(Editor’s note: Entrepreneur William Jolitz posits a contrarian view on YouTube, praising its expensive use of bandwidth as a key to its sucess. Read on about how YouTube meets the “Google Test.”)
I was over at Buck’s recently catching up and comparing notes with some of my colleagues running the gauntlet pitching to local investment firms. Even though we all have completely different startups, we found we’ve been asked the same questions about business model - in short, what did we deliver?
So I dropped by my old friend and mentor Marty Tenenbaum of Commerce.net, who’d led in helping me to get my first start-up funded years back. We took a closer look at YouTube’s return on a “million a month” in bandwidth costs. It all came clear. They pass “The Google Test”.
So what’s “the Google Test”?
Google consumes a fantastic amount of bandwidth, efficiently translated into revenue over many years. Long before Google was a “Big IPO”, I was a senior exec at a managed service provider. Wayne Rosing, then Google’s VP Engineering, asked me to bid out the lowest cost way for Google to ship a massive database update between coasts. I hadn’t the heart to mention that Jim Gray of Microsoft maintained the best solution was to UPS overnight disk drives. They use bandwidth like nobody else, and it’s a long-standing problem.
Yet even as Google’s bandwidth costs have risen, their revenues, success and prestige have multiplied. Think about it.
Sequoia has a thing for companies that squirt gigabytes to make gigadollars. Even Bill Gates paid homage to this last year, both in his discussion of a “sea change” towards Internet services, and in Microsoft’s partnership with AP over video news.
So in looking at Google and now YouTube, maybe the question isn’t one of obsessing over bandwidth costs - great engineers like Wayne get there eventually. Instead we should ask how can we drive revenue sources by driving tons of content like Google and YouTube do? How much you displace in the ad space (Google) or TV (YouTube) is more important than what you displace it with.
Driving bandwidth costs up means stealing the percentage share of the total audience from others. The higher the costs, the fewer can compete. It’s a bold strategy not for the timid businessman or investor. Like the oil barons of another age (where do you think we got Stanford University), getting the corner on the market is mostly keeping everyone else out of it.
Customer created or repurposed content is the linchpin of a bandwidth driven business model. Older mainline publishers just can’t compete with the plethera of “free” media appearing on Internet portals and are struggling to maintain their mindshare - simultaneously feeding these self-same portals with expensively generated “journalistic” stories that make the high percentage of amateurish video and slashdot-like rants bearable.
As the rush to grab more consumer content surges, tools and services to make this material better, faster, cheaper become valuable. Rapid content generation services like blogs for text stories and services for video content accelerate and lower new content creation costs and time, supplying the pipe at a fraction of the cost of traditional approaches.
Do bandwidth-driven business models have the winning edge, displacing Moore’s law models as an investment strategy? We’re too early in the game to know, but it’s a provocative question. News and publishing are moving to center stage as print moves to the Internet, causing a major business model disruption. As print value collapses with the flood of cheap electronic media, it is washed out — driven off what print/broadcast publishers would consider an excessive bandwidth investment. Content value collapses, creating an entirely new group of media moguls. Those too frugal to invest in a bandwidth-driven business model, waiting for someone else to “double the speed”, may find too little, too late.
Google and their backers showed us how to seize a market boldly. YouTube is attempting the same strategy with video. As the new publishing magnates rewrite the industry with embedded targetted advertising that floats up in value as it outcompetes the moribund print side, old world industries take note: Take a hard look at your online business and see if you pass “The Google Test”.
Tags: co:google, co:YouTube21 Comments
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Anonymous said:
This is the most vapid, hear-yourself-talk analysis I have read in a while. Someone REALLY wants to invent a term (Google test), but can’t think of a better reason.
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Matt Marshall said:
Anon, I think the point is, in a nutshell:
YouTube gets all this criticism for using this bandwidth, but that this usage reflects something pretty significant — that it takes guts to grab a stake in Web traffic, but worries about monetizing it should come later. And, if you’re a Web company, and not displacing other peoples’ traffic, you’re doing something wrong.
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Martin Levy said:
If YouTube is spending $1M/month on just the bandwidth portion of their business they are clearly out-of-sync with good business practices. Even if you ignore the “lets worry about making an ROI till later” statement, there is a clear disconnect between cost-of-goods and potential ad based revenue. Why? Because video is not static images (aka. Flickr) or news or classic web sites, it’s video and video is REAL bandwidth that costs REAL dollars. Don’t get all caught up because of cute flash-based video players, it’s still bandwidth. Add to that the ability to embed a YouTube player in a blog and hence host video without the end user paying for it and you have a recipe for zero ROI on bandwidth costs.
You could consider video as the Third-Rail of the Internet. Touch it and you die.
This article clearly misses the point about bandwidth. There is good bandwidth usage (where ROI can be had) and there is bad bandwidth usage. This is bandwidth with no foreseeable ROI.
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Mathew said:
Wasn’t old Leland Sr. a railroad baron, not an oil baron?
easy facts to get straight.
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UpChuk said:
“You could consider video as the Third-Rail of the Internet. Touch it and you die.”
That is a great line!
