There’s one big Web 2.0 question we’ll never know the answer to: Could YouTube have survived on its own?
There are a handful of industry-changing Web 2.0 names including MySpace, Facebook, YouTube, Twitter, and LinkedIn. But unlike those other Web 2.0 behemoths who have the luxury of waiting out revenue challenges as their user base surges and the economy recovers, YouTube’s runaway success meant extremely high bandwidth costs and legal worries early on. It’s one of the only companies in that list that should have sold early while the momentum was high.
Evidence: Nearly three years after the acquisition, the mighty Google still hasn’t figured out exactly how to monetize all those eyeballs either. Industry estimates say YouTube spends half a billion or more a year in bandwidth costs. That’s not to say it was a bad acquisition, particularly considering Google’s stock currency was tantamount to monopoly money back then. But you have to wonder, if YouTube were alive today, how much more would it have been forced to raise and at what terms?
You can get an inkling by looking at the fortunes of a handful of Chinese equivalents: YouKu, Tudou, and 56.com. The three tell a lot about the Web in China. YouKu is based in Beijing, Tudou is based in Shanghai and 56.com is based in Guangzhou – and each is representative of the 
strengths of the region, according to several dozen interviews I did in China over the last two weeks. Situated at the nexus of Chinese startup culture and government influence, YouKu is widely credited as being the best at playing the startup game. Drawing off the Shanghai’s strength as a media hub, Tudou prizes self-expression as you can see by its Facebook-esque employee-graffiti-ed walls (right). And like a lot of emerging Chinese tech powerhouses to come out of the Guangdong province, some say 56.com has the best sheer technology of the bunch.
YouKu and Tudou both claim to be the largest, while 56.com suffered from a several week government closure last June.
The three are also emblematic of the flood of US money trying to get a piece of China: Among others, General Catalyst and Granite Global Ventures invested in Tudou, Sutter Hill Ventures invested in YouKu and Sequoia Capital, Disney and Adobe backed 56.com.
The three are also examples of the Chinese habit of taking something popular in the US and doing the China version. The temptation is to think ideas that worked in the U.S. plus the world’s largest Internet market equals closest thing you can get to a sure thing. But the so-called “China Factor” has been a mixed blessing for these sites. 56.com’s closure is emblematic of the challenges these companies face sitting at the crossroads of a closed China and a (more) open China, as user generated video blurs the lines of media and information and video is a powerful way of telling a story.
But that’s not the only unique “China Factor” challenge. The sheer size of the world’s largest Internet audience is sucking these companies’ coffers dry, as they work to do what YouTube couldn’t in the less developed Chinese online advertising market. The companies are literally growing too fast for their own good. As a result the number of players in the market have shrunk from 200 pure-play video sites in 2007 to about ten in 2008 and only a handful today.
Those numbers are according to Gary Wang, CEO of Tudou. (Pictured above.) It was the first to launch back in 2005 and in the first six months of business the site did half the video traffic in China. That terrified Wang and his co-founder Marc van der Chijs. Today, the site has to proactively throttle back the size of its pipeline, knowing full well it’s giving a lot of users a bad experience. But Wang doesn’t have much of a choice. He’s raised a whopping $85 million and doesn’t want to tap the markets again until his revenues are break even, and while growing, they’re not close now.
It’s a catch-22: More traffic could bring in more ad revenues, but the bandwidth costs would also be too crippling to prove out the model. “We could be five to ten times bigger if we wanted to,” he says. “It’s purely a financial decision.”
All the Chinese sites have some advantages over YouTube. Chinese Web surfers tolerate a lot of ads and bling online and, with more limited media options, they tend to watch clips for longer. That means they won’t necessarily balk at pre-rolls. Tudou has five-second pre-rolls, and YouKu has 15-second pre-rolls. And while a lot of haters like to call the sites nothing more than havens for pirated content, that’s not exactly verboten in China the way it is in the U.S., so there’s not the same legal threat for now.
The battle may be going on half-way around the world, but it has all the makings of a Valley-LA grudge match. Most of the people I met in Shanghai argued why Tudou was stronger, while those in Beijing argued YouKu had the edge. A few even said that 56.com’s tech advantage and content partners like Disney could make it a compelling dark horse.
But all three should probably worry less about each other and more about someone winning. Because that’s the big fear of most people who live in China and love the sites: That the fire hose of traffic kills them before online ads catch up. And then it’s back to those pirated DVD shops for everyone.
Very nice article and analysis. Professional and informative.
although the title sounds like eugenics
if youtube were independent??? who cares?
moreover, youtube suits very well with goog’s pro “free” piracy agenda. maybe goog supports piracy just because it hurts msft.
I was just going to say the same thing. Not that I have anything against other articles that are purely personal rants with some fact sprinkled in. It’s just refreshing to read a blog that is about about information instead of opinion.
ya or racist insinuations
What’s up with the Chinese guy in the picture… Who is he?
