Burn Rate and YouTube's Mega Bandwidth Bill

Posted on May 2, 2006

Forbes.com has an article about video sharing star YouTube.com that says YouTube has a bandwidth bill that is approaching $1 million a month. Most of this bill is paid to a company called Limelight Networks according to Forbes.

Startup of the moment YouTube, which garnered 12.9 million unique visitors in March, doesn't care what viewers watch, as long as they keep tuning in. Making money is another matter: The site, which has raised $11.5 million in venture capital in the last year, didn't see a penny in revenue until March, when they cautiously began selling ads. Meanwhile the site's bandwidth costs, which increase every time a visitor clicks on a video, may be approaching $1 million a month -- much of which goes to provider Limelight Networks.
Internet optimists predict that online video, long-rumored to be the next big thing, is finally taking off: IDC estimates that video generated $230 million in revenue in 2005 but will jump to $1.7 billion by 2010. In the meantime, the best play in Internet video may not be the companies that show off the clips, but the ones who deliver them to users' PCs.
The content-delivery business may be a $500 million a year business--twice the value of Internet video advertising and users fees--and is growing 25% per year, IDC estimates. It is dominated by big, publicly traded hosting providers such as Akamai Technologies and AT&T, as well as boutique shops such as Limelight, which also serves News Corp.'s MySpace and Microsoft's Xbox Live videogame service. Some of the biggest portals, like Yahoo! and Google, have built up their own content-delivery networks and don't need to pay a third party for many services.
The bandwidth companies typically charge video sites up to a penny per minute of video streamed. Big players who buy in bulk get discounted rates: Industry observers estimate that YouTube, which is streaming 40 million videos and 200 terabytes of data per day, may be paying between a tenth of a cent and half a cent per minute. Neither YouTube nor Limelight would comment on their pricing.

YouTube may be able to bring in enough revenues with advertising and third-party video deals to offset their bandwidth expenses. But at some point we are going to have to start talking about the issue of burn rate again when it comes to Web 2.0 companies. Burn rate was a big issue during the dot com boom days. There was even a book called Burn Rate written by Michael Wolff.