With the news last week that German TV company ProSiebenSat1 has taken a 30% stake in YouTube clone MyVideo, budding entrepreneurs are analysing YouTube's business model in the hope of replicating it. But what exactly is YouTube's business model? And is it worth copying?

The basic rationale of YouTube is contained in the company's motto . . . broadcast yourself. Tapping into the burgeoning user-generated content market, all of YouTube's content comes from its users, with the company merely providing an umbrella to park it under.

User-generated content, though, brings with it many potential legal problems, from libel to breach of copyright. And it is this latter threat which has led some commentators to view YouTube not so much as Web 2.0's new MySpace but rather as Bubble 2.0's new Napster, which got taken out by the music industry for breaching copyright.

Copyright breaches have already landed YouTube numerous legal letters of the cease-and-desist variety. In February, NBC forced the site to remove all its copyrighted content, though you can still find illegally posted NBC content on the site today.

Policing YouTube's content is a Sisyphean task. The company's 30 or so staffers can be expected to review only a tiny proportion of the 65,000 videos uploaded daily. No matter how diligent they are, something is bound to slip through.

As it has in the case of a video from the 1992 Los Angeles riots, showing Reginald Denny being dragged from his truck and beaten by rioters. Robert Tur, whose Los Angeles News Service owns the copyright in the Denny video, was less than happy to discover his content appearing on YouTube. So in July he slapped a lawsuit on the company, seeking $150,000 any time any of his content is uploaded.

YouTube's standard defence against such accusations is to lay the blame on the site's users. However, last year's US Supreme Court decision in the case of MGM Vs Grokster (which held the peer-to-peer file-sharing network responsible for content its users uploaded) suggests that defence is unlikely cut the mustard in court.

The threat of litigation is not the only thing making some question YouTube's business model. The amount the company is spending on bandwidth is an even bigger concern. While YouTube refuses to put a figure on this cost, others have taken an educated guess at it. In April, Forbes magazine threw the problem at its best business brains and came up with an estimate of nearly $1m a month.

At that point YouTube's traffic was estimated at 40 million downloads a day. In July, YouTube reported that it was serving more than 100 million downloads a day. That suggests its July bandwidth bill was nearly $2.5m.

Annualise that and factor in double-digit month on month growth and you can see why some are wondering if there even is a business model behind YouTube. Especially when they know how YouTube is financing this cost.

It's not through advertising.

While other video-sharing sites like Revver insert advertising into users' videos, as well as serving advertising on the site itself, YouTube didn't allow ads on the site until March. And the downloads themselves still come free of advertising.

New revenue lines are being explored, as the company wakes up to the realities of the business world. Over the summer, YouTube announced 'brand channel' deals which would see it being paid to host content by, among others, NBC. While no figures were associated with these announcements, it's a pretty safe bet that none of this revenue yet comes close to covering the bandwidth bill, let alone clearing the deficit already accumulated.

So how are these costs being covered? Through the money invested in YouTube by venture capitalists Sequoia Capital. Sequoia put in $3.5m in November 2005 and another $8m in April 2006. And at the rate YouTube is spending money, Sequoia will likely have to invest more before the year is out.

Sequoia's increasing control over YouTube's future has been most evident in the spate of recent hirings, especially former Yahoo treasurer Gideon Yu, who last week became YouTube's chief financial officer. While YouTube's founders are freshfaced 20-somethings, Sequoia seems to be bringing its influence to bear in packing the company with experienced, investor-friendly senior staff.

One obvious implication of this is that Sequoia is angling for an IPO as its exit strategy, putting a Wall Street-friendly face on the company. An IPO worked for Sequoia's investment in Google, though it did have to wait through the post dotcom downturn before Google finally went to market. By then Google was a mature company. And making money. Which is something the upstart YouTube can not yet claim to be.

An alternative option is to position YouTube as a takeover target for an existing TV channel looking to buy its way into the IPTV market. If a German channel thinks a YouTube clone is worth paying for, someone must be tempted to buy the real deal. And with the disastrous AOL Time Warