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Can Youtube and Facebook Continue to Operate in this Credit Crunch?

Society  is so used to the idea that everything online should be free that we don’t even think about it, we expect every service even media(music, movies, videos) to free.

There’s only one problem. Free costs money, and there isn’t enough of it, sites still have to pay for the bandwidth we use up and other expenses.

You Think It Easy, Well Think Again

Thinking about building a new rival to YouTube and other establish video services? Think again, YouTube’s popularity is costing it a fortune: according to analysts at Credit Suisse, it’s going to lose $470 million this year. Now that a whole lot of money. I wonder how Google feels about this.

If you’re delivering copyrighted content such as music or video, you need to pay the copyright owners. In an interview with PaidContent, Steve Purdham of  We7 says: “You’re talking about roughly a penny a stream for on-demand streaming.” Just covering the royalty payments would require ads to bring in £10 per 1,000 impressions, although that still wouldn’t cover the other bills; Purdham says the actual income is between £1 and £12 per 1,000.

Royalties aren’t a new-fangled, internet-only idea. Radio stations pay them, as do broadcasters and even libraries: an organisation called Public Lending Right or PLR for short collects money from the government and dishes it out to the writers whose books we borrow. Shocking right?

The Pros want to be paid and Pros generally ask for “bags” of money

The reason sites have to pay royalties is because in most cases, people want professionally produced content  and professionals like to get paid. People want quality, even on Youtube, the most popular videos are by Youtube partners.

There’s an unspoken agreement between you and the broadcaster: It’ll pay to make the programme, and you’ll watch ads. The broadcaster then makes money from the ads and pays the program makers.

It’s the same with commercial radio. The radio station makes money from ads, and it pays royalties to the musicians.

YouTube is no different: it hosts the clip, and the ads are supposed to pay for the costs of hosting and streaming as well as the appropriate royalties. That’s the theory. The reality is that the ads simply aren’t bringing in enough cash.

As Slate reports, bandwidth costs YouTube $360 million per year, broadcast licenses are another $250 million and various other expenses bring the total cost to $700 million per year.

Ads only bring in $240 million, and the credit crunch is pushing rates down. Meanwhile YouTube’s costs are skyrocketing: HD video needs five times the bandwidth of standard definition clips. That means that there even more expensive to Youtube.

Of course, not all firms have to pay the professionals for content. User generated content is free, it’s abundant and it’s popular, whether it’s Youtube, Flickr photos, Twitter tweets or Facebook status updates.

Unfortunately, while you can get the content for free, actually doing something with it costs money. Lots of money. Slate estimates that Facebook spends a million dollars per month on electricity, half a million on bandwidth and two million a week on adding servers. That  a big bill at the end of the month.

User generated content may be free, but it isn’t cheap.

FREE CONTENT: User generated content is free, but hosting it costs - Facebook's electricity bill is $1 million per month

Paying for P2P

You are probably thinking right about now, Why bother with servers? If services use peer to peer, you don’t need to worry about the bandwidth bills, or the servers, or the electricity bills. That’s true, but transferring all those files still costs money. You’re just passing on the cost to somebody else. Who is that someone else exactly?

That’s one of the reasons why ISPs have been so vocal about the iPlayer. The license fee means the BBC can offer iPlayer content for nothing, but somebody’s got to get the video from the iPlayer to your PC. According to ISP PlusNet early last year, the iPlayer bumped ISPs’ bandwidth costs for the iPlayer alone from 6.1p per month per user to 18.3p per month.

ISPs could always demand cash from the Beeb, but the iPlayer isn’t the only bandwidth hungry service out there - and of course, there’s Bittorrent. All those Linux distributions, pirated movies and cracked software packages take enormous amounts of bandwidth, and when you factor in HD movie streaming and all the other things we’re beginning to expect, it’s no surprise that ISPs’ bills are soaring.

As Richard Bennet writes about Time Warner (TWC), “TWC’s consumption per user has been increasing roughly 40 per cent per year, and there’s no reason to assume it will do anything but increase as more HDTV content becomes available on the web, people connect more devices and video calling becomes more popular.”

That means ISPs are in an awkward situation: their costs are rising but the amount we pay for broadband is falling, and we expect unlimited to mean unlimited.

As the Telco2.net blog puts it: “The problem with the current ISP model is it is like an all you can eat buffet, where one in 10 customers eats all the food, one in a hundred takes his chair home, too, and one in a thousand unscrews all the fixtures and fittings and loads them into a van as well.”

STREAMING COSTS: Streaming music costs around 1p per person per stream. Spotify's millions of free users are costing a fortune

Content costs

The price of bandwidth may be decreasing, but our appetite for it is increasing much more quickly - and bandwidth isn’t the only cost for ISPs. With bandwidth bills that have some if not all major ISPs trebling, free content is hammering ISPs’ profit margins, and they need to make that up from somewhere else.

Some ISPs cap connections, others charge heavy downloaders more - Time Warner has temporarily shelved plans to charge as much as $150 per month for broadband in the US - and others are looking at alternative sources of income, such as tracking users’ behaviour.

And that’s the problem with free. What feels free to us is costing somebody something, whether it’s Facebook’s electricity,  royalty payments or ISPs’ bandwidth bills.

The move to free content is like a game of pass the parcel where the parcel contains a great big bill. Whoever ends up holding the parcel will have to pay it, and to do that they’ll have to get money from somewhere. That somewhere will always be you.

You might not pay the content creators directly, but unless you prefer webcams to The Wire you’ll still pay, either in the form of bigger ISP bills, restrictions on your broadband connection or your ISP selling your personal data so that people can sell you things.

While you’re beating The Man by downloading via bittorrent, The Man’s capping your bandwidth, throttling your ports and installing Phorm. He is also rising the price on Internet service and other services they offer. So i hope that this article informs individuals on why Youtube might one day have membership fees or not exist at all.

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