YouTube Loses Money; Google Plays It Down

YouTube, a Google subsidy, has incurred losses that some analysts may have overblown. Google does not seem to mind the misperception, according to an internet economics study released yesterday.

RampRate Inc. projected a $174.2 million loss by YouTube, a far cry from the $470.6 million loss estimated by Credit Suisse analysts in April. This Credit Suisse research report that became a popular read on Wall Street and the internet. Since Google bought YouTube for $1.76 billion in late 2006, it still has yet to prove it is financially lucrative for Google. It has, ironically, proven financially lucrative for many YouTube users, reminiscent of Chris Crocker (“Leave Britney Alone”), “lonelygirl15” (an international drama sensation) and Brandon Hardesty (the kid with the strange faces and noises in the Geico commercial who has also signed on for several movies).

Google has agreed that YouTube is not profitable, though they have refused to provide any specifics. Google’s CFO, Patrick Pichette, says that estimates by analysts tend to lead to inaccurate conclusions. “Most people build outside views of what it costs us to do things, and often they exaggerate,” Pichette said in an interview with Mclean’s, a Canadian magazine, just after Credit Suisse released their report.

RampRate says that Google does not seem interested in setting the record straight about YouTube’s actual losses. They believe that the enormously high loss perception by analysts helps Google negotiate more favorable contracts with movie, TV and music studios. Copyright owners tend to be less likely to pursue legal options to receive unpaid royalties and damages if they believe YouTube is a debt maker. “Google is no doubt thrilled to let YouTube be known as a financial folly,” RampRate said in their recent report.

YouTube spokesman Aaron Zamost said that Google has been running advertisements around millions of user created videos to lessen YouTube’s losses, though he would not actually comment on RampRate’s report. He also said YouTube shares revenue with its business partners, giving Google little reason to purposefully allow YouTube’s losses to be magnified. “We want our partners to do well, because when they succeed, we succeed,” Zamost said.

The real question is how much it costs Google to run YouTube. 20 hours of video are supported by Google every minute, requiring high numbers of bandwidth and storage space. Credit Suisse, after lots of research and interviews, believes operation costs to be as high as $380 million. RampRate believes it is only $83 million, believing that Google has negotiated lower costs with broadband providers and data movers. RampRate also believes Google has helped keep down YouTube’s costs with their own innovative technology, an idea that Pichette supported when he spoke with Mclean magazine. “When people run models, they generally use standard industry pricing for bandwidth, storage, but we build everything from scratch,” Pichette said in the interview. “So we know our cost position but nobody else does.”

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