The Secret 'Profits' Of YouTube

from the don't-worry,-be-happy dept

Wed, Jul 8th 2009 7:15am — Mike Masnick

It's become quite common for folks who dislike "web 2.0" or the concept of "free" business models to mock YouTube as an absolute disaster. For example, music industry lawyer (and hater of all things "free") Chris Castle has already declared the site dead (which is news to, well, just about everyone). Over in the UK, the Independent is running an odd little article that goes back and forth on whether or not YouTube is a real business proposition and then tries to extrapolate from there whether or not "free" works as a business model. The whole discussion is a bit off -- since YouTube really doesn't represent a good example of a business model that uses free, since the bandwidth costs of hosting video is so high. To use that as a proxy for the concept of free would be a mistake, since most other business models don't have that same issue.

That said, really the only truly worthwhile parts of the article are the ones where analyst Keith McMahon speaks up. He seems to be one of the few folks out there who actually has bothered to look at YouTube within the larger context of Google itself, and makes a few important points about (a) why YouTube helps Google in many other ways and (b) Google benefits from the widespread belief that YouTube is losing tons of money:

"There are many urban myths surrounding the way that companies extract value from the internet," he says. "Google's spin-off benefits from owning YouTube include the accumulation of our data and strengthening of their network design -- and the more time people spend watching online video, the more advertisers will pour into marketing on the internet as a whole. There's no doubt that Google can afford YouTube."

McMahon also believes that by keeping quiet about YouTube's hidden benefits and by allowing the misconception of it as a deeply unprofitable business to circulate, things work very nicely in Google's favour when it comes to negotiating with copyright holders in the world of TV, movies and music. Copyright holders can't demand money that isn't there, and it would certainly take no more than a hint of profitability at YouTube for lawyers to descend, threatening court cases and demanding higher royalties. In the new, topsy-turvy world of online economics, it seems astonishing that losses on paper have actually made YouTube a more powerful online force.

This leaves out another point as well: the more that people believe YouTube is unprofitable, the less likely they are to build serious competitors. I have no idea whether or not YouTube is actually profitable directly yet (I'd doubt it), but I think those who are insisting that the acquisition by Google was a bad idea, or that YouTube is somehow on its deathbed, haven't taken much time to understand some basic trendlines or the larger picture of how Google views YouTube, and the opportunities it has to make money via YouTube down the road.

Thank you for reading this Techdirt post. With so many things competing for everyone’s attention these days, we really appreciate you giving us your time. We work hard every day to put quality content out there for our community.

Techdirt is one of the few remaining truly independent media outlets. We do not have a giant corporation behind us, and we rely heavily on our community to support us, in an age when advertisers are increasingly uninterested in sponsoring small, independent sites — especially a site like ours that is unwilling to pull punches in its reporting and analysis.

While other websites have resorted to paywalls, registration requirements, and increasingly annoying/intrusive advertising, we have always kept Techdirt open and available to anyone. But in order to continue doing so, we need your support. We offer a variety of ways for our readers to support us, from direct donations to special subscriptions and cool merchandise — and every little bit helps. Thank you.

–The Techdirt Team

Filed Under: bigger picture, free, profits, youtube
Companies: google, youtube

25 Comments

If you liked this post, you may also be interested in...

Reader Comments

Subscribe: RSS

View by: Time | Thread

Emmanouil Karagiannis, 8 Jul 2009 @ 7:27am

The Secret 'Profits' Of YouTube
To add to this article, i would also like to include that a system (including the Internet) gain more value as more users use the system. The value of internet is high now because of the number of users. This is the case as well with youtube, it has more value when more users use it, so of course more adverts will be produced which will increase the organization's revenue.
[ link to this | view in thread ]
Anonymous Coward, 8 Jul 2009 @ 7:34am

So can we assume that Joel West was wrong when he said:

"The fundamental problem of acquiring public companies is that you have to pay more than the market price -- so the claim is either you know better than the market (never true) or that you will realize synergies that increase the value of the acquired company (almost never true)."

