Credit Suisse analyst Spencer Wang has made public an estimate that YouTube will take in about A$240M in ad revenue in ’09 against operating costs of roughly $711M, leading to a very large shortfall of just over $470M. This half-billion dollar loss comes after more than a year of 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 popular website to reach profitability, but the enertainment portal is fighting an up-hill battle as a parade of rights holders lines up with hands outstretched wanting a bigger slice of a diminishing pie as recompense for YouTube streaming audio and video content they either own or control.
For companies such as Universal, which estimates combined video licensing income over the past several years has totalled in excess of $100M, the loss of YouTube revenue could be signficant. Even if the economy were not in the listless state it finds itself in today, it appears there aren’t enough advertisers willing to pay the huge dollars necessary to fund this profitless YouTube entertainment magnet.
The biggest expense for YouTube is the incredible amount of bandwidth that it must pay for. Despite estimating that YouTube pays about half the lowest market rate for bandwidth, the cost of streaming 5 million videos a month comes with a steep cost. Analysts place bandwidth costs associated with YouTube at about $360M a year, or $1 million a day.
Options for salvation could include a subscription fee to access rights protected content; charging for user-generated content, or dismantling this option altogether; or moving into MySpace territory with a full menu of shopping options, and fee-for-use access to Hollywood movies and cable network TV shows.
However YouTube wishes to play it, corporate owner Google cannot sustain the losses forever, and in this economy a decision is likely to be made sooner rather than later. This is perhaps the first visible chink in the wall that is common to a swath of social websites that appear visibly successful, attract incredible traction-but so far have failed to produce a business model that spins cash instead of spilling blood. For an encyclopedia of acts and any number of record labels the consequences of any change in direction for the site will be dramatic. These are uncertain times as owners of newspapers and network TV have quickly found out. One has to take a long-view in such times and realize that for every action there is an equal and opposite one too. Hopefully the opposite one has a silver lining to it.
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YouTube is a miracle, and a great improvement over parting the Red Sea and turning water into wine.
Full of utter rubbish, of course, but the video of Johnny Cash and Louis Armstrong is priceless, as is Tom Waits on Fernwood Tonight with Martin Mull and Fred Willard, and as is Tom Rush singing The Remember Song.
YouTube is God’s way of forcing people in the music industry to learn their history…