Over on his Communications blog, Brough Turner took a swing at Credit Suisse's analysis of YouTube last week. Credit Suisse had said that YouTube's 2009 revenues would be about $240M whereas its costs would be $711M - which would be a spectacularly bad business to be in by anyone's measure. However, they somehow came up with the number of $360M for third party bandwidth costs. Brough's point is that this is ridiculous, as it discounts the common practice of peering to reduce costs. He's correct about this, Google's scale gives them all sorts of bargaining power with internet backbones. That financial firms don't really understand the economics of peering isn't surprising. Heck, few people really do. However, Credit Suisse should have known their number was ludicrous just by being the bean counters they are.
Why? Because the IP transit market is really not very big. Providers make money (or at least try to) via other services offered over IP networks, not via raw connectivity. For a really rough estimate, just look at a few of the top IP networks according to various measures: Level 3 Communications (NYSE:LVLT, news, filings), Cogent Communications (NASDAQ:CCOI, news, filings), Savvis (news, filings) [a subsidiary of CenturyLink (NYSE:CTL, news, filings)] and TINet (formerly Tiscali). The first two have in the past claimed to be amongst YouTube's main providers. Level 3's entire high-speed IP revenues are known to be in the neighborhood of $150M/year. Cogent's datacenter-centric business is only around $100M/year and that includes colocation and other revenues. Before lumping it with other data revenues Savvis used to report 'other network services' revenues of about $100M but that included private lines. Likewise, TINet's 2008 revenues were less than $50M. If one extrapolates those numbers on the back of an envelope to the rest of the field, the top 10 IP transit networks generate less than $1B from that service and Google isn't likely to be buying much from anyone else.
Now YouTube generates vast amounts of traffic. It is Big. Very big. But it isn't that big. If they're paying $360M for IP transit then I want to know who's getting paid, because the money isn't coming out the other end of the tube. Besides, the whole point of Google's vast array of datacenters and related infrastructure has been to control such costs. You have to give them some credit for a few brain cells here and there, even if you are writing a hatchet job.
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