It seems that google knew better than the market.

http://techdirt.com/articles/20080713/1709131662.shtml
[ link to this | view in thread ]
Ryan, 8 Jul 2009 @ 8:09am

To add to this article, i would also like to include that a system (including the Internet) gain more value as more users use the system. The value of internet is high now because of the number of users. This is the case as well with youtube, it has more value when more users use it, so of course more adverts will be produced which will increase the organization's revenue.

"There are many urban myths surrounding the way that companies extract value from the internet," he says. "Google's spin-off benefits from owning YouTube include the accumulation of our data and strengthening of their network design -- and the more time people spend watching online video, the more advertisers will pour into marketing on the internet as a whole. There's no doubt that Google can afford YouTube."

I wonder if this benefit can be quantified, though. It sounds kind of like saying that Wal-Mart would benefit from poking holes in condoms because then more pregnancies would occur, thereby increasing the population and market. Is the difference that great?
[ link to this | view in thread ]
Marshall Stokes (profile), 8 Jul 2009 @ 8:18am

Re: The Secret 'Profits' Of YouTube
You're definitely onto something there. The overall value that an asset like YouTube adds to Google, and the internet as a whole, is very high, albeit difficult (or impossible) to quantify. But this is the case in so many online ventures now, especially those like Facebook and Twitter. There is no doubt that those two sites are in possession of a valuable user base, but that value hasn't been converted into revenue yet. That doesn't mean it's worthless, it just means that it's a different kind of value.

Not that I want to get into it in depth here, but I would like to mention that I think Facebook is going to find a harsh reality down the road when they discover that their users really aren't in a mindset to be marketed to while they are socializing online. However, the data they have on their hundreds of millions of users could be of great value to a larger partner, like, say, Microsoft...
[ link to this | view in thread ]
Kazi, 8 Jul 2009 @ 8:19am

Only difference with Walmart and YouTube is once you poke holes in them condoms not many people will come back for round 2. With YouTube people come back for rounds 2, 3, 4, 5, and way way more.
[ link to this | view in thread ]
Matt, 8 Jul 2009 @ 8:25am

Google Video
Another point is that Google was already building Google Video when it purchased YouTube. If it didn't think it was worth while, why buy another company to bolster what it was already building?

-Matt
[ link to this | view in thread ]
Aaron, 8 Jul 2009 @ 8:30am

Actual Numbers
"I have no idea whether or not YouTube is actually profitable directly yet"

Estimates of Youtube's losses are $174M-$470M / year. That they are deeply unprofitable is not a misconception. Doesn't detract from the overall point of your post, just pointing out that there are numbers out there.
[ link to this | view in thread ]
CuiJinFu, 8 Jul 2009 @ 8:35am

An Echo Dot.Com Bubble?
I won't take issue with the assertion that YouTube is more valuable to Google than the raw financial data might indicate, but it seems to me that the same horribly flawed business models that dominated during the Dot.Com bubble are resurfacing. I'm surprised someone hasn't mentioned an eyeball metric for Youtube, Facebook, and Twitter. Until these websites can show some meaningful profits from their "valuable" user base, their value is highly dubious.
[ link to this | view in thread ]
Anonymous Coward, 8 Jul 2009 @ 8:46am

Youtube on it's death bed? Laughable. It's popularity is insane and while the losses quoted on here are staggering for the common man and even people who have a sports car for every day of the month it's nothing more than a scratch on the hull of the super-carrier known as Google. It builds Google's name, it integrates into your Google account. When people think "Online video" they think Youtube (I'd say it's safe to say MOST of the time yea I know of hulu and other stuff) and invariably Google. It's about keeping Google on your mind so they can keep creeping into your mind with their evil razor sharp claws.

