Benjamin Wayne, CEO of Fliqz, thinks so.
YouTube, that incandescent tower of video Babel; monument to the sloughed-off detritus of our exponentially-exploding digital culture; a Technicolor cataract of skateboarding dogs, lip-synching college students, political punditry, and porn; has reached the zenith of its meteoric rise; and Icarus-like, wings melting; is spiraling back to earth. Despite massive growth, ubiquitous global brand awareness, presidential endorsement, and the world’s greatest repository of illegally-pirated video content, Google’s massive video folly is on life-support, and the prognosis is grave.
The problem lies with the bean-counters. According to a report by Credit Suisse, YouTube is on track to lose roughly $470 million in 2009. No matter Google’s $116 billion market cap: a half-billion dollar loss on a single property, even one as large as YouTube, is a bitter pill to swallow. Even Eric Schmidt, talking to the New York Times about the YouTube acquisition, was quick to say that, going forward, Google would “be more careful with potential large expense streams, which are of uncertain return.”
Credit Suisse estimates YouTube will manage to rake in about $240 million in ad revenue in 2009, against operating costs of roughly $711 million, leading to a shortfall of just over $470 million. This half-billion dollar loss comes after more than a year of feverish experimentation in various forms of advertising, cross-product embedding, licensing and partnership deals. YouTube is adamant that ultimately they’ll find an advertising solution that will enable the ungainly behemoth to reach profitability. Looking at the math, it doesn’t seem likely.
The economics are hard to overcome. Assuming YouTube delivers the 75 billion streams that Credit Suisse projects for 2009, and assuming YouTube manages to slot an ad for every stream (which is practically speaking, impossible, given the nature of much of their content), YouTube would have to achieve a $9.48 CPM for every video impression shown. Presumably, the videos YouTube is already monetizing represent the best content available, with diminishing returns as they reach deeper and deeper into a repository rife with copyright violation, the indecent, the uninteresting, and the unwatchable. Hulu claims to be charging a $30 CPM, of which roughly 70% goes to the copyright holder. Averages for other proprietary content hover around the $10 CPM mark. CPMs for user-generated content, assuming you can attract the advertisers, tend to be measured in fractions of a dollar.
So what does this mean? It seems safe to assume that YouTube’s traffic will continue to grow, with no clear ceiling in sight. 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. Unfortunately, far more user-generated content than professional content makes its way onto the site, which means that while costs grow linearly, non-monetizable content is growing geometrically as compared against the monetizable content that YouTube really wants and needs to survive. This means less and less of YouTube’s library will be revenue-contributing, while the costs of delivering that library will continue to grow.
With the ongoing hammering of ad CPMs and unstoppable growth in the site’s popularity, Google is going to bleed substantial cash on this experiment for the foreseeable future. With costs of operation at half a billion dollars and growing, YouTube’s future is very much in doubt.
Is youtube doomed? If it was an idenependent company it would have been in deep trouble for sure and online video space would not be as sexy it is now. Just the fact that google owns youtube makes so much difference in how we view youtube and the space. Even google has constraints as a public company. Youtube will continue to grow like a weed and if youtube can not figure out a way to brdige the cost and revenue gap soon, youtube will become a major liability to google if it is not already so.
If google decides that it can not bankroll youtube losses any longer what can it do? It can do a couple of things. It can increase ad friendly professional content inventory by coppying Hulu’s model. Youtube has a major hulu envy already. The other thing that can happen is it can try to severely restrict the upload limits for free accounts and try to get counsumers and businesses to pay. Youtube is already aggressively trying to sign up hollywood studios. If they start charging consumers then you know that purely ad based web video days are history.
