Why Advertising Isn't That Important to YouTube

Video Site Is Getting Closer to Breaking Even; Benefits Parent Google in Other Ways

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NEW YORK (AdAge.com) -- Google would like YouTube to become profitable -- a tough task when it's providing free bandwidth and video storage for much of the world's videos, most of which have limited interest to advertisers. But providing all that bandwidth isn't as expensive and YouTube is far closer to break-even than previously thought, according to IT outsourcing firm RampRate.

Profitability is definitely within reach for YouTube, even if it isn't able to monetize the vast long tail of birthday videos and cats on treadmills.
Profitability is definitely within reach for YouTube, even if it isn't able to monetize the vast long tail of birthday videos and cats on treadmills.
In a study released today, RampRate estimates that YouTube will lose a mere $174 million in 2009, a far cry from the $471 million loss estimated by Credit Suisse in April. What's more, YouTube has already paid back part of its cost to Google by making the data the search engine delivers over the internet more efficient.

YouTube is able to deliver its massive amounts of video much more cheaply than anyone else due to delivery infrastructure, massive purchasing power, use of unused fiber optics and favorable agreements with ISPs such as AT&T and Level 3. YouTube accounts for 35% of all video served in the U.S., according to ComScore, and a much higher percentage internationally.

Less dependent on Madison Avenue
What does this mean? Profitability is definitely within reach for YouTube, even if it isn't able to monetize the vast long tail of birthday videos and cats on treadmills. It also means that YouTube isn't as beholden to Madison Avenue as once thought, and can afford to pay the kind of licensing fees that the record labels and media companies hope to extract for their content.

RampRate analyzed all the things that go into delivering video content -- YouTube's server farms, co-location facilities and "peering" agreements with global networks and ISPs and cable operators such as Comcast -- and concluded that YouTube, which streams more than 1.2 billion videos a day around the globe, is paying only $83 million a year to deliver that data. Earlier this year Credit Suisse estimated it was $375 million.

Indeed, RampRate Chairman Tony Greenberg believes that a majority of YouTube's traffic is routed through connections with ISPs where the two agree to exchange traffic for free. Not only that, Mr. Greenberg said, "YouTube lowers the cost of infrastructure for all other Google properties."

Widely divergent estimates
Until now, some of the best estimates of YouTube's business -- including the Credit Suisse analysis -- put the cost of hosting and delivering video as at least as high, or higher, than the cost of its content deals. Credit Suisse estimated YouTube content and overhead costs at $332 million and bandwidth costs at $360 million, against advertising revenue of $240 million.

Of course, YouTube's ad revenue has also been subject to some widely divergent estimates. RampRate's estimate of a $174 million loss is based on Credit Suisse's assumption that YouTube will bring in $240 million in ad revenue. But revenue estimates for YouTube range from $120 million from Screen Digest to $500 million from investment bank Jeffries & Co. The higher estimate would mean YouTube actually turns a slight profit in 2009.

YouTube does not comment on its costs, or give projections of its revenue. In 2008, Google said it had "yet to realize significant revenue benefits" from YouTube.

RampRate doesn't work with directly with Google, but based its estimate on its view of the way YouTube routes internet traffic through its work with clients such as Microsoft, Fox, Sony and Viacom.

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