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
Thanks for all that number crunching David, You might summize Google as "classy". I however believe they are among the most well run shrewdest companies of the 21st century.
Three things will happen:
1. They will shed You Tube
2.They will turn it into a fee based site
3.They will figure a way to make it profitable.
One thing they won't do:
1. Continue to bleed money for the sake of the viewer
Google is bleeding money on so many different failed projects and startups that I've lost count (they have been well covered on this site)
Why isn't this just what it looks like - yet ANOTHER titanic failure by Google to expand beyond its core search business???
Why is it that everyone (including you, but more especially the New York Times) seems to feel the need to make excuses for Google everytime it screws up again?
This article is rare in that it actually makes an attempt to deliver real journalistic analysis of Google rather than just drink its PR coolaid.
Kudos to Silkversmith and the IE eds that helped him prep this story.
How could the #3 site in the world be considered a failure?? What would happen to web2.0 if youtube called it quits and shut down? Would hulu be able to step up and assist in all of the video embeddings going on? Youtube is still fairly young in my opinion, and I'm confident it'll rake in the dough when the market is ready, continuously..IN AN UNPRECEDENTED FASHION.
If you had to do a traffic report or treat it like traditional networks with nielson ratings and so forth. Where would youtube network fall among abc, nbc, cbs, wb, etc?
Hey Chris,
I don't think they consider it bleeding money. It's strategic and goes along the lines of Ubiquity first Revenue Later..it's still not later yet. Would you spend that type of money on youtube if it could be yours? let me rephrase, would you allocate the funds it costs to run youtube now for a marketing expenditure to be youtube? if you had the money in the bank?
Wow how expensive is it !!! i'm sure google is not crazy , google is doing an investments because today video sharing site is increasingly day another , you've experienced SELFCAST developped by RAWFLOW all those companies are looking to the summit , they want to be the best at the market .
It loses money. and it's a business. Thus, by definition, it is a failure.
Yes, it really is that simple. The fact that a huge number of people use it just makes it a bigger failure, in that regard.
It is young, that's true. But Google still spent $1.65B on it (adding another dimension to its blundering).
"Ubiquity first Revenue Later" was the mantra of all the Web 1.0 companies just before they went bust. It's become almost a throwaway line/joke for those of us who lived through bubble 1.0. To hear it used in defense of companies like google or (heaven forbid) twitter is pretty amazing.
Insultant, No disrespect to this article or your comments. But corporate USA would love to have a cash flow statement, balance sheet, and income statement that look comparable to Google's.
That said, yes, many failures, much like Microsoft, many irons in the fire, maybe too many.
I could spend the next decade, just writing on poorly run technology companies, but I'm not here to do that.
In my opinion, Google grossly over paid for You Tube, no question about it. My point, they will make it work, or they will get rid of it.
With $8.56 billion in cash, You Tube losses don't even cover interest earned.
This is pretty amazing. I really don't think we can just give Google the benefit of the doubt here. As YouTube continues to grow, what exactly can turn this money suck into a profitable business? I think these numbers are pretty serious and deserve more than a simple "Google will work it out" response. It's nice to think that a business can survive on traffic and bright ideas alone, but that's just not the case.
I think the future of online video looks a lot more like Hulu than it does YouTube.
Maybe ROI of youtube for Google isn't measured in dollars and cents. The same way ford looks at the ROI of web/enterprise 2.0. "What's the roi of having your phone on?", lol.
If I had my choice of buying rent.com @ $415 million (eBay 2004), myspace @ $600 million or youtube @ $1.65 billion.. It's unfortunate that I cannot back up my gut feeling of thinking that it was a steal for Google. There is definitely value for the user though.
If youtube decided to get in the cable/network game, would that oppose as a threat to the current networks? WHAT IF they decided to do so and charge networks to post their material on youtube? the script would now be flipped right? I dunno, I think looking at millions of view counts of music artist's hit videos on youtube says something about their leverage. WHO ELSE CAN PROVIDE SUCH A MEDIUM TODAY??? Youtube is a gold mine. wait, a diamond mine that is bigger thatn the dabeers corporation. They JUST STARTED DIGGING.
ok, i can see the point you are making. At this point, though, can they afford to get rid of it, and who would they sell it to even if they wanted to?
I guess i'm reacting to a couple of things. One is the perception that Google is a well run company. It's not - it just has huge amounts of money. HUGE. Huge amounts of money means you can do truly stupid things and get away with it... for a while.
Two is the whole ubiquity first, revenue later thing (I know; you dind't make this point).
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