YouTube Is Doomed
businessinsider.com
businessinsider.com
1. Costs >> Since the majority of Google’s costs for the service are pure variable costs of bandwidth and storage, and since they’ve already reached the point at which no greater economies of scale remain, the costs of the business will continue to grow on a linear basis.
Costs of bandwidth and storage will continue to decrease, perhaps geometrically, in the foreseeable future, and so is Youtube operating cost.
2. Monetization There must be other ways to monetize the eyeballs that have not been fleshed out in full yet. It's still very early days. The author assumes that YouTube has mostly run out of ways to monetize through ads (although he did point out a subscription model, esp. for marketers.)
You can stream HD video in 2mbit, and virtually all of the content on YouTube is drastically lower native bitrate than this (and transcoded to 300-384kbps).
The elephant in the room is that YouTube should have given Google the "first mover advantage" and control of the legal feature-length TV episode (and perhaps movie) space, giving them the revenue of the popular, high-rate advertising to bear the load of the "uninteresting and unwatchable" (mind you that unwatched media has no bandwidth costs associated with it, reducing it to a storage expense alone). Hulu blindsided Google and now Google's best bet is to pull a Microsoft and iterate and hope for their competitor to slip. This is complicated by the fact that Hulu is backed by the content producers themselves.
Who cares if YouTube is big? Without the rights to the most popular content, they're stuck trying to make money out of dog weddings and tearful tirades about Britney with 13 hours of additional low quality crap uploaded every minute. The content owners who setup Hulu are under no pressure from them whatsoever.
Google paid $1.65 billion for YouTube. It has never made a cent and its running costs are now equivalent to a small airline. Really, this is a no brainer. Shareholders should be asking for someone's head on a platter.
If traffic grows, and bandwidth and storage are the highest costs, then revenues should increase while costs decrease as bandwidth and storage costs come down.
Or is there something else I'm missing there.
The real flaws with this article are that user content is growing geometrically compared to paid content (citation? where does he get this from), along with the fact that the author is the CEO of fliqz.com - a video streaming company. Good job reporting conflict of interest, business insider.
Youtube has gone through many of these stages, culminating in the Google purchase, and are now the big fish, with no more economies of scale left. They already have datacenters worldwide, and global name recognition. No matter how much they continue to grow, they will not become more profitable due to growth alone.
However, the other issue here is the exponentially rising value of computing technology, especially in bandwidth and storage space. It's why you paid $3500 for a 5MB hard drive in 1981 when you can get 200,000x the space for 2% of that price today. This fact, which has nothing to do with economies of scale, is why Youtube's profit should increase to >0 someday. The question is whether Google can (or will) wait that long.
Why? Because bandwidth is getting cheaper. It won't be long before running YouTube costs half as much per visitor as it does today, so even if their cash potential per visitor stays the same, they will eventually break even.
On top of this, Google has some of the lowest bandwidth costs on Earth. They have massive peering and lots of their own wires; to suppose that they pay anything near what a startup video company would pay for bandwidth is ludicrous. But if you want to make YouTube look unsustainable, it helps to subtract a profitable network business from the bottom line.
Yes, YouTube might cost a lot for a few years, but if it retains its dominance for another three to five years, it will become ridiculously profitable.
"they’ve already reached the point at which no greater economies of scale remain, the costs of the business will continue to grow on a linear basis." This is wrong on several levels.
YouTube helps Google reach even larger economies of scale. Granted YouTube is still going to end up as a net loss, but things like heath care become cheaper per person as the company grows. However, over the next 10 years hardware and bandwidth is going to get even cheaper. While moving to HD will probably eat most of that benefit, I still think YouTube will break in the not so distant future.
PS: Management tends to work the other way, so cost per person is ~x + Log(N) but generally speaking it's a net win to increase the size of the company.
As with all analyst estimates, you can't totally bank on accuracy, but I'd have a hard time believing they're far off.
"To arrive at the estimated $360 million bandwidth tab for YouTube, the analysts assumed the site will receive 375 million unique visitors in 2009 and that a maximum of 20% of those users are on the site at any given time."
There's no way 20% of visitors are streaming video simultaneously. I doubt it's even 1%. Kongregate maxes out at about 0.5% of its monthly uniques connected to chat at once.
Same website, but other end of the spectrum speculating YouTube will make $500 Million: http://www.businessinsider.com/analyst-youtube-revenues-will...
75,000,000,000 streams/year
400 kbps (average bw)
average stream length: 300 s (stream length, not video length, highball estimate)
-> BW/year = 1.13e9 GB/year
0.1 $/GB (BW cost, based on AWS S3 prices, again a highball)
-> BW cost ~= $113m / year
Only 1/3 of the estimated amount, and I'm not taking account of any clever stuff YT do to lower the costs. What gives? Is this a peak BW issue?
I'd say that's insanely high. I've heard for large amounts of traffic you can get 1TB for $8 - instead of $100.
Let me explain. Google's general game plan is this: massive compute clusters + massive datasets + Phd CS brains trying to do something cool. My bet is that Google thought that having the world's largest video dataset was well worth the $2.5 billion they spent to buy YouTube. It's still worth $0.5 billion a year for them to keep maintaining it.
I don't think that they are going to be panicking about monetizing YouTube any time soon. That's not the reason they bought the company.
-- Mark Twain
-- Voltaire
(Seriously, though, YouTube as a company may or may not prosper, but YouTube-style streaming online video isn't going anywhere. So for most of us, the whole issue is moot.)
Marginal Rev is a fascinating blog, and it this comment is by the guy who posted an article that rose to the front page, explaining "not only is this article fascinating, but there's a lot of other fascinating stuff at location X on the internet".
I like watching videos on youtube as much as the next person, but according to the numbers ... youtube is in the red (never mind that Google will keep pumping money into it for the time being).
Serving up content costs money. Period. And youtube serves up a lot of content. The only reason Google bought youtube and continues to run it at a loss is because they hope to monetize it somewhere in the future.
This kind of strategy isn't new (cough XBox cough) and it may or may not pay off somewhere along the line.
Google's acquisition of youtube was a gamble and an attempt to move into yet another market. Will this pay off? Who knows, but one interesting aspect is that Google isn't identifying itself branding-wise with youtube. If they flush youtube down the toilet tomorrow it will have an almost minor impact on the Google brand.
There's linkbait and then there's businessinsider.com
The real question is whether online advertising will ever bring CPMs in line with TV or print advertising. Personally, when I hear about YouTube not being able to place ads on most of their user-generated videos, it makes me immediately stop and think: is this perhaps just a huge market hole, and a big opportunity for anyone willing to pay for ads on those videos? Are the eyeballs on user-generated videos really worth less than those on professionally produced ones, or is it just that most of the big advertising spenders are nervous about associating themselves with lower quality or potentially offensive content?
Further, are online eyeballs really worth that much less than TV eyeballs?
I still think it's possible that reduced online CPMs may come up naturally over time as more of the entertainment market shifts online. If this is the case there's not much Google can do to help the situation, but it may be worth holding out a while longer to see if things normalize a little bit.
Then again, it's also definitely possible that either a) print/TV advertising rates are a lot higher than they "should" be, and the only reason TV has been able to sustain itself on ads is that advertisers were getting ripped off but couldn't figure out a way to prove it to themselves, or b) online eyeballs are inherently worth less, perhaps due to demographic issues. If either of those is true, free video on the Internet may be fundamentally unsustainable until bandwidth costs come down substantially.
Utilize users bandwidth.
Of course, this line of argument is rather vacuous...