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Monday, October 20, 2014

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Analysis for 'RampRate'

  • Does It Actually Matter How Much Money YouTube is Losing?

    Guestimating how much money YouTube loses has been heavily debated since the company first burst on the scene. And even though YouTube has been part of Google for close to three years now, there are no signs the debate is letting up.

    For example, this past April, Credit Suisse analyst Spencer Wang got a lot of attention asserting YouTube might lose $470M in 2009. Using these numbers, Fliqz CEO Benjamin Wayne generated a lot of buzz for his Business Insider post "YouTube is Doomed." Then earlier this week, in a much-noticed white paper, the IT outsourcing firm RampRate said the company's annual loss is closer to $174M, given a more accurate analysis of YouTube's true bandwidth costs.

    No doubt the debate will continue to rage on. But does it really matter how much money YouTube is losing? I'd argue the answer is mainly no, with two caveats: first, that Google has the financial wherewithal to sustain YouTube's losses (whatever they may be), and second, that Google believes in YouTube's long-term strategic value.

    With respect to Google's financial wherewithal, I think it's pretty much indisputable that Google can afford YouTube's losses, even if they exceeded Credit Suisse's estimate. In 2008 Google generated almost $8B in cash flow from operations, 36% more than in 2007. It currently has over $17B in cash. Its stock has bounced back from its $257/share low in the dark days of Dec. '08 to $415/share as of yesterday, translating to a market cap of over $130 billion and a P/E just north of 30. To be sure, Google is still a one-trick pony, relying on advertising alone to power its business model. But that pony has proven itself durable in the down economy and in the face of competitors, and the market has justifiably rewarded Google. If anyone thinks Google is being penalized for YouTube's estimated losses, I ask, where's the evidence?

    Google's financial prowess gives it license to do what very few public companies are able to do: focus on the long-term. And that brings us to the second caveat, Google's belief in YouTube's long-term strategic value. Of course, none of us is privy to exactly what Google's executives believe on this front, but for my part, there's ample reason Google should be bullish, notwithstanding YouTube's current financial challenges.

    First, and most important, YouTube maintains a dominant 40%+ share of online video viewership month in and month out, according to comScore. As I said in this recent post, YouTube has the best-known brand-name, deepest catalog, and best promotional reach of any online video site. In UGC it is in a rare "winner-take-all" position (even deep-pocketed Microsoft this week threw in the towel on Soapbox, its YouTube competitor). It would be unthinkable for anyone looking to upload video to not upload to YouTube, which is why the site gets an incredible 20 hours of video uploaded every minute.

    What are these all worth in a market growing as fast as online video, where significant business model disruption lies ahead? A lot. YouTube would be the first partner of choice for any number of consumer and technology heavyweights now starting to slug it out for market share in the broadband era. Meanwhile, YouTube is well-entrenched in the cultural zeitgeist. It is the go to resource for presidential candidates, community organizers and lately, Iranian election protesters.

    Sure, YouTube has its challenges. Hulu is crowding it out for access to premium content. UGC is a monetization drag (though a significant traffic driver). It doesn't have a bona fide or clearly articulated convergence strategy, as its recent YouTube XL initiative underscored. And it hasn't settled on an ad format that works. Regardless, YouTube has massive long-term strategic value. As long as Google recognizes this and has the financials to support it, then even in these recessionary times, how much money YouTube loses is largely irrelevant.

    What do you think? Post a comment now.

     
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