Google is spending more than $2 million a day on YouTube -- and it is nowhere near seeing a return on that investment. Indeed, it may be losing up to $1.65 million daily on the video site.
According to financial firm Credit Suisse and Internet measurement provider comScore Inc. , YouTube Inc. is on track to serve 75 billion video streams to 375 million unique visitors in 2009.
That's the good news. The bad? To support those visitors, Google (Nasdaq: GOOG) will spend more than $2 million dollars daily -- to be exact, up to $2,064,054 a day, or $753 million annualized, according to Internet Evolution calculations of YouTube's costs derived from a range of sources, including Bear Stearns & Co. Inc. , comScore, Credit Suisse, and Google itself.
Now, Google does not disclose sales figures by division, so there is no definitive revenue number for YouTube. The range of estimates from financial analysts stretches from a low of $90 million (Bear Stearns) to a high of $240 million (Credit Suisse).
All the numbers are well below the estimated maximum of $753 million Google is spending annually, based on our calculations. So, depending on whose version of revenues you accept, Google is losing anywhere from $513 million to $663 million annually on YouTube, or anywhere from $1.4 million to as much as $1.65 million every day (see chart below).
Let's make it personal: The average visitor to YouTube costs Google more than a dollar ($513 million to $663 million in estimated losses divided by 375 million unique visitors).
In effect, Google is paying you to enjoy YouTube videos. In return, it gets the chance to show you some advertising. But adoption of those big-ticket items (YouTube sells homepage roadblock ads at $175,000 per day and branded channels at $200,000 apiece) has been limited, and Google AdWords image advertising remains the primary revenue source for YouTube.
A YouTube spokesman declined to comment on these figures or any conclusions of this blog.
Meanwhile, to deliver YouTube, Google is bleeding money in the following areas...
Bandwidth: If YouTube will get 375 million unique visitors in 2009 and each user downloads video at 400 kbit/s (based on figures from a range of sources), the cost to Google of YouTube bandwidth is a minimum of $1 million a day. This assumes YouTube is paying a minimum of 50 percent of the lowest market rate for megabit-per-second services.
Content acquisition: YouTube gets lots of user-generated video for free, but it has to pay for name-brand videos from sources like Sony/BMG and CBS. According to Credit Suisse, YouTube could pay up to $260 million -- about $710,000 a day -- to acquire content in 2009. Notably, Google just inked a deal with Disney to get short clips from ESPN and the Disney/ABC Television Group. More publicity for YouTube, more visitors -- but this is an expense, as YouTube pays royalties to Disney.
Revenue share: If you provide videos to Google and join its revenue sharing program, then you get a commission if ads are shown alongside your content. Credit Suisse estimates that YouTube will "share" away $24 million this year -- $66,000 per day.
Hardware, storage, software, collocation, electricity, etc.: Every minute, Google claims that 15 hours' worth of video is uploaded to YouTube -- equivalent to 86,000 new full-length movies weekly. Credit Suisse estimates the average video uploaded is 30 to 40 Mybtes and that YouTube is storing at least 5 petabytes of video. Given market estimates of about $2 per gigabyte, it's possible Google spends roughly $13 million -- $36,000 every day -- to store YouTube's stock in trade.
Other overhead: Add to the costs just mentioned all the overhead it takes to run any business -- sales, marketing, administration, all the elements that comprise cost of revenues. On December 31, 2008, Google spent 38.4 percent of total revenues on these items. Assuming the same percentage for YouTube and factoring high-end estimated revenue of $240 million for YouTube in 2009, the cost of YouTube revenues conceivably amounts to roughly $92 million, or $252,054 daily. If you prefer the low-end revenue estimate of $90 million, the cost of YouTube revenues would be $34.5 million, or $94,520 per day.
Now take this economy, in which advertising revenues are declining while all of YouTube's costs are increasing. The forecast is only that Google will start losing more money per day.
On the lighter side, you have to give Google credit for losing money with class! The first participant in its recent "Call to Action" for nonprofit partners raised over $10,000 in one day from a video. Classy of Google, yes. It might also be a tax write-off against its monstrous losses from YouTube.
— David Silversmith, Internet and Web analytics consultant, and former CTO of Carfax
I agree with you and especially with what BWayne has to say here.
Youtube is an expression of Freedom,Democracy at its craziest,wackiest best.That's why we can't stand people pulling it dow and could explain the nasty reactions Bwayne got for his blog.
But maybe we are not considering one thing.The fact that Google stores more of its Data in Data Centres based in places where Electricity is super-cheap like Washington State.What this does is cuts down on Electricity expenses for the entire organization and not just Youtube.
Also as Koshcner says they need to look at ways to get rid of Multiple copies of the same Videos.Best way to do it?Appoint Volunteers,who will get Premium Download/Ad-free videos in return for flagging down and helping reduce Data Stored on Google's various Servers.Cost cutting needs to be the order of the day.
Also when it comes to Sales and Marketing Expenses.Google has already fired planty of people in those areas recently.So those costs will fall.
Legal Costs are also getting taken care of thanks to all those negotiations that are on with other Providers.
