Internet Industry

Content Economics

A few months back there were a series of analyst reports and subsequent blog posts about how much money YouTube was losing for Google.  What struck me about this coverage was that many people seemed surprised that YouTube would be hemorrhaging money since they had a lot of users.  Since then I’ve realized much of the industry does not think about the economics of serving content.   The smaller content is in terms of the bytes the better off the provider is.  Large content like video consumes tons of bandwidth and storage both which cost real money.  User content like YouTube uploads is even worse since there is a lot of it store and much of it is rarely if ever used.  Even photo storage and serving is a significant expense.

To offset these costs, heavy content needs superior monetization and since consumers rarely pay for content on internet regardless of what the old media types want to believe, this means advertising.  Video has the advantage that video ads have much higher CPMs than standard display.  However, any user generated content suffers from the problem of much lower CPMs than editorially produced content since the brand advertisers are wary of associating their brand with such unpolished and potentially offensive content.

Profitability data on individual properties is hard to come by since most properties are part of the big providers like Google, Yahoo, AOL and MSN but if it were available, I’m confident that the ratio of revenue per view to bytes served per view would be a strong predictor of profitability. As an approximation, ad CPM / bytes served per view would work and ad CPMs are easier to estimate from the outside since the CPMs of most ad types does not have that much variance across similar properties.

At the other end of spectrum of the content, Facebook recently announced they are cash flow positive.  Most of Facebook’s content is the news feed which is very small in terms of bytes.  Facebook does have the challenge of keeping track and assembling small pieces of content which has its own expenses but from what I’ve read, Facebook engineers have been able to make that process reasonably efficient.  Facebook also had to invent a new type of advertising to get to positive cash flow.  Traditional display advertising has never been high CPM on user generated content.

I haven’t done enough analysis to know whether YouTube can be profitable on its current model.  Google has advantages of both scale and scope.  From their other businesses, Google knows how to run massive data centers cheaply.  Being a huge purchaser of bandwidth and infrastructure hardware surely gives access to rock bottom prices.  If Google does mange to make YouTube profitable, these other advantages will protect them against new entrants.  My guess is that without a new advertising model that raises their revenue per view, YouTube can not over come the costs of serving video for free.