Will YouTube bring Google down?

Ian Betteridge notes recent reports imply that YouTube could lose a small fortune this year:

As I mentioned earlier, a recent Credit Suisse report estimates it will lose a whopping $470 million this year.

The reason for that is simple: while its revenues should grow at a more-than-respectable 20% in 2009, the number of streams it serves will grow at a rate almost double that (38%).

As Credit Suisse estimates half of YouTube’s expenses come from bandwidth, this means that the growth in revenue is only just paying the bandwidth bill for the growth in traffic.

Add in all the additional costs in infrastructure, people (and now licensing) and it’s clear that it will have to sell a hell of a lot more advertising than 9% of inventory to bring it into the black.

Basically, at the moment, every time someone watches a video on YouTube, it costs Google about 10¢. Delivering ad revenue of 10¢ per view is going to be a really big challenge, even for Google’s mighty ad sales machine.

This is interesting, a piece of analysis we did last year estimated it would lose around $100m in 2008. As it stands, YouTube makes a loss on every new customer. A key driver of profit is the % of videos that have Ads served against them. We read elsewhere that YouTube is now making Ad revenues against c 9% of all videos sold, nearly double that reported last year.

The other critical factors are:

- revenues per Ad served, which we believe are falling globally and;

- cost of video serving. Moving to HDTV format increases required bandwidth by c 5x and this is a major proportion of cost today, and is flexed with volume.

We haven't recast our analysis from last year, but you can see how large increases in volume and in cost, and reduction in Ad prices will outweigh even a doubling of % Ads served and get to a number like $470m quite fast.

This is what the FreeConomic guys don't grasp - yes, bandwidth is cheap - but it is not free and it is consumed in huge volumes, and though no-one is paying YouTube et al directly for these services, these Web Video companies have to pay for pipe, port, power and ping......

Just as well Google made $1.4 bn in net revenues last quarter, if YouTube carries on as it is will need them all in a few years time......