Rethinking YouTube's Bandwidth Bill

Written by Ryan Lawler

Wednesday, September 9. 2009 at 11:59 AM EDT Post a comment

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Less than six months after suggesting that Google (Nasdaq: GOOG) could lose upward of half a billion dollars operating YouTube Inc. this year, Credit Suisse has revised estimates for how much the company pays for bandwidth.

In April, Credit Suisse analyst Spencer Wang issued a "Deep Dive into YouTube" research report that suggested Google would lose approximately $470 million on the online video portal in 2009, based on a revenue forecast of $240 million and a opex estimate of $711 million for the year.

Key to that estimate was a bandwidth bill that Credit Suisse pegged at around $360 million, based on an estimate of the amount of traffic YouTube pushed over the course of the year multiplied by a heavily discounted market rate for IP transit services. But the Credit Suisse didn't take into account Google's peering relationships, which would heavily reduce the amount of bandwidth that the company pays for.

That led IT consulting firm RampRate to come up with its own estimate of YouTube's traffic costs, based on the amount of traffic that is either free (due to extensive peering) or leased at very favorable wholesale rates from some low-cost Tier 1 bandwidth providers.

RampRate estimated YouTube's bandwidth costs at $48.7 million, due to the belief that nearly three quarters of Google's traffic is peered. Even taking into account a cost of $26.3 million for sustaining those peering relationships, RampRate's estimate of YouTube's total traffic costs are well below what Credit Suisse published.

Now, Credit Suisse has come back with a more extensive dive into YouTube's bandwidth costs and a revised estimate for how much the company spends delivering the massive amount of video it serves. And while Credit Suisse has revised its estimate of YouTube's bandwidth cost downward, its new forecast is not as low as some would expect.

In a research report issued this morning, Wang estimates YouTube's bandwidth bill for 2009 will be $300 million, 17 percent lower than its previous estimate, but not nearly as low as some competitor forecasts.

That's because, while the financial firm now takes peering into account for the new forecast, it assumes that only about 20 percent of YouTube traffic is peered. That's a far cry from the 73 percent of traffic that RampRate estimates is peered -- but unlike RampRate, Credit Suisse stresses that its new estimate is based on "public peering data provided by Google engineers and conversations with bandwidth providers, transporters, peering facilities, and Google peering partners."

Wang writes:

The main difference between our bandwidth expense analysis and others' view that YouTube bandwidth costs are de minimus is that we do not rely on IP space routing data to measure peering traffic volume. Using IP space routing data to gauge traffic assumes that the number of IP spaces are in direct proportion to traffic volumes. According to Renesys, a company that tracks IP space routing, this is not the case for Google, as routing data are not representative of the traffic volumes being passed through.

While lowering its opex forecast, Credit Suisse noted that it is not bearish on YouTube's financial prospects, despite the fact that the site is still a money-losing operation. That is based on Credit Suisse's belief that YouTube's profitability should continue to improve as it adds more video that it can monetize -- something the company has been doing by bringing more premium content providers on board.