Youtube had almost no revenue to speak of and was losing money. The bandwidth costs for an online video site like that are enormous. The site also has many lawsuits pending due to the fact that Youtube allows users to upload any video they like. Although users are told not to upload copyrighted video, that doesn’t stop them from doing it.

So what made a website that’s losing money worth $1.65 billion when Google already had its own competing video site – http://video.google.com? The answer is simply traffic. Youtube is, by far, the most popular online video site. Youtube’s traffic kept on growing while Google Video kept losing traffic.

Youtube did a far better job is building a community of users. Google Video required users to wait several days before their video was live. Youtube, on the other hand, gave users a link to their video immediately and was able to have their video live for them to view in less than an hour.

Youtube also took a cue from social networking sites and allowed users to add tags to their videos. Basically, the way Youtube ranked its videos was based more on how well the video was rated by users rather than by how well it performed according to a search ranking algorithm.

So did Google get a good deal from its purchase of Youtube for $1.6 Billion? That remains to be seen. Google has already set aside $200 million to fight and pay lawsuits due to the amount of copywritten material on the site and the amount of unhappy copyright owners.

One would have to assume that Google will be able to find a way to make Youtube a profitable site. After all, Google itself lacked a way to make money until it came out with Google Adwords. With more traffic to its network of websites, it makes sense that Google will continue to be innovative and solve the problem of monetizing its newfound traffic stream.