Google’s YouTube money hole not as deep as feared
Not as much as you think, according to a new report by an IT research and consulting firm.
The cost of streaming billions of videos a month, and Google’s difficulties monetizing those videos, has put YouTube on track to lose almost a half billion dollars this year, according to a famous report by Credit Suisse released in April.
But that report failed to take into account key aspects of the Internet infrastructure business that significantly lower YouTube’s costs, says RampRate, a San Francisco firm that consults companies on IT outsourcing practices.
According to RampRate, YouTube’s vast size means it can negotiate bandwidth deals for about half the cost per megabit per second that Credit Suisse used in its estimates. More importantly, roughly three quarters of YouTube’s bandwidth costs are virtually free thanks to peering arrangements that allow it to bypass carrier networks and the associated fees.
“YouTube’s costs are a fraction of any other company running similar operations,” said RampRate’s report, which also estimated YouTube’s hardware costs to be significantly below Credit Suisse’s assumptions, thanks to Google’s use of off-the-shelf commodity hardware.
All told, RampRate estimates that YouTube’s loss this year is only $174 million versus the $470 million estimated by Credit Suisse.
Google, of course, doesn’t break out financial figures for YouTube, which it acquired for $1.65 billion in 2006. And RampRate said its analysis is based not on any inside information about Google, but rather from the knowledge of the online infrastructure business it has acquired by working with clients.
Of course, RampRate’s estimate of a $174 million loss means YouTube is still losing a hefty chunk of change.
But RampRate argues that YouTube provides value by serving as a sort of loss leader for Google. While Google loses money on YouTube, the extra scale it gets with the video service gives the company the clout to negotiate better infrastructure deals for Google’s broader needs.
“Far from being an infrastructure money pit, YouTube is key to reducing operational costs for other Google initiatives,” said the RampRate report.
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