

YouTube Is Doomed - dsil
http://www.businessinsider.com/is-youtube-doomed-2009-4

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nopinsight
Issues with the article's arguments:

1\. Costs >> Since the majority of Google’s costs for the service are pure
variable costs of bandwidth and storage, and since they’ve already reached the
point at which no greater economies of scale remain, the costs of the business
will continue to grow on a linear basis.

Costs of bandwidth and storage will continue to decrease, perhaps
geometrically, in the foreseeable future, and so is Youtube operating cost.

2\. Monetization There must be other ways to monetize the eyeballs that have
not been fleshed out in full yet. It's still very early days. The author
assumes that YouTube has mostly run out of ways to monetize through ads
(although he did point out a subscription model, esp. for marketers.)

~~~
ivankirigin
Bandwidth is decreasing, but resolution is increasing. They'll push as many
pixels as is feasible, so I'd expect costs to be static.

~~~
abstractbill
I suspect bandwidth costs are decreasing at a rate that's faster than the
increase in resolution of display devices though, and there's no point pushing
more pixels than the best display has.

~~~
iigs
I suspect you're right, and this is a double-whammy when you consider that
excluding file sharing, there's no significant driver for internet bandwidth
above a small fraction of (even USA) broadband installations.

You can stream HD video in 2mbit, and virtually all of the content on YouTube
is drastically lower native bitrate than this (and transcoded to 300-384kbps).

The elephant in the room is that YouTube should have given Google the "first
mover advantage" and control of the legal feature-length TV episode (and
perhaps movie) space, giving them the revenue of the popular, high-rate
advertising to bear the load of the "uninteresting and unwatchable" (mind you
that unwatched media has no bandwidth costs associated with it, reducing it to
a storage expense alone). Hulu blindsided Google and now Google's best bet is
to pull a Microsoft and iterate and hope for their competitor to slip. This is
complicated by the fact that Hulu is backed by the content producers
themselves.

~~~
tjmc
The thing that hackers (pg included) fail to understand about video online is
that there _is_ no first mover advantage. There's no network effects. There's
little if any brand loyalty. It's about IP ownership of popular content.

Who cares if YouTube is big? Without the rights to the most popular content,
they're stuck trying to make money out of dog weddings and tearful tirades
about Britney with 13 hours of additional low quality crap uploaded every
minute. The content owners who setup Hulu are under no pressure from them
whatsoever.

Google paid $1.65 billion for YouTube. It has never made a cent and its
running costs are now equivalent to a small airline. Really, this is a no
brainer. Shareholders should be asking for someone's head on a platter.

------
pedalpete
Isn't this the great flaw in the author's theory? ' It seems safe to assume
that YouTube’s traffic will continue to grow, with no clear ceiling in sight.
Since the majority of Google’s costs for the service are pure variable costs
of bandwidth and storage...'

If traffic grows, and bandwidth and storage are the highest costs, then
revenues should increase while costs decrease as bandwidth and storage costs
come down.

Or is there something else I'm missing there.

~~~
mattj
He says later that youtube is big enough that they've maxed out their
economies of scale (hence costs won't come down, which seems like a reasonable
argument).

The real flaws with this article are that user content is growing
geometrically compared to paid content (citation? where does he get this
from), along with the fact that the author is the CEO of fliqz.com - a video
streaming company. Good job reporting conflict of interest, business insider.

~~~
dandelany
These are two different issues. Economies of scale are cost advantages that
businesses obtain by expanding. Web Startup X starts out in a rented office
with their content sitting on externally hosted servers, since they're too
small to buy their own space/servers. At some point, they have enough users
and cash that it becomes much more cost effective to build a datacenter and
host everything in-house.

Youtube has gone through many of these stages, culminating in the Google
purchase, and are now the big fish, with no more economies of scale left. They
already have datacenters worldwide, and global name recognition. No matter how
much they continue to grow, they will not become more profitable due to growth
alone.

However, the other issue here is the exponentially rising value of computing
technology, especially in bandwidth and storage space. It's why you paid $3500
for a 5MB hard drive in 1981 when you can get 200,000x the space for 2% of
that price today. This fact, which has nothing to do with economies of scale,
is why Youtube's profit should increase to >0 someday. The question is whether
Google can (or will) wait that long.

------
shimon
This argument only makes sense if you believe Google's ability to generate
money from YouTube will actually get worse as YouTube becomes more popular.

