Credit Suisse Far Better at Analyzing Derivatives Than YouTube Infrastructure Costs
YouTube may be losing money, but it’s not losing nearly as much as some claim. Certainly not the $470 million that Credit Suisse projected in April, citing massive infrastructure costs. According to IT research outfit RampRate, a more realistic assessment of YouTube’s operating loss for 2009 is $174 million, nearly $300 million less than Credit Suisse’s estimate.
Why the discrepancy? RampRate says Credit Suisse vastly overestimated YouTube’s bandwidth, storage, and data center costs. Worse, it failed to account for Google’s peering agreements, which significantly reduce Internet transit costs by exchanging traffic locally with other large networks. RampRate figures Google (GOOG) pays for about 27 percent of YouTube’s bandwidth. It trades for the remaining 73 percent through peering deals.
Beyond this, Google finds savings in other ways. It’s likely able to negotiate a lower rate for 27 percent of YouTube bandwidth it pays for simply by virtue of the sheer amount of business it’s able to bring to the table. And it keeps hosting costs low by maintaining servers in out-of-the-way locations. Says RampRate, “Regardless of what you may hear, YouTube costs are a fraction of any other company running similar operations. Most of Google’s bandwidth is free or near-free; its hardware is cost-optimized; and its data center costs are mostly committed or sunk.”
If that’s the case, why didn’t Google take issue with Credit Suisse’s (CS) projections? Why does it allow this perception of YouTube as money pit to persist? Well, silence is golden, is it not? “Any appearance of profits leads to more draconian revenue share demands from partners and additional lawsuits from owners of unlicensed content,” Ramprate explains. “An apparent loss deters this behavior, making it eminently advisable for Google to let rumors of YouTube’s losses grow and compound….
“The trail for this strategy was blazed long before YouTube. Apple’s poor-mouthing of iTunes served it exceptionally well for years in holding back the tide of higher revenue share demands (even as labels privately suspected the service was much more profitable than reported). The apparent stability and maturity of the business finally culminated in recent price increases. Google can only hope that its run with YouTube lasts as long as Apple’s luxury of $.99 pricing.”