Ecosystem economics – Sticky wicket

Reply to this post

YouTube contributes no profit but a lot of value to Google.

• Even though YouTube managed to earn around $4bn in revenues in 2014A, the inherent nature of video economics continue to prevent it from turning a real profit in its own right.
• I suspect that the main reason for this is that most of the data that it gathers is monetised elsewhere within the Google ecosystem.
• As a result, YouTube is an excellent example of how important it is to look at the overall economics of an ecosystem rather than its individual pieces.
• I believe that YouTube is unprofitable for the following reasons.
  • First, Although it has billions of visitors, it is estimated by data analytics company, Pivotal, that 9% of users consume 83% of the videos viewed.
  • This has a substantial and negative effect on the advertising opportunity that exists for marketers on the platform.
  • Second, A large proportion of the videos are viewed from embedded players rather than on the site itself.
  • This reduces the opportunity for profiling of the user as well as the opportunity to advertise to that user.
  • Third, The real money in TV, movies and video is not made in the long tail.
  • In TV and video there is a small amount of content that appeals to almost everybody and then a long tail of categories and genres that appeal to special interest groups.
  • YouTube is the long tail whereas Netflix is the small amount that everyone watches.
  • Fourth, The popular content is many times more expensive to acquire but it is only here where the benefits of scale can lead to sustainable profitability.
  • The cost to support video streaming is much higher than it is for audio or a webpage.
  • A video requires much more storage space and transmission capacity than audio or a simple webpage.
  • This means that that in order to have comparable economics, advertising revenues per video have to much higher than for a piece or audio content or a webpage.
  • This is exactly the problem that made video calling over 3G completely pointless for mobile operators as they would have needed to charge 10x the price of a voice call for a video call in order to earn the same return.
  • Advertising revenues from video have been the fastest growing in recent years but I think they are still far below the levels needed to match the economics of audio or a webpage.
• Given these limitations, I think it extremely unlikely that Google will turn YouTube into a meaningful profit centre anytime soon.
• If YouTube is making no money, one has to ask why Google bothers holding onto it?
• The answer to this is simply that video is a very important part of the ecosystem and I suspect that Google’s overall revenues would fall by much more than $4bn if YouTube was to be sold or closed.
• This is because YouTube is an integral part of the overall Google ecosystem where I continue to believe that the whole is much greater than the sum of the parts. (see here).
• Consequently, while YouTube does not turn a profit in its own right, I believe that it enhances Google’s ecosystem to a point where the overall return on investment is nicely positive.
• This makes YouTube a very valuable asset despite the fact that it earns no money in its own right.
• RFM forecasts that Google’s revenues from its ecosystem will grow nicely again during 2015E, albeit more slowly than it did in 2014A.
• Google after Microsoft, is my second choice in the digital and mobile ecosystem.