Why? Because bandwidth is getting cheaper. It won't be long before running
YouTube costs half as much per visitor as it does today, so even if their cash
potential per visitor stays the same, they will eventually break even.

On top of this, Google has some of the lowest bandwidth costs on Earth. They
have massive peering and lots of their own wires; to suppose that they pay
anything near what a startup video company would pay for bandwidth is
ludicrous. But if you want to make YouTube look unsustainable, it helps to
subtract a profitable network business from the bottom line.

Yes, YouTube might cost a lot for a few years, but if it retains its dominance
for another three to five years, it will become ridiculously profitable.

------
neilk
Says the CEO of a competitor.

~~~
Retric
Yep,

"they’ve already reached the point at which no greater economies of scale
remain, the costs of the business will continue to grow on a linear basis."
This is wrong on several levels.

YouTube helps Google reach even larger economies of scale. Granted YouTube is
still going to end up as a net loss, but things like heath care become cheaper
per person as the company grows. However, over the next 10 years hardware and
bandwidth is going to get even cheaper. While moving to HD will probably eat
most of that benefit, I still think YouTube will break in the not so distant
future.

~~~
mattmaroon
Health care stops becoming cheaper per person at some number far below what
Google has exclusive of YouTube. The same is true of most things.

~~~
Retric
Your forgetting about overhead. They spend K + Nx so cost per person is x +
K/N which drops as N increases. Granted for companies the size of Google K is
small relative to Nx but it's still a large number.

PS: Management tends to work the other way, so cost per person is ~x + Log(N)
but generally speaking it's a net win to increase the size of the company.

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axod
Where is the actual data for these articles? Does anyone have a link to the
actual figures Credit Suisse put together, with explanations as to where the
figures came from?

~~~
mattmaroon
[http://www.multichannel.com/article/191223-YouTube_May_Lose_...](http://www.multichannel.com/article/191223-YouTube_May_Lose_470_Million_In_2009_Analysts.php)

As with all analyst estimates, you can't totally bank on accuracy, but I'd
have a hard time believing they're far off.

~~~
tomsaffell
OK, here goes some back-of-the envelope math (risky business in this group, so
looking forward to hearing what I'm doing wrong..). Where I have made
assumptions, I have erred on the side of 'expensive', i.e. this should be an
upper bound estimate:

75,000,000,000 streams/year

400 kbps (average bw)

average stream length: 300 s (stream length, not video length, highball
estimate)

-> BW/year = 1.13e9 GB/year

0.1 $/GB (BW cost, based on AWS S3 prices, again a highball)

-> BW cost ~= $113m / year

Only 1/3 of the estimated amount, and I'm not taking account of any clever
stuff YT do to lower the costs. What gives? Is this a peak BW issue?

~~~
axod
>> 0.1 $/GB (BW cost, based on AWS S3 prices, again a highball)

I'd say that's insanely high. I've heard for large amounts of traffic you can
get 1TB for $8 - instead of $100.

~~~
abstractbill
Agreed, but tomsaffell's point is that _even with these insanely high
assumptions_ , the cost is still a lot lower than the number from the article.

~~~
axod
Right. Perhaps the article is assuming the cost of bandwidth is the same cost
you pay for SMS or something ;)

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iamelgringo
I've actually long thought that Google's YouTube acquisition wasn't purely to
get into the online video market. It was all about the huge corpus of video
that they acquired.

Let me explain. Google's general game plan is this: massive compute clusters +
massive datasets + Phd CS brains trying to do something cool. My bet is that
Google thought that having the world's largest video dataset was well worth
the $2.5 billion they spent to buy YouTube. It's still worth $0.5 billion a
year for them to keep maintaining it.

I don't think that they are going to be panicking about monetizing YouTube any
time soon. That's not the reason they bought the company.

------
Anon84
"Rumours of YouTube's demise have been greatly exaggerated"

\-- Mark Twain

~~~
sketerpot
"I may not agree with what you have to say, but I will defend to the death
your right to misattribute it to Voltaire."

\-- Voltaire

(Seriously, though, YouTube as a company may or may not prosper, but YouTube-
style streaming online video isn't going anywhere. So for most of us, the
whole issue is moot.)

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dsil
Found via <http://www.marginalrevolution.com/> , a great, very readable blog
about economics.

~~~
tjic
Why in heck was this voted down?

Marginal Rev is a fascinating blog, and it this comment is by the guy who
posted an article that rose to the front page, explaining "not only is this
article fascinating, but there's a lot of other fascinating stuff at location
X on the internet".

