Earlier this year, a Credit Suisse research note on Google caused a furore by suggesting that Google was spending huge amounts to pay for Youtube's bandwidth usage. Now people have realised their mistake, and we now see articles saying that Google's bandwidth bills are zero. Both are wrong.
What the Credit Suisse did was look at the amount of bandwidth Youtube uses (hosting video on the internet is very expensive), and therefore claiming that Youtube was make huge losses.
What they missed was the (well know) fact that Google had long been buying <a href="http://moneyterms.co.uk/dark-fibre/">dark fibre</a>, and had built up its own telecoms infrastructure. In other words, it does not pay much to telecoms companies to connect Youtube to the internet, because it is a telecoms company itself and Youtube connects to Google's own telecoms infrastructure. Like any owner of internet infrastructure it enters in peering arrangements (we will carry your traffic if you will carry ours) .
It is a classic example of how sell-side analysts go wrong. The logic appears flawless, but they focused too narrowly on what they were looking at (Youtube) and failed to look at the big picture.
The original research note was, obviously, very shoddy. However the claims that Google has free internet connectivity are wrong. You may not pay rent if you own your house, but you did not get it free either.
What it does mean is that Youtube is potentially very cash generative as it can keep a higher proportion of its revenues than competitors that do not own infrastructure.