Google accused of avoiding YouTube revenues

Google acknowledges that YouTube is still losing money. But according to an opinionated San Francisco IT research and consulting firm, it's not losing as much as it wants you to believe.

In April, the financial brains at Credit Suisse famously estimated that Google will spend a good $711m on YouTube this year while pulling in revenues of only $240m. That's a $470m loss. But a new report from RampRate - a firm that claims better IT knowledge than Credit Suisse - says that number is much too high.

"YouTube as a millstone around Google’s profitability is a mirage. Contrary to Credit Suisse’s estimates of a $470m annual loss, Google is more likely losing a fraction of that amount, due to peering for 73 per cent of its traffic, buying bandwidth from some of the lowest-cost Tier 1 providers, using unprecedented bulk purchasing power to secure very favorable wholesale rates, and running data centers far away from expensive locales," the report says.

"RampRate estimates that, based on our experience working with other top internet, e-commerce, and media firms, Google’s maximum loss is no more than $174M without challenging Credit Suisse’s revenue assessment."

What's more, RampRate argues that Google has purposefully allowed such misconceptions to proliferate. The firm insists that Mountain View is using tales of YouTube money eating as a way of gaining negotiating leverage against TV, movie, and music houses looking to license their content as well as copyright holders crying foul over piracy.

"Google is no doubt thrilled to let YouTube be known as a financial folly. In the dangerous waters of online content, a whiff of potential profit is an irresistible lure for predators such as copyright lawyers circling user-generated content monetization and content partners that are all too ready to turn on their distributors in a feeding frenzy," the report continues.

According to RampRate chief executive Tony Greenberg, the report was an effort to deliver video-happy businesses from the notion that the web will never make them any money. "The intent of the report was to really pull the dagger out of the back of video-based distribution businesses to show that their are ROIs after Google and after YouTube, that there will be many profits and opportunities on the largest social networking site in the world: YouTube," he tells The Reg.

Certainly, Google won't say how much it's losing from YouTube. But Google won't say much of anything. And in the wake of the Credit Suisse report, the company seemed to indicate the report's numbers were inflated. "Most people build outside views of what it costs us to do things, and often they exaggerate," Google chief financial officer Patrick Pichette told the Canadian magazine Macleans shortly after the report was released.

"When people run models, they generally use standard industry pricing for bandwidth, storage, but we build everything from scratch," he added. "So we know our cost position but nobody else does."

Whatever it's spending on YouTube, Google has also said it's having trouble convincing advertisers to spend money on the site. "The one thing that's not there with the fragmentation of media is a large audience," Jordan Hoffner, YouTube's head of content partnerships, told a San Francisco conference last year.

"We've seen that because of the increased fragmentation of audiences, brand advertisers that we deal with - Coca-Cola, Proctor and Gamble, General Motors - feel like they're missing something. They want to know how you reach a large number of people with a small amount of money."

For Greenberg, this too is Google FUD. He wants content owners to know that ads aren't the only way to make money from online video. "Video business is a possibility," he tells us. "Google is clearly doing a revenue avoidance."

Greenberg argues that at this point, Google is merely interested in beefing up its relationships with the TV, music, and movie crowd. Once Google augments the "cat videos" with professional vids, he says, they'll flip the revenue switch, expanding ad coverage and tapping other revenue sources, including direct video e-commerce. "Their strategy is to create advantageous content revenue sharing relationships, and content owners need to hold their mark."

Google did not respond to our request for comment. But a company spokesman tells the AP that Google is running millions of ads within or near millions of YouTube videos in an effort to reduce the site's loses. "We want our partners to do well, because when they succeed, we succeed," the spokesperson said.

Considering the state of the economy - and the way Google is scrambling for extra dollars in other areas - we find it hard to believe it's "doing a revenue avoidance" with YouTube. But we have no doubt that those Credit Suisse numbers are inflated. ®