Did you even read the article? It says that is Gary Wang, CEO of Tudou
Oh I missed the “(Pictured above.)” …
Robert… can you not read? HAHAHAHAHAHA… got your ass.
Youtube was a good idea, but not a good business model and I don’t think it ever will be..sheer advertising will not cover the cost..they will have to think deeper and harder..
“…they will have to think deeper and harder..”
You’re saying they should become a porn site?
Wow, I think you just solved google’s pardigm.
But China also has a loads of censorship issues which makes any content-rich site have to jump through a ton of hoops. Money, yes. Hassle, yes.
Funnily enough, in terms of limiting copyrighted content, it’s the West that’s the biggest censor.
Just look at the most popular streaming sites for commercial content – youku is streaming the newest Trek movie to the entire world, youtube ain’t.
piracy and censorship are two totally different things
streaming the star trek movie is theft. why bother spending a hundred million making a film, if some bunch of crooks are going to steal it?
“It’s a catch-22: More traffic could bring in more ad revenues, but the bandwidth costs would also be too crippling to prove out the model. ‘We could be five to ten times bigger if we wanted to,’ he says. ‘It’s purely a financial decision.’”
Have they tested paid membership for ad-free content, or any kind of micropayments?
YouTube has lost its way. My thoughts here:http://searchengineland.com/youtube-is-broken-heres-how-to-fix-it-18272
Sarah Lacy, wanna go to China and start Twitter there? We’ll be rich!
u ain’t kiddin! Chitter on the rise
a few sites featuring similar functionalities already appear in the Chinese Market. A tad too late :C
LOL except that China already has its own twitter – fanfou.com (fanfou = have u eaten yet?). It even looks like twitter.
if I had over a billion at http://www.worstpizza.com, first I would buy people free pizza. Second I would surely have figured out a revenue model by now!
Classy.
At least leave a real comment and plug your site at the end, as a signature.
Well first of all, you need to make sure your website clearly states its purpose to users. Secondly, it should give users a set of actions they can perform on your website– clearly and up front. I don’t see either, so I clicked and left immediately.
That has to be the the worst attempt at spam ever.
For all but 56.com, you’ve revealed two sites unfamiliar to US audiences which hold lots of pirated films….according to my ‘friend’
For me it’s enough
Great article. I’m biased, but I enjoyed reading it tremendously.
oh do elaborate on the bias, please..
we love devil’s advocates..!!
Video sites in China. This is so yesterday. C’mon Sarah, you really couldn’t find a better story going on in China? You’re 2 years too late. This is so 2007.
Thanks for this update!
Any news on PPLive?
Nice post.
Opens an appetite for doing some Chinese tech homework.
Another factor needs to be taken into consideration is that Youtube usually gets blocked in China for political reasons, including right now.
I believe the only profitable video sharing site in the world is Pandora.TV in Korea. Youtube launched there a few years ago but is still a small player (Google in general has had a hard time in Korea). Pandora.tv has always carefully balanced growth and monetization. They are now the #3 player in Japan and have started interesting monetization experiments. Each country may take a different path to profitability. They have launched other languages (including Chinese and English) but they are not promoting those sites until they are ready to monetize (in fact, when we initially invested in 2005, we shut down their Japanese division until we were ready).
its a pity that such big acquisitions were made without any thought.The similar thing happened to yahoo’s broadcast acquisition didnt it ?
The Chinese Video sites wont last long. As far as I know, unlike what people do in youtube, tudou and youku are more like hulu.com, people tend to watch more TV shows instead of home-made videos. There is a rumor that CCTV, the biggest national TV, which is the largest TV station in China, plans to build a site that could host all the tv shows it owns, and there would be a lot of shows that are pirated by Tudou and Youku. CCTV and some other local TV stations consider video sites like Tudou a huge threat. For example, a very famous TV show on most of TV channels (some background info about how TV shows are made in China: TV shows are made sometimes by media companies or TV station such as abc or nbc in US, the play right will be sold to different TV station in the timeline) was not so popular on TV, as even before the it was on TV, it was pirated by Tudou and most of people watched it online. Most of TV stations are not so happy about that, and they have made a lot of adjustments regarding this threat, such as playing more than one episode per day and reducing the ads etc. As I said, the future of Tudou and Youku is not that promising. People in China, unlike people in US, don’t tend to make videos on their own, as it is time consuming and not promising in making money. Most of home-made videos are either from somewhere else or clips of TV programs. Regarding how long YouKu and Tudou will struggle, I don’t know, but it is definitely a surprise if they can break even in 10 years.
