YouTube celebrated its tenth birthday the other day, almost nine of those years being as a property of Google (GOOG). It would seem like a raging success: Some stars of the medium make significant amounts of money, companies use it as a powerful marketing tool, and Google harvests enormous amounts of user data that become marketing gold. YouTube is the top video site in the world, with more than a billion users and $4 billion in annual revenue.
What it isn't: Profitable, according to the Wall Street Journal. Some unnamed person at Google reportedly said that the site is "roughly break-even."
That is an astounding assertion. After so many years, all that investment, and widespread acceptance by consumers, even Google, which knows as well as anyone how to operate massive computing for consumers, hasn't been able to turn it into a money-maker.
So, why isn't YouTube making money? And, if it can't, what other high-flying tech names might one day leave investors with the realization that the happy expectation of massive financial success will never come?
Significant portions of the tech industry, stemming from the dot com days, are built on the assumption that you can start a business, trade revenue for users at the start, and eventually become large enough to find a way to make money from all that traffic.
It was the theory behind Facebook (FB), which does make money now. But it was also the rationale for Twitter (TWTR), which still loses money, as does Box (BOX), and continues to be for companies like Snapchat and its recent $15 billion valuation.
The approach doesn't always work. The reason is that having a big audience isn't enough on its own to make money. There has to be an efficient monetization system and ways of leveraging infrastructure investment so that additional traffic comes in at next to no cost while still offering the chance for revenue that exceeds the expense.
To understand how things veer off the approved grow-and-eventually-become-rich business plan, here are some of the reasons why YouTube has remained break-even at best:
- User entitlement -- A key to the plan of scaling up and eventually figuring out how to make money is free services for users. The minute you charge people, most walk off, particularly when they've been trained to assume that services should be free. YouTube has clearly told people that they should expect free video streaming, even if it has considered an ad-free paid subscription service. Getting consumers to change their behavior after they've become used to not paying is next to impossible.
- Infrastructure costs -- The concept of free user services and scaling to eventually make them pay depends on the negligible price of adding additional consumers. But video is demanding of bandwidth and storage. Even if those are cheap in general, once you're handling as much material as the service does, it means big expenses for infrastructure. Although those costs won't scale linearly with the increased number of users, they do grow.
- Advertising rates -- Online media in general has had major problems with ad revenue. Even though video ads pay better than banners or other text ads, advertisers only want to be charged for people who actually see the ads. The question of verifying the actual audience that saw an ad is a thorny one. Older media like print and television were hugely profitable in their heydays because they never had to show that the audiences they claimed were ever truly realized by advertisers.
- Link economics -- For years, people in media and tech proclaimed the link economy. The idea was that you'd give away material, welcome people to link to it, and those links would bring new audiences that you could then turn into customers. But there is a basic problem, in that very few people actually click links that require them to go to other sites. As the Journal pointed out, many people simply watch a video hosted on YouTube and embedded elsewhere and don't actually visit Google's site, reducing the ability to display ads.
The tech conceit of starting with nothing and growing a business into being profitable sounds appealing. Who wouldn't like to minimize initial investment? But the successes have typically required hundreds of millions, if not a billion or more, of investment to ultimately succeed. And there are many ways in which the grand concept can fall short the way theory sometimes does when faced with the reality of application.
What will happen if one of the high rollers collapses under its own weight?