Blog Post

How Much Did It Cost to Build YouTube?

Let’s say it’s 2005 and online video is in its infancy. If you’re a Chad Hurley, Steve Chen and Jawed Karim, how much would it cost to start up and run a video sharing site with the hopes of flipping it for more than $1.6 billion? As of this week we know, thanks to confidential Profit and loss information released as part of filings that have been made public in the copyright infringement case between Viacom (s VIA) and YouTube (s GOOG).

Based on those filings, we were able to put together some numbers about how much it cost to run YouTube leading up to the Google acquisition. During the first 18 months of YouTube’s operations, from February 2005 when the domain was first purchased through August 2006 when it was desperately seeking acquirers, the fledgling video company spent more than $11.5 million to grow its user base big enough to become attractive to Google.

Most of that money — about $8 million or so — went to paying for infrastructure needed to run the site, with a vast majority of that money going toward the site’s web hosting costs. In the three months from June 2006 through August 2006, the company was spending about $1 million each month on hosting costs alone, and that wasn’t even taking into account data center costs that YouTube was also paying for or ad serving costs as the firm began selling its own advertising.

In addition to web infrastructure costs, YouTube had other operating expenses and personnel costs to contend with. In the first 18 months of its existence, YouTube spent about $3.6 million on employee compensation, travel, facilities, costs and the like. By November 2005, its regular operating expenses were about even with infrastructure costs — at a little more than $130,000 per month, but not long after that, the company’s web hosting bills really started to take off as the video sharing site gained traction.

It wasn’t until December 2005 that YouTube started clocking revenue — a meager $15,000 during that month — and by that point, the company had spent more than $400,000 on operating and infrastructure expenses. But costs began to increase rapidly after that, and topped out at about $2.6 million during August 2006 — just two months before Google’s purchase of the company was made public.

YouTube was never profitable before the Google acquisition — in fact, it pulled in just $5 million in revenues during its first 18 months — but it came close in August 2006, which might have been one reason that Google had an interest in the firm. That month, it posted revenues of $2.5 million. The site did post a gross profit of more than $575,000 during the month if you don’t take into account its monthly operating expenses. Otherwise, with total opex of about $2.6 million, the site fell about $100,000 shy of hitting profitability.

The site raised about $11.5 million in two rounds of financing before being bought by Google in a deal valued in excess of $1.65 billion in October 2006 — which wasn’t a bad return on investment for YouTube’s investors or founders. Famously, though, YouTube has yet to reach profitability, in part because Google had remained committed to growing its user base after its acquisition.

As reported in Viacom’s filings, Google CEO Eric Schmidt mandated for the company to focus on aggressively growing the site, aiming “to grow playbacks to 1b/day [one billion per day].” That mandate remained in place until early 2008, when Schmidt decided the site should shift its focus to monetization of its video assets. Since then, the company has been increasingly focused on bringing more premium content to the site and increasing the number of videos it can place ads against. That focus means that the online video site might finally become profitable this year, according to some analyst projections.

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5 Responses to “How Much Did It Cost to Build YouTube?”

  1. Wow that is a very usefull topic to know how many money is in youtube.
    About $8 million only for the infrastructure is very much. But youtube is used from million of people of the world and a life without youtube can i dont believe.

  2. As proof that new media trumps old, your piece provides all the saucy details of youtube financials. And Wired Magazine called YouTube Google’s “cash cow,” which is the most inaccurate use of that term ever in the history of business writing.

  3. I’d like them to place ads against my videos, I got 6 million views. But they won’t do it just cause I am a Danish resident, I can’t even apply to become a Youtube partner.

    I think Google is missing on Billions of dollars of revenues by not activating monetization on all videos by any content creators connecting their Youtube account with an Adsense account.

    Also, Google is missing out on Billions of dollars by not yet allowing cheap sub-$100 set-top-boxes from directly streaming all of its contents. If bandwidth costs are too high to stream 1080p 4mbit/s to all those cheap set-top-boxes, Google should setup pay-for-bandwidth system, where users would have to login to their Youtube account from the set-top-box and put some certain amount of credits using Google Checkout to their Youtube account. A fair cost could be something like $1 per few Gygabytes of Youtube HD/SD streaming, of which, by paying, as long as content providers don’t opt-out, the videos could be streamed without the ads.

    I know Google is going to implement all those things. But years have gone by without them doing any of this yet. So I feel this is obviously a missed opportunity and I would estimate Google has skipped on about $10 Billion in revenues these past 2 years, half of which should have been given to the content creators, most of which independent content creators who own their own videos uploaded to Youtube, not distributed through old media.