YouTube's fine - Analysts don't understand Internet peering

As widely reported, Credit Suisse analysts have estimated Google's YouTube may lose $470M in 2009 and more in the future.  However, their estimates say Google will pay $360M for bandwidth in 2009.  I don't know how Google figures their cost of bandwidth, but anyone who understands anything about Internet transit/peering knows Credit is way off base.

Google does not pay for Internet Transit the way most tier 2/3 ISPs or most content providers must.  The economics are simple.  If you are a Tier 2 ISP, you have to purchase Internet Transit services from a Tier 1 network to handle that customer traffic which goes off your network and for which you cannot make other arrangements.  The most notable 'other arrangement' is peering.  If you have significant traffic to/from another specific network, you and the other network can both save Internet Transit costs by exchanging traffic locally, i.e. peering.  Of course an enormous amount of your traffic is directed to Google.  If you have a presence in any data center where Google has a presence, you would love to peer with Google, as that saves an enormous amount on your payments for upstream Internet Transit.

A similar effect plays out among Tier 1 providers.  If one tier 1 network cuts a special deal with Google, Google routes all their traffic through this provider and suddenly the other tier 1 networks have large asymmetries in their tier 1 peering arrangements.  Either they also cut deals with Google or they have to renegotiate their tier 1 peering arrangements to pay for the traffic asymmetry (something that's highly unlikely!).  Google is the one with leverage here!

I don't know what, if anything, Google pays for bandwidth, but it's not paying $360M for Internet transit.  Sorry Credit Suisse, you better go back to analyzing derivatives, credit swaps and other purely financial plays.

Google does have costs.  They have data centers in many parts of the world and they have a private fiber backbone that interconnects their sites and connects their private network to many, many potential peering points.  Operating their private backbone is a real cost to them and I haven't examined their financial reports to see if there is any way (from public data) of estimating their costs for this private network.

But until someone does this analysis, forget what you've read from Credit Suisse.

Comments

[Benoit Felten]

Not to slam on yet another financial/banking institution, but it's apparent that these guys know as much about this as they know about the financial markets. Which is saying, not a lot...