The Google Test

(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”.