What will the Internet do when it no longer has YouTube to kick around? The video giant's business model has been categorically maligned since Google bought it for $1.7 billion in 2006. Except now it looks like YouTube is turning the corner toward profitability. 

And if the video giant is to be believed, all those user-generated cat videos aren't bad for business.

For years, YouTube has served as a whipping post for the argument that popularity does not behest profitability online.

Pundits and investors love using YouTube to prove that ad supported, free content just doesn't work. Take this bit from Malcolm Gladwell earlier this month:

"YouTube is a great example of Free, except that Free technology ends up not being Free because of the way consumers respond to Free, fatally compromising YouTube’s ability to make money around Free, and forcing it to retreat from the “abundance thinking” that lies at the heart of Free. Credit Suisse estimates that YouTube will lose close to half a billion dollars this year. If it were a bank, it would be eligible for TARP funds."

Except last week Google's earnings report showed that the site's ad serving business is making some traction. Google's CFO Patrick Pichette said that "YouTube's revenue growth... is really material to YouTube, and... in the not long, too-long-distant future, we actually see a very profitable and good business for us." And today, the company took to its blog to shatter some "myths" that have been floating around about it.

YouTube says that it is no longer just a place for short-form user-generated content, advertisers aren't afraid to work with them and it's not bleeding money. But other than noting how “over 70% of Ad Age Top 100 marketers ran campaigns on YouTube in 2008," the "mythbusting" post gives little in the way of hard numbers.

However, the proactive rebuttal after years of ignoring criticism on these points could be an indicator of where the site is heading. Some analysts estimate that YouTube will earn about $500 million in revenue this year. With that rate of growth, if sustainable, the site could become a huge earner for Google, user generated content and all.

And if YouTube starts coming out with data to support today's claims, it could shift itself from an Internet punchline to an prototype for successful advertising online.

Mark Cuban, the Dallas Mavericks owner and tech entrepreneur, has been historically bearish on YouTube, but told Silicon Alley Insider today that the "new YouTube" has some promise, due mostly to how its size drives down costs:

"[YouTube] is like every other video site on the net. It licenses content and sells ads around it. This isnt a bad business model when you have the traffic generation ability of Google, along with the best bandwidth prices in the business.

If they get out of the UGC business, they actually would be profitable."

Of course, YouTube isn't planning to stop serving UGC content, but the idea of its size becoming an asset is a big shift. Many critiques of the video giant stem from a estimates of the exhorbinant costs of suporting all those UGC videos. Credit Suisse estimates YouTube's operating costs will run around $711 million this year. But now YouTube has finally come out to rebut those cost estimates, saying its size is a virtue. From the post today:

“The truth is that all our infrastructure is built from scratch, which means models that use standard industry pricing are too high when it comes to bandwidth and similar costs. We are at a point where growth is definitely good for our bottom line, not bad.”

Meghan Keane

Published 21 July, 2009 by Meghan Keane

Based in New York, Meghan Keane is US Editor of Econsultancy. You can follow her on Twitter: @keanesian.

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Comments (1)



There's been a lot of talk about YouTube not being able to turn a profit, that Google should cut its losses. But I think there's more too this than meets the eye. This GigaOM post talk about a report stating that YouTube may already BE in the black: http://gigaom.com/2009/06/16/youtube-infrastructure-costs-vastly-overestimated-report/ So the jury is out, as far as I'm concerned.

almost 9 years ago

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