A New Form of Foreign Aid?

Web companies that rely on advertising are enjoying some of their most vibrant growth in developing countries. But those are also the same places where it can be the most expensive to operate, since Web companies often need more servers to make content available to parts of the world with limited bandwidth. And in those countries, online display advertising is least likely to translate into results.

This intractable contradiction has become a serious drag on the bottom lines of photo-sharing sites, social networks and video distributors like YouTube.

There may be 1.6 billion people in the world with Internet access, but fewer than half of them have incomes high enough to interest major advertisers.

“Whenever you have a lot of user-generated material, your bandwidth gets utilized in Asia, the Middle East, Latin America, where bandwidth is expensive and ad rates are ridiculously low,” Mr. Volpi said. If Web companies “really want to make money, they would shut off all those countries.”

Perhaps no company is more in the grip of the international paradox than YouTube, which a Credit Suisse analyst, Spencer Wang, recently estimated could lose $470 million in 2009, in part because of the high cost of delivering billions of videos each month.

Because it is more expensive to be poor, large corporations must subsidize the cost of providing these web services to poor countries. Hopefully the money Google is losing in 3rd world countries providing YouTube service counts towards the amount of aid that America is giving to the world.

via NY Times