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YouTube's success to date has been measured by its ability to sell ads against video content, but that may be the wrong metric for measuring the video giant's profitability.
Today, Google CEO Eric Schmidt said that YouTube is monetizing according to schedule. But is advertising the only means to reaping YouTube's money making potential? It might also have to do with the information gathering possibilities YouTube presents for the search giant.
Speaking in Cannes today, Schmidt told MarketingWeek:
“YouTube has taken some work, but the new set of ad products including pre-roll, in-stream, and pay to promote, as well as the text ads are beginning to gain momentum. Some of them seem to be working, others not so much. We will keep doing more to encourage choice. There is a connection between culture and consumer here, which is suited for tapping into."
And if a new reading of YouTube's expenses is correct, it should take a lot less for the company to become profitable. Compared to a site like Hulu, which has seen success advertising against professional content, YouTube's use generated video advertising offerings have been slow to catch on. But that could be less of a concern if YouTube's expenses for Google may have been overestimated.
In April, Credit Suisse came out with a report estimating that YouTube would lose as much as $470 million this year, which led many to predict the video giant's imminent demise. Google bought YouTube for $1.8 billion in 2006, and without a big jump in advertising revenue, recouping that investment seems like a lost cause.
But if a new reading of Google's overhead for running its massive library of videos is correct, it may not be so far from profitable after all.
RampRate, a consultancy that advises companies on Internet bandwidth, content delivery, and other infotech services, thinks that Google pays far less for bandwidth to deliver all those videos than Credit Suisse assumed — $49 million instead of $360 million.
According to BusinessWeek:
"The difference chiefly comes down to something called peering, whereby Internet networks exchange traffic from their customers without paying each other. Google, with massive networks around the world--unlike most companies--can pay very little because of these agreements. 'They're paying only a little bit for that bandwidth,' says RampRate Chairman Tony Greenberg."
Thse figures still have YouTube operating at a loss this year, but the ramp up of advertising rates on th site makes that a much smaller gap to meet. And Google has reaped other benefits in owning YouTube besides is fledgling advertising base.
According to The Register, Google worldwide revenues have grown by $11.2 billion to $21.8 billion in the two years since purchasing YouTube in 2006 for $1.8 billion. In the same period, operating cashflow has grown by $4.3 billion to $7.9 billion. Another stealth value for Google is YouTube's social and data resources. Users must sign in and provide personal data to comment, create and rate content. According to the Register:
"It is hard to envisage that at this stage YouTube is directly monetising this meta-data. Undoubtedly, however, it will be contributing to understanding of user-behaviour, and probably the data is already contributing to the optimisation of the Google advertising engine."
Google was attracted to YouTube for more than simply ad value. Running the world's largest video site seemed like great landgrab in 2006. And while YouTube's user generated content might be hard to monetize, the data that it gets from users could become very important, if and when YouTube wants to do something with it. Considering that Google is focused on making headway in the display advertising business, growing its data reserves could be a very good thing.