Google has adopted a recent tactic of building sophisticated servers within ISP networks and therefore bringing the web content closer to the user and thereby improving the speed of delivery. Early signs point to Google building its own content delivery network in much the same way that Akamai has done. The only difference is that Google is using for its internal use only. However this is only how far the story goes. Google definitely won’t spend large sums of money without intending to commercialize.
Most media houses outsource content delivery networks to a third party as they don’t enjoy the economies of scale that Google has. For instance the BBC use Akamai for its content delivery and this makes its costs to be variable depending on the charges of the third party company. Meanwhile Google costs are fixed.
The fundamental question however is how much volume of traffic at YOU Tube is helping the other Google services especially the hugely lucrative search business. Google benefits in terms of cost, reliability and speed. Additionally the overall cheaper bandwidth that Google enjoys are extremely difficult for competitors to replicate. This represents a serious barrier to entry to other companies. The strategy that Google has employed seems to be that they outsource as little as possible and therefore keep firm control over their services. Of course Google would only adopt this strategy if it felt that it could gain a competitive edge through distribution. Scale matters in distribution and YouTube offers Google the kind of economies of scale that it needs.
Video on the internet is very difficult to monetize. The mainstream media are seeing their profits dwindle as video is now uploaded to the internet free of charge. However as stricter rules are being enforced new businesses will emerge that will be able to churn profits and revenues alike. The effort to increase the percentage of YouTube videos that carry ads is a key indicator of this trait. The business model for this new kind of business is extremely volatile. However because of the large volume of traffic Google will be a key player in this niche. Due to economies of scale Google will be lowest cost player in the industry and this will bestow enormous advantages to them.
Google is edging out the middle man and its recent launch of Google books confirms this act. Google is interested in distributing payment directly to content creators and not through traditional aggregators. The aggregators in this case are the publishers and the creators are the authors. Google will most likely use the same principle to elbow out the traditional video companies that fund the actors. In the not too distant future Google will be in a strong position to licence media content and therefore not only controlling its costs but also be a critical player in the media industry. Despite some proponents claiming that YouTube and BBC are enjoying a free ride, the exact opposite is true. Google is building both a sophisticated bandwidth infrastructure and network for delivery. Other video services like the BBC are paying huge sums of money to third parties for distribution. This comes at enormous cost. Therefore Google will still hold onto YouTube because of the enormous benefits it gets.