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John Myers said:
Good article - Jolitz gets it right. Matt, I’m glad to see you’re finally getting
columnists with the grit to tell it like it is. Keep it up. -
Patrick Sassen said:
I’m absolutely amazed that no one else has noticed that Google was a big bandwidth
consumer for the time and it still was a huge success. The point Jolitz is making
seems to be that inhibiting your business strategy by worrying about negotiable
line items like bandwidth (ever hear of “quantity discounts” Martin?) over grabbing
market share is short-sighted and risk-adverse. No wonder Sequoia is the king of
home runs. -
Jason Cummings said:
I know everyone is tired of hearing about YouTube and FaceBook and Google and MySpace.
But they seem to be on a roll. Maybe they know something we don’t?
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ronald said:
Simple question when do you start worrying about ROI?
Google was always been very smart, guess why they don’t have big graphic ads plastered all over the place. Or how many text ads can they deliver for the bandwidth cost some other Internet company’s with there graphic ads. Clicks count not bandwidth. Or how many packets has a Google server to send you before it can serve another customer. Now compare that to Video.
Now try again …. -
Pran said:
Spend big and worry about ROI later. This is the exact kind of craziness that resulted and ended in the dotcomm bust.
Its unfair to compare Youtube to the success of Google which had very good technology and a very innovative business model (both of which should make up a true Google test), neither of which is currently true with Youtube. As we know Yahoo, Google, and MS already offer Youtube like services minus the traffic.
At present, all Youtube has going for it, is the infamous “first mover” advantage. In other words, it flunks a true Google Test.
The geniuses at Sequoia will likely finally come out on top by selling/IPO etc. “Pump in a bunch of $, hype, and exit” sounds sooo dotcomm to me! I just hope this does not go the IPO route (under some creative super hype strategy) to burn the public at large.
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Thomas said:
I agree with the first comment. This post shows the friction between Silicon Valley’s engineering culture and the fact that Internet is largely a media play (best exercised out of L.A.).
There is a reason why Sergei and Larry say they got lucky when asked how they did it by breathless Web 2.0 conference organizers during keynote Q&A. That reason is that they did, in fact, get lucky. Remember, they swore they would never put advertising in their searches, until they did.
I love bubble 2.0. It’s very interesting to watch SV make the same mistakes twice. Has anyone bought the Kibu.com domain? I hear it’s available… -
Tom Offenbach said:
Interstingly enough, the large consumers of bandwidth like goog, youtube, msft, amzn, ea , shutterfly, etc are beginning to realize that they are the ones with the true power when negotiating with the upstream providers. how many isps are going to shut down routes to youtube, goog, msft, etc? companies like these are in a position to start charging the isps to access their content as opposed to assumed inverse. on top of that, these large companies are becoming less depended on traditional network providers to gain more routes. most of these big companies directlyy peer with each other, in theory bypassing upstream network providers altogether. it would be interesting to compare power consumption of these companies because costs of power aren’t going down and you can’t multiplex it and all that other stuff you can to networks to get them to scale up.
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clark said:
last time i checked, google’s buiness model wasn’t built on displaying copyrighted material illegally. google is search, search drives revenue. viewing videos does not drive revenue (and just TRY to sell ads on the front of those crappy videos - won’t happen). This article is a complete whiff.
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Eric Hansen said:
Like “contrarian” views, especially when they’re right. Invest in winners who
aren’t afraid of making the big decisions. Bandwidth is an engineering and accounting
issue which can be solved. But businesses succeed on getting and holding customers.If you can’t pay to play, maybe you should get out of the game.
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Winsor Pilates Abs said:
Like what you have to say. Your blog makes good since to me.
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Tim said:
Clark’s comment was right on. No one will tolerate watching ads on YouTube, especially when they pull all the copyrighted material and all that’s left is kids dancing in their bedroom in front of a webcam.
YouTube is going to be sued into the stone age now that google owns it, which means Google is going to have to strongly go after copyright violations, which will kill the audience. YouTube won’t even be allowed to show kids lip-synching anymore because they’re using popluar songs.
It’s going to be the same deal that happened to Napster when they made it a pay service, no one will stay.
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William Jolitz - The Startup File - Scale and Competition on the Internet said:
I realize that with the exception of Tom Offenbach, who I know understands the value of a bandwidth-driven business model, many small businessmen don’t - it goes against the grain.
Which is why Matt chose to label it ‘contrarian’. It may be painful to consider.
To reconcile ’small’ with ‘big’, here’s a follow on that breaks it down in greater detail. While less crisp than ‘The Google Test’, it may be less misunderstood by those newbies to the ‘big’ deals. Yes, you have to ‘think different’. Try to stretch, even if it hurts, just a little.
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Khalil said:
I honestly believe that this situation with Goog/Youtube is more than vaguely reminiscent of 1999…too much valuation on a “non-product product”. Too much credit is given to the bandwith driven business model. Ultimately, IMHO, it’s content that rules the day. If we learned anything from the dot-bomb days, it’s that at the end of the day, it’s what you are actually selling that determines who wins and who loses. It’s the product,not the traffic. It’s called commerce for a reason. someone, namely, the public, has to purchase what you have in order to have a sustainable business model. I just don’t see the average netizen buying this content. And if it’s ad-driven, people will tune out eventually leaving investors holding an empty bag full of promise.
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sejal shrivastava said:
The test is maybe good .
I hope i am graet at it .
This test is maybe my best .
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yogesh kshatriya said:
The test is maybe good .
I hope i am graet at it .
This test is maybe my best .
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[...] Does bandwidth drive success? Silicon Valley guy William Jolitz wrote that high bandwidth consumption is key to social media success while driving off potential competitors. [...]