You Tube’s Losses

Is there a better daily source of insight and cracker-jack examples to use in the classroom than the Lex column in the Financial Times? One of today’s pieces focused on Google - described as a one-trick pony - and also the loss-making You Tube. You can dominate a market and be regarded as a huge success - but make eye wateringly large losses at the same time.

Monopoly power!

Google has over sixty per cent of internet searches - it dwarfs the competition and will continue to do so for the time being - and its stable-mate You Tube is estimated to carry 40% of all videos watched online worldwide. Annually You Tube is estimated to serve up 75 billion video streams to 375 million unique visitors.

Digital popularity does not equal monopoly profits!

Google’s challenge is to create a sustainable revenue model from the You Tube investment.

The business model is heavily focused on driving advertising revenues from home page ads, in-video overlay ads, banner ads, sponsored videos and sponsored links.

But You Tube is an expensive business to operate - the costs of running the site including bandwidth, content acquisition and licensing and other costs amount to over $700m a year.

“Credit Suisse estimate YouTube’s total running costs will be between $500m and $1bn this year, while revenues will only be in the region of $240m. Even with the addition of more professionally created content, the economics appear unsustainable.”

The really important concept is monetisation - in other words how to turn our millions of daily video viewings in cash revenues. It involves being tougher on unauthorised content and You Tube signing licensing agreements with mainstream content providers. Yesterday we learnt that YouTube said has signed deals with Hollywood studios to showcase thousands of TV episodes and hundreds of movies on its Web site.

Over time the business will have to find a tolerance level among users as to how much advertising they are happy to see without damaging their web experience.

How responsive will demand be if You Tube eventually moves towards charging a consumer for premium online video content or launches a ‘micro-payment’ system for a sizeable number of their stock of content?