2010: Time to redefine “success” in online business

What does “success” mean for a company in online media? Reading through comments online, it’s obvious that it doesn’t really tally with the way that we view success in most kinds of business.

What got me thinking about this was a comment by Clint Boulton on Google Watch:

“That’s why Google continues to target successful companies like Yelp and online real estate specialist Trulia. Google sees the potential to expand its online ad companies. Microsoft either doesn’t see this, or prefers to pump money elsewhere.”

What’s interesting about this comment is that neither Yelp nor Trulia have made any profits yet. They are both “successful” only in the sense that they have built audience, not in turning that audience into meaningful revenue.

“The comments that praise Microsoft for its frugality regarding Internet businesses have the tenor of ‘well, Google buys companies that don’t make any money.’ Spoken like people who don’t believe that every Web service can be infused with online ads.”

Care to tally up exactly how much money YouTube has lost Google so far? year-after-year, add that figure to the cost of acquisition, and then work out how much the company needs to make on ads via the service over, say, the next ten years to make that money back?

Let’s be conservative and say that YouTube has lost $100m per year since it was bought (and note that Credit Suisse estimated its losses for 2009 alone at $475m). That, plus the $1.65 billion cost of buying it, will peg the cost to Google so far at around $2 billion.

This means that for Google to turn a single cent of profit on the deal by 2020, it needs to average $200m in profit on YouTube alone every year between now and then. With NONE of that profit being reinvested in infrastructure, services and so on.

Google is awash with cash because of ad revenue from its SEARCH pages. Nothing else makes significant money, and the vast majority of its other services make losses. In Search, Google is a massive success. By conventional business logic, virtually everything else it does is a massive, massive failure.

In a sense, Clint it right: Every web service can be suffused with online ads. However, that doesn’t mean they are profitable, especially in the case of bandwidth-intensive services like YouTube. Ads are not magic pixie dust. And perhaps it’s time we stopped viewing a service as a success just because it has a lot of users.

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  • James

    I’ve noticed that YouTube has really slowed down lately. I wonder if Google has put the breaks on infrastructure upgrades?

  • http://softwaredevelopmenttoday.blogspot.com Vasco Duarte

    You make a good point. We currently lack the yardstick for success and that allows pundits to claim their favorite companies are successful without regard to reality!

    There’s a lot of “halo” effects in the tech world today, to the point that Sillicon Valley Insider claiming that Tim Cook will be named CEO of GM!

    What would be your definition of success?

  • Ian Betteridge

    There is only one meaningful definition of success for a business: profit. Does a company have enough revenue not only to run the company at a working profit, but to pay back investors (handsomely!) over the longer term?*

    You can, of course, make money for your investors over the short term by selling the company, as, say, YouTube’s founders did. But that’s not building a successful company – it’s simply making a successful deal. Whoever owns the company after the sale will still have to turn a profit sooner or later if they don’t want their investment to turn to dust.

    By that measure, a lot of the “Internet stars” aren’t successful businesses. Twitter, YouTube, and even Facebook have yet to turn their traffic into consistent, large revenue streams. While they may be successful in the sense of getting traffic, they aren’t successful businesses. Yet.

    As someone involved in publishing, I’ve seen a particularly bad example of this forgetting the fundamentals of business. Newspapers in particular have become so obsessed with getting the maximum possible traffic that they’ve forgotten that the important thing is money. We’re seeing the start of a correction of that now – but it’s notable how many people in the Internet community are resistant to it.

    (*It should be noted that this isn’t a definition of success for every kind of company. For a micro-business, for example, the definition of success may be simply “make a better living than I could working for someone else”, or “make enough money while also having more time for my family”. But for a company with shareholders, profit is king.)