertising work on YouTube.
An April 2009 report from Credit Suisse did nothing to suggest that YouTube had finally figured things out: It predicted that Google would spend $470 million this year on YouTube, the result of high infrastructure costs without revenue to match.
But on Wednesday, RampRate, a Santa Monica, Calif.-based market research firm, plans to release a report that puts YouTube's loss at $174 million, almost $300 less than Credit Suisse's estimate.
And profit, the report suggests, is there if needed in the form of unrealized ad opportunities. "All they have to do is turn on the revenue engine and they have instant profitability," said Tony Greenberg, chairman and founder of RampRate.
According to Greenberg, Google's ownership of dark fiber, its cost-efficient data centers, its commodity server equipment, and its use of peering agreements in lieu of paying for bandwidth combine to give the company a far lower cost model than Credit Suisse estimated.
Google pays for about 27% of its bandwidth and trades for the remaining 73% through peering deals, the RampRate report estimates. It states that some large buyers of bandwidth working with RampRate spend less than $1/Mbps for bandwidth and that Google can probably get that cost down to 50 cents/Mbps.
Yet for all its cost efficiency, the report suggests that Google has reason to allow YouTube to be seen as a financial folly. "[A]ny appearance of profits leads to more draconian revenue share demands from partners and additional lawsuits from owners of unlicensed content," the report says. "An apparent loss deters this behavior, making it eminently advisable for Google to let rumors of YouTube's losses grow and compound."
The report cites "Apple's poor-mouthing of iTunes" as a parallel, noting that such tactics held "back the tide of higher revenue share demands."
Such Machiavellian revenue manipulation on Google's part is conceivable, but it is also highly speculative. Google hasn't exactly been coy in its efforts to improve the monetization of YouTube. Given the recession and the benefit of a rising stock price to its employees and shareholders, Google has reason enough to push for every penny of profit.
A YouTube spokesperson, having not seen the report, declined to comment on it, but noted that YouTube is monetizing hundreds of millions of video views in the United States every month and billions worldwide. It's monetizing more views than any other video site has total views, the spokesperson said.
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