I totally agree. Who out of mind invested $85 million? The reason these sites exist is because they offer pirated movies and TV series. Once they become big or profitable, Chinese government will definitely censor them. This already happened about a month ago, the government ordered all sites to stop playing copyrighted material. But it seems these sites resume offering pirated movies again. “Pirated DVD shops” will survive because they don’t plan to go IPO…
This post was better than “Cats.” I’ll read it again and again.
i’ve been wondering how youtube was gonna make money for years…
i’m still worndering when myspace, facebook, twitter, and a plethora of other sites are going to make money too.
ads in the videos! http://www.zunavision.com/
Well, if services become a burden because the ones using them do not contribute enough to maintain them, the one or the other way, sooner or later, they´ll come to an end.
“We are losing money on every new user we add, but we will make up for it in volume” – its interesting to see how this will play out. Facebook photo hosting for users in far off parts of the world can’t be profitable.
Good article but one cost that YouTube has that the Chinese sites don’t have (yet) are the royalty costs Google pays the music labels for music video plays. And they’re apparently not insignificant either..
Good article, but a few things that we need to keep highlighting when we discuss the Internet in China:
1) Stop bandying about the 1.3 billion number. Hundreds of millions of those people are rural peasants for whom the Internet is a luxury they will never have. As you can see, the Internet in China is extremely urban, so the large cities like Shanghai, Beijing, Guangzhou, Shenzhen, etc. is where the Internet is. Sure, this means you have a couple/few hundred million, so it’s the size of the US, but not quite that billion number. (Note: the same goes for India.)
2) Many of these Chinese sites have gotten edges by doing things that are either inherenty unfair, or simply following a scorched earth policy to gain market share. Look what Taobao did to eBay, or how Baidu got the edge with MP3 search.
3) Have fun with the Chinese censors. No, seriously, have fun.
4) Good luck getting an ICP license if you’re an outside company. If you start gaining share and you’re not Chinese and you did somehow manage to get an ICP license, expect serious government scrutiny.
I actually like China a lot, and I think a lot of companies are doing some amazing stuff there (I’m particularly impressed by the mobile phone market in China.) However, in China, the population numbers are horribly overblown, load times can be brutal, the monetization models sketchy, the security a nightmare, and the competition is blatantly rigged against you if you’re an outsider. Until that changes significantly, we’re not going to see a fair representation of what China can really do with the Internet.
i am a Chinese , you don’t know anything about China . shut up please。。。。
Bandwidth costs are always going to be a major issue unless we do something to make bandwidth cheaper.
Youtube / Google doesn’t pay for much of it’s bandwidth. They get it for free through the magic of peering.
See this for a smart explanation:
http://blogs.di...et-peering.html
This comment and link will probably be lost in the TC shuffle, but people have got to start thinking differently about the economics of Youtube. The “industry estimates” are way off.
Good article. Looking forward to more as you continue your trip.
can someone explain where the $500M bandwidth cost estimates come from? YouTube do what ~600Gb of traffic? (which is obviously very huge) but that should only equate to about $3M/month (and that’s assuming about $5/Mb, which at there volume is more than obtainable)
Sarah who are these people you speak of?
Does anyone have a better estimate of YouTube’s peak network traffic?
I believe it’s based on estimates from Credit-Suisse analysts. To get technical, they estimate that bandwidth costs will be $360 million, the total cost of running the service will be about $711 million (you have to add servers and electricity costs – storage alone for video is probably substantial), and it will generate about $240 million in revenue. You end up with a net loss of about $500 million.
I’m not sure how they can ever climb out of that hole – certainly in my high school economics class we learned that when your marginal profits are negative, you should shut down (of course theirs might not be since they presumably already paid for the servers). In any case, you know you’re in trouble when becomng more popular loses you more money.
http://blogs.di...et-peering.html
“There’s one big Web 2.0 question we’ll never know the answer to: Could YouTube have survived on its own?”
We’ll never know the answer to this? You’ve gotta be kidding me. I think the answer is pretty obvious in view of the fact that Youtube is still bleeding. Kudos for asking the most rubbish question I’ve ever seen on TC.
“And while a lot of haters like to call the sites nothing more than havens for pirated content”
Why would you label these people ‘haters’. They’re just calling a spade a spade. In praise of your lexicon, I really think more frequent use of terms like ‘haters’ in TC articles is a great way to boost TC to the same level as Kanye West’s blog. Encore!
Great article indeed. Thanks Sarah,
At my company we’re having the same dilemma with bandwidth costs exceeding half of our total burn rate. Indeed, we need better monetization models for online video. Ad networks should convince big brands to get more brand awareness (cost per impression) campaigns over the internet. TV broadcasting costs are not lower than online video broadcasting costs. This model should be viable. The problems with advertising on the long tail are obvious. But the brands should get over it. I know it’s gonna take time, at least until gen y dominates. My 2 cents,
Article = Not bad but whats up with that title??
Could YouTube have survived on its own?
NO
No business model