YouTube may pay less to be online than you do, a new report on internet connectivity suggests, calling into question a recent analysis arguing Google's popular video service is bleeding money and demonstrating how the internet has continued to morph to fit user's behavior.

In fact, with YouTube's help, Google is now responsible for at least 6 percent of the internet's traffic, and likely more – and may not be paying an ISP at all to serve up all that content and attached ads.

Credit Suisse made headlines this summer when it estimated that YouTube was binging on bandwidth, losing Google a half a billion dollars in 2009 as it streams 75 billion videos. But a new report from Arbor Networks suggests that Google's traffic is approaching 10 percent of the net's traffic, and that it's got so much fiber optic cable, it is simply trading traffic, with no payment involved, with the net's largest ISPs.

"I think Google's transit costs are close to zero," said Craig Labovitz, the chief scientist for Arbor Networks and a longtime internet researcher. Arbor Networks, which sells network monitoring equipment used by about 70 percent of the net's ISPs, likely knows more about the net's ebbs and flows than anyone outside of the National Security Agency.

And the extraordinary fact that a website serving nearly 100 billion videos a year has no bandwidth bill means the net isn't the network it used to be.

But the lack of a monthly bill in the mailbox doesn't mean Google's internet connection is free — it's just that it has purchased unused fiber optic cable known as "dark fiber" — and uses it to carry its traffic to other networks where it "peers" or trades traffic with other ISPs. Its costs for bandwidth are then amortized across the life of its fiber and routers.

YouTube has been mum on its actual costs, for competitive reasons, but did say in blog post in July that it has homegrown infrastructure and that traditional pricing models don't apply.

There's been a lot of speculation lately about how much it costs to run YouTube.... The truth is that all our infrastructure is built from scratch, which means models that use standard industry pricing are too high when it comes to bandwidth and similar costs. We are at a point where growth is definitely good for our bottom line, not bad.

In fact, YouTube's low or nonexistent bandwidth bill points to a very important shift in the structure of the internet, which is rapidly becoming much more complicated.

Traditionally the net has been shaped like a pyramid with small ISPs at the bottom, connecting up to regional carriers, that connect to backbone and transcontinental carriers. It's much more complicated now with the top 30 websites serving up 30 percent of net traffic, either from their own sets of pipes or from data centers around the world that connect much closer to your computer – and for much cheaper – than ever before.

It's just one of many changes in how the net is structured, a change that started in 2007, according the report.

In 2007, the majority of the internet's traffic came distributed by 30,000 blocks of servers around the net (technically Autonomous System Numbers).

In 2009, 150 blocks served up half of the net's traffic.

"What we mean by the internet is changing and it's happening really quickly," Labovitz said. "I was blown away to find out that one-tenth of the internet is going [to] or coming from Google."

Those blocks include Google and increasingly popular and cheap content-delivery networks, such as Akamai and Limelight, which serve content from websites such as Wired.com from server farms around the net — often at rates far cheaper than self-hosting.

Which is to say that the real money is in the ads and services in the packets, not in moving the bits from computer to computer. The cost of bandwidth has fallen and so too have the profit margins for moving bits, even as traffic grows at an estimated 40 percent a year.

With the growth of Google's network and Content Delivery Networks, the economics of who pays whom to connect grows more complicated than the early days of the net when money flowed upwards — little ISPs paid regional ISPs who paid major ISPs who paid backbone operators.

Now if you are Google, you might even begin asking Comcast to pay up to connect its Google Tubes straight to their local cable ISP networks. That way, YouTube videos and Google search results would show up faster, letting the ISP brag that YouTube doesn't stutter on their network, a potential commercial advantage over its DSL competitors.

"Who pays whom is changing," Labovitz said. "All sorts of negotiations are happening behind closed doors."

Unfortunately, few will know the outcomes of those talks, since most of the net's architecture, let alone the financial machinations behind them, remain a secret cloaked in nondisclosure agreements.

But Labovitz says the changes will have a big upside for typical net users, who are already seeing faster downloads. For instance, many videos on YouTube now come in HD, an option that would have been unthinkable in the days when its video always seemed to be stuttering and buffering.

Labovitz also expects ISPs to react to falling margins for moving internet traffic by continuing to offer more and better services, such as backup services, smartphone apps to control their in-the-cloud cable DVRs or online video services like the controversial ESPN 360. That's all part of their attempts to become something other than just dumb pipes ferrying YouTube videos — and Google's ads — to your computer.

A full report, co-written with select academics, will be presented at the end of the month at the NANOG47 meeting, a gathering of net traffic engineers from North America. However, the Arbor Networks data is not available to other researchers due to confidentiality agreements, according to Labovitz.

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