I can just imagine the slogan: "Escape your depressing real life into a matching world!"
"Our records show that you are an overweight high-school educated 36-year old mail in Akron, Ohio with below-average IQ, part-time employment at a Wal-Mart with an annual take-home of $16k who is a single Baptist Republican."
Creating avatar... done.
"Congratulations! Explore our virtual world with your new avatar -- an overweight, high-school educated 36-year old male with below-average IQ."
Your avatar will spawn in: Virtual Akron Ohio You start with the following items: Bible, Pat Robertson DVD, "Going Rogue" by Sarah Palin You start with: 0 gold You earn: 7 gold per hour For doing the following task: Checking groceries at the Virtual Akron Wal-Mart.
Oh please... overweight, below average IQ, republican, and Christian? That's your stereotype? Here's a mold-breaker for you. I'm 24, married (going on three years, woot!), 6'3", 225 lbs of solid muscle, a software entrepreneur, and I have an IQ of 175. Jesus is my homeboy.
Time is on Google's side. Look ten years down the road. Hosting costs and bandwidth costs will be greatly reduced, as is the trend. (Think how far web technology has come since 1999.) Advertising models will have matured, and YouTube will have profitable deals with specific content providers.
The most important thing to have is users. People use Google for searches because it is familiar and it is a habit. The same is now true for videos and YouTube. Despite the fact that other video sites exist, most people think of YouTube by default. Google is willing to lose money now in order to encourage this habit, so that when it does become profitable they will be in prime position.
Finally-- somebody mentions Moore's "Law"... YouTube's growth is close to a point where it's linear, whereas bandwith costs, speed, and power will decrease exponentially.
The only difference between a car salesman and a computer salesman is that the car salesman knows he's lying.