Who knows by the end of 2010,if these and other changes to the Ad structure pan out right,Youtube could be profitable and not a Adwords Subsidy supported Entity.
Hopefully after looking at the cost of Youtube ,Google thinks multiple times(especially for the sake of thier Shareholders) before buying Twitter.
For some reason all I have is the sound of the Chipmunks singing how all they want is a Hula....
That's pretty much what YouTube did today with this announcement on their blog about watching movies and TV shows.
The announcement confirms that they are copying Hula with more movies and shows and MORE PAID ADVERTISING with"Another change you'll notice today is the wider roll-out of in-stream ads, which we've been testing since October, to support our shows and movies content -- not unlike what you might see when viewing this type of content on TV."
The key to understanding YouTube/Google is really thinking big, and somewhat perversely. Look at my article "The Google Test"(http://venturebeat.com/2006/09/21/the-google-test/).
Spending huge amounts of money is something Google can and should do - very few can do this but Google. They can establish video on the web in such a way that it is as valuable as broadcast TV time ... or even things much more valuable.
How much would you pay for global reach for all TV stations in full? What if Google corners the market on world-wide video, with the largest market, largest library?
Now take that as a future market cap (assume broadcast TV revenues as thet then phase in more sponsorship because then they can), and reverse back to get to current valuation/expense profile. Then accumulate the losses til you get to substaaintial revenues - how many could source that capital?
I see ire towards Google's shear mass and influence over the Internet. For the bullies of the Internet, like, Google, Microsoft, Apple, Amazon etc. the public outrage is understandable. Their presence is so encompassing and intrusive that one feels it stymies inovation.
For these publicly traded companies, they have an obligation to their shareholders to create wealth. Hoarding large sums of cash is the devil's playground. This money needs to be invested.
Many times these investments are buyouts, mergers, acquistions, or expanding into new markets.
Some of these investments do not pan out. But, none the less, corporations need to move forward. In the case of Google it seems getting into a bidding war with both Microsoft and NewsCorp. has proven toxic. The clear winner of course, the acquiree.
I don't pretend to know Google's motives for overpaying for You Tube, it might be a case of it being more important for MSFT and NSC NOT to have You Tube.
As it appears now, You Tube, either as a stand alone franchise, or a business model in transition, hasn't reaped any financial rewards for Google, on the contrary.
Google may chalk this up as a mistake, but pricing these content providers has proven next to impossible, and will continue to be, for the near future.
With all the legal costs associated with YouTube the overhead or admin costs for YouTube might be higher than for the overall Google organization. We applied an equal percentage but YouTube might even be higher.
You wrote "One other interesting way of thinking about the problem is to consider the impact to the overall market value of Google" and I have to admit that is quite an interesting perspective. It also highlights that even if Google is losing a less than we and many others are estimating - the bottom line impact is still substantial.
Given the circumstances I can't blame Google for NOT wanting to release the YouTube specific data. And since, compared to the rest of the market, Google is doing well so stockholders are not going to be too demanding - though looking at your numbers maybe they should be!
It has potential, and that's what they are counting on. They started to shift their content from cats and dogs doing tricks to "premium" content that has a chance to ge tthem some revenues from pre-roll or mid-roll ads.
What about Hulu - the video streaming "savior"? While Youtube gets around 40% of videos viewed, Hulu only gets 2.5% (ComScore Video Metrix, February 2009). According to Mark Cuban (yeah, that guy) said that Hulu's revenues would surpass YouTube's in 2009 (read the article here).
It is going to be impossible to actually know but if it turns out to be true, it is a thing to look for in the future.
That's the big issue. You could make a case that the company is, at best, worth one year annual revenues and that would be a far cry from the $15 billion that we've backed into based on some equity stakes taken into Google.
Of course, revenue of $240 million annually, with annual operating losses--well, that's a hard sell to say it's even worth what Google paid for it.
Now, if many users go to YouTube through a Google search, there's probably some fuzzy math that helps negate the operating loss.
But, I'd say, if Google ever thought YouTube was worth $15 billion, this is a pretty good analysis to say otherwise.
as far as Disney and other companies concern. The maximum length of the video on Youtube is only 9 minutes, so Youtube videos may be some kind of a bait.Look, this 9 minutes are awesome, you have to go to the movie and see this film. There are all new trailers on youtube,so youtube advertises movies and tv-series, so who has to pay? those who adrvertise or those who are advertised?
You're right about the YOU and TUBE, Jwallace. I don't think Hulu and Youtube should be compared cos they're evolving in different branches of online videos. On one hand, I think Hulu is at its initial implementation of Internet TV (TV shows, movies, documentaries, commercials, etc) that's on demand, and Hulu is a good model for future online TV branch. On the other hand, Hulu is no replacement for Youtube.. Youtube's still user-generated and getting more and more interactive with users, allowing more creativity and occasionally producing unexpectedly excellent and creative content. But Youtube isn't exactly evolving on the Internet TV branch, per say.
(P.S. thanks for the Youtube link.. it's hilarious!! that's what I'm talking about)
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