------
tdavis
Wait a second here! This guy is saying Google can't monetize a video site made
up almost entirely of illegal content with an enormous user-base consisting
mostly of people with an intelligence level and attitude roughly equal to a
toddler on meth?! That's just crazy talk! YouTube will make tons of money,
just you wait! Just like Facebook! I mean, there must be _some_ way to
monetize millions of users no matter what!

------
mpk
YouTube never made sense. It was geared to be bought out from the start.

I like watching videos on youtube as much as the next person, but according to
the numbers ... youtube is in the red (never mind that Google will keep
pumping money into it for the time being).

Serving up content costs money. Period. And youtube serves up a lot of
content. The only reason Google bought youtube and continues to run it at a
loss is because they hope to monetize it somewhere in the future.

This kind of strategy isn't new ( _cough_ XBox _cough_ ) and it may or may not
pay off somewhere along the line.

Google's acquisition of youtube was a gamble and an attempt to move into yet
another market. Will this pay off? Who knows, but one interesting aspect is
that Google isn't identifying itself branding-wise with youtube. If they flush
youtube down the toilet tomorrow it will have an almost minor impact on the
Google brand.

------
knightinblue
"Youtube Is In Trouble" is one thing, but "Youtube Is Doomed"?

There's linkbait and then there's businessinsider.com

------
wmeredith
Why can't they just charge a membership fee to upload? Would it be way too
expensive?

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LostInTheWoods
The mathematics of most sites, especially the super large ones like Youtube
and Facebook, simply do not add up. They are putting all their chips down on
some profitable future that I just don't see materializing. Giving aways tons
of content, functionality and bandwith is simply not a sustainable operation.
In my opinion, the future of the internet will contain a lot of toll booths or
perhaps we will find a better way. These large monolithic web services just
does not seem the way to go.

~~~
ewjordan
One could easily have said the same thing of Google's search business itself,
which gives away tons of functionality and bandwidth.

The real question is whether online advertising will ever bring CPMs in line
with TV or print advertising. Personally, when I hear about YouTube not being
able to place ads on most of their user-generated videos, it makes me
immediately stop and think: is this perhaps just a huge market hole, and a big
opportunity for anyone willing to pay for ads on those videos? Are the
eyeballs on user-generated videos _really_ worth less than those on
professionally produced ones, or is it just that most of the big advertising
spenders are nervous about associating themselves with lower quality or
potentially offensive content?

Further, are online eyeballs _really_ worth that much less than TV eyeballs?

I still think it's possible that reduced online CPMs may come up naturally
over time as more of the entertainment market shifts online. If this is the
case there's not much Google can do to help the situation, but it may be worth
holding out a while longer to see if things normalize a little bit.

Then again, it's also definitely possible that either a) print/TV advertising
rates are a lot higher than they "should" be, and the only reason TV has been
able to sustain itself on ads is that advertisers were getting ripped off but
couldn't figure out a way to prove it to themselves, or b) online eyeballs are
inherently worth less, perhaps due to demographic issues. If either of those
is true, free video on the Internet may be fundamentally unsustainable until
bandwidth costs come down substantially.

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jpwagner
Generalization: With no change (in product itself or demand for that product),
a product's current margin is unsustainable in the long run.

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zandorg
I previously mentioned that if video was just a 9mb file on someone's website,
like a HTML page or GIF, it would kill YouTube. I'm not sure about the
bandwidth requirements for the more popular sites, though.

~~~
jonknee
... And yet sites like Flickr are huge even though JPGs are as easy as
anything to post on your own website.

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randallsquared
Posting and management tools are important, in other words.

~~~
jonknee
And community.

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paul7986
I wonder if they could build into Chrome a P2P video streaming client?

Utilize users bandwidth.

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TweedHeads
Oh gawd, not again...

~~~
abstractbill
I've seen enough of these stories recently that part of me wonders if Google
is deliberately trying to spread the idea that youtube isn't, and can never
be, profitable. I can see a few ways in which it would benefit them to have
the division perceived as such.

~~~
TweedHeads
I wouldn't say google is spreading FUD about themselves, but I know of one
company that has a big budget for propaganda.

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ams6110
Nothing useful can stay free forever.

~~~
tjic
Yeah, the Emacs and Linux fees these days are outrageous.

~~~
Dilpil
Forever is a ways away.

Of course, this line of argument is rather vacuous...