Sadly when I want something quick, easy and works on the internet my mind typically goes to Google. Youtube is just another facet of this.
[ link to this | view in thread ]
Mayer, 8 Jul 2009 @ 8:56am

This article(and many others) point out that "the bandwidth costs of hosting video are so high"

So what does it really cost Google when I watch 10 minutes worth of high-quality video on YouTube?
[ link to this | view in thread ]
Hephaestus (profile), 8 Jul 2009 @ 9:09am

Re: Re: The Secret 'Profits' Of YouTube
"There is no doubt that those two sites are in possession of a valuable user base, but that value hasn't been converted into revenue yet. That doesn't mean it's worthless, it just means that it's a different kind of value.
"

Before the dot net bubble collapsed people spoke about future value and incorporated it into the companies valuations ....
[ link to this | view in thread ]
Anonymous Coward, 8 Jul 2009 @ 9:37am

Re: Re: Re: The Secret 'Profits' Of YouTube
I think you meant the dot com bubble, no ?
[ link to this | view in thread ]
MattP, 8 Jul 2009 @ 9:38am

Re:
More like Wal-Mart providing items at a loss (which they do) to get more people in the door buying their other goods.
[ link to this | view in thread ]
Anonymous Coward, 8 Jul 2009 @ 9:40am

Re:
No, I think a better analogy would be that Walmart benefits from providing free parking.
[ link to this | view in thread ]
Ben, 8 Jul 2009 @ 9:56am

I think you missed the key point. Google sees Youtube as its platform for breaking into the $78 billion dollar TV ad market. Losing a few hundred million per year now is a small price for Google to pay considering the potential payoff.

The transition will take many years even with perfect execution on Google's part. The entrenched power structure in TV media buying is still very profitable/strong and they don't need or want Google involved.

Here is more background:
http://www.adweek.com/aw/content_display/news/digital/e3i67f2ad037eba0dd6900535147f1391 47
[ link to this | view in thread ]
wsuschmitt (profile), 8 Jul 2009 @ 9:59am

Cost Centers vs Profit Centers
From my point of view, the use of YouTube in an overall strategy to run a business is akin to a company having an R&D department. YouTube and R&D departments are cost centers for an organization. No products or services are ever produced and sold directly to the consumer from YouTube or R&D, but a lot of information is generated for a good manager and leader to take advantage of and figure out ways to sell it to the consumers. The learnings are passed on to those parts of the organization that are profit centers, and, hopefully, the profit centers make more than what the cost centers spend. Basic business.

Once one wraps their brains around the thought processes of utilizing a cost center for profit, and keep in mind that YouTube is a cost center, then one can see that this strategy makes a bit more sense.
[ link to this | view in thread ]
ChurchHatesTucker (profile), 8 Jul 2009 @ 10:37am

Re: Re: Re: The Secret 'Profits' Of YouTube
"Before the dot net bubble collapsed people spoke about future value and incorporated it into the companies valuations ...."

True, but they also said the same things about google early on.
[ link to this | view in thread ]
Anonymous Coward, 8 Jul 2009 @ 10:52am

Isn't the fact that google is the megalith it is now proof that they know how to make money? It's not as though they are hurting, even though they are putting out free software left and right, offer free searching, free video and so on, but still have money left over in reserve? They must be profitable as a company or people would not put money into them.
[ link to this | view in thread ]
Ryan, 8 Jul 2009 @ 11:57am

Re: Re:
That would be the case if by going to YouTube, you were more likely to directly purchase something of Google's. But advertising revenue is already taken into account when determining Google's net loss from YouTube and is not hidden. The allegation is that YouTube, as a popular site, increases overall Internet usage for everybody, which would naturally lead to more customers for Google. Hard to tell if by increasing the potential market(however much they do so), they recoup the maintenance costs in advertising elsewhere.
[ link to this | view in thread ]
danny, 8 Jul 2009 @ 12:00pm

google's business as i see it is in collecting user data. it's a tradeoff, we give our user-habit data in order to use their free services. down the line, they'll have these huge profiles on everything about our lives. what we buy, read, watch. what blogs do we read. what coffee shop we go to. who our friends are. etc. and google can do what they want with this data. you gave them the right when you signed up for their services. it's in your user agreement. once this data reaches a critical mass, then you use heuristics for targeted marketing. done.
[ link to this | view in thread ]
Auditrix (profile), 8 Jul 2009 @ 3:15pm

The Secret Youtube Profits of *Record Companies*
Speaking of Youtube profits...When Google acquired YouTube, The New York Times reported that YouTube gave each record company an equity stake that just hours later was valued at up to $50 million from the Google acquisition.

But the record companies haven't shared a penny of it with artists, including my client who had the #1 Youtube video during the month leading up to his record company's "investment" with Youtube (really, it was a settlement agreement). My client drove millions of users to Youtube to see the video, which is what gave his record company the leverage it needed to negotiate its sweet "investment" deal with Youtube. That's why he and other artists like him deserve a chunk of his record company's profit on the deal.

Regrettably, so far, none of my clients' lawyers have had the gumption to hold the record companies' feet to the fire on this issue.

If you are remotely interested in this issue, I encourage you to read Marc Cuban's 2006 re-post of a report from an anonymous source that is at least mostly true: http://blogmaverick.com/2006/10/30/some-intimate-details-on-the-google-youtube-deal/

For those of you who think that Artists are lucky to have the exposure on Youtube, that may be true for unknown artists, but for artists like my client, what good is increased popularity when it cannibalizes your income? Youtube and the record companies have piggybacked artists' brand equity and my client has reduced income as a result, even though he may be more popular than ever (people don't want to buy his record when they can watch his videos for free on Youtube).

Beyond the measley share of ad revenue that the record companies finally began to report in late 2008, entertainment companies should be held accountable to share Youtube and other hidden profits with the content creators.

I just need a client with a lot of leverage who is willing to fight for this!!!
[ link to this | view in thread ]
Almost An Anonymous Coward, 9 Jul 2009 @ 4:07am

"...since the bandwidth costs of hosting video is so high."
Hey Mike, what are those costs of YouTube and from whom do they obtain their bandwidth? I would think that they would have just a "little" leverage in negotiating that "cost" with their bandwidth supplier, if indeed there actually is one. Why not look into that?
[ link to this | view in thread ]
Paul, 15 Nov 2013 @ 5:09am

Sounds like a lot of you guys don't get it. Google screams "Youtube's not profitable". They hide their actual direct profits from everyone (reporters don't do that much research).

Record companies don't ask too much cash for their material.

There are ways a company can get money from other companies that it owns (consultancy fees).

Aaron, Ryan, CuiJinFU & Hephaestus don't seem to get it.
[ link to this | view in thread ]
Paul, 15 Nov 2013 @ 5:12am

Re: The Secret Youtube Profits of *Record Companies*
Artists have to create in order to make profits. There's nothing like actually buying an album.

If you've got that problem solve it with the record company. Youtube started sharing revenue. It's you job to make sure that your client get what he deserves from taht revenue.
[ link to this | view in thread ]
Ticks, 15 Nov 2013 @ 4:35pm

Re: The Secret Youtube Profits of *Record Companies*
Auditrix, If someone is launching an album or an EP the fans of the artist will buy it.

The thing is that after the fans have bought it, the sales will diminish because there will be less people interested.

In other words usually 90% of the sales in the first 10 years after the album appeared will be in the first 2-3 years and among these each year it will be less profitable.

I can guarantee that your client's income hasn't been "cannibalized" by Youtube (record comapnies did it, like you wrote). If you want to do something for your client send a memo to Youtube where you ask that the videos to have a "Support the artist, buy the record." inscription in the description. If he can live a good life he should be thankful for that. Since he's an artist sh should learn to cash in on his popularity (advertising anyone?).
[ link to this | view in thread ]