On the day that it’s rumored Google is looking to buy Twitter, analysts claim that the company is set to make a massive loss on its last big acquisition, YouTube. Is the most popular online video sharing site in the world ever going to become effectively monetized and profitable?
When Google paid $1.65 billion to acquire YouTube in October, 2006, most people thought the price was a little on the high side, despite the obvious reasons for the purchase. Fast-forward to over two years later, with a recession in full swing, and that price is starting to make me think Google was robbed.
A Bad Acquisition?
today reported that Google could be about to try and buy Twitter, the micro-blogging service and social network that is making headlines around the world. Today also saw a research report by Credit Suisse that claims YouTube is on course to make a massive loss this year, with more money going out than there is coming in. Surely there’s a lesson here for Google.
In a report titled ‘Deep Dive into YouTube’, Credit Suisse analysts Spencer Wang and Ken Sena look at where Google has taken YouTube in the two years since it bought the site. The good news for Google is that they estimate YouTube will make $240 million in revenue during 2009. The bad news is that operating expenses will come to an estimated $711 million. That’s a loss of £471 million in the course of a year.
The Money Pit
Those $711 million in operating expenses include bandwidth, content acquisition, partner revenue shares, site overheads, and storage. YouTube bandwidth alone eats up an incredible $360 million a year, or $1 million a day.
YouTube is by far the most popular online video destination in the world. In the U.S. it accounts for 41 percent of the total videos watched on the Internet. The big problem is that of the 160 million videos YouTube has in its library, only around 3 percent of them can be monetized. This is due to YouTube being unwilling to place advertising on UGC in case it inadvertently makes money from copyrighted content.
All problems Have Solutions
The Credit Suisse analysts don’t however think it’s necessarily game over for YouTube. They describe the site as being still “at a nascent stage.” They then spell out how Google could better turn YouTube from a money pit into a veritable gold mine.
Increasing the percentage of videos that can be monetized would be the first and most obvious solution. This requires more official or premium content being put on the site, which will only come from content deals. Better methods for detecting and deleting copyrighted material, increasing the number of advertisers, and improving the adverts would also help.
Work Already In Progress?
If the rumors of a redesign prove to be true then it looks as though some of these solutions are already being put into place at YouTube. Separating the premium content from the user-generated content is a must and seems to be the backbone of the new site layout we previewed a few days ago.
I’m sure YouTube can be monetized effectively, and Google is probably the company best able to achieve such a mammoth task. The problem is how long it’s all going to take and whether Google can afford to prop up a failing business model until a new, more profitable one, arrives.
[Via Multichannel]
