That’s Money in 2.0 – Part 2

Not every Web 2.0 venture is YouTube. Not many sites get the kind of user traction, page views and revenue growth that YouTube has seen. So isn’t YouTube an exception, with the normal run of Web 2.0 sites being unprofitable?

YouTube does have a very high expense profile – that goes with the number of views, and the type of content that it stores. Nevertheless, as long as the earning per user / per page view exceeds the cost, it contributes to the bottomline. The multiplier inherent in the numbers impact the extent of the profit ; however, it’s the intrinsic profitability or otherwise, coupled with the costs, that drive the final numbers.

Video content, which is what YouTube’s offering is all about, involves huge file sizes per item – ranging from a few MB to a few GB space. Other types of content usually are far less space and bandwidth intensive – a blog or Myspace type service requires a couple of MB space per user, a Linkedin or Digg type probably a few hundred KB or less. Bandwidth typically involves a multiple of the space – ratios between 5 and 20 are quite common, could go up to 100 in extreme cases.

But as discussed in the earlier posts (Excavating the Foundation, Chasing the Long Tail, and Net Effects) – the cost drivers today are far different from what existed a few years ago. Reddit reportedly has about 70,000 page views a day – given the type of content, it probably translates to anywhere from 5 – 10 GB per day, or about 300 GB per month. Even if that’s an underestimate, that doesn’t have too much of impact – typically servers offering around 2000 GB transfer per month cost around $100 - $200 on a monthly lease.

Now add to that, a number of additional favorable cost influencers :

1) Content on the site doesn’t cost anything – it comes from the users themselves.
2) The value provided – of evaluating what users find interesting – itself comes from the views of multiple users, aggregated.
3) Addition of new users comes from the recommendations of users themselves, for the most part – barring the initial priming to get users / visitors, subsequent growth is driven by viral techniques rather than promotional techniques.

So at most, the costs involved are

a) The basic servers and related Net resources required – which are extremely low for a startup situation with few users
b) Any initial development costs – these are much lower today because of shared code, available modules and programs, and the fact that additional functionality can be added as and when required.
c) Initial promotion, to attract users. Given that most of the growth would be based on user recommendation, the key is to attract influential users to come in early – and the promotional spend needs to be based more on non monetary incentives like recognition, peer acclaim, preferential access coupled with ease of use.

The costs really aren’t too great - in fact, they’re such that even an individual can afford to sustain it for quite some time, as long as he’s willing to take the risk. The real driver of profitability or otherwise lies in 2 elements - making it attractive to the user, and finding a business model that generates more revenue than the costs incurred per transaction.

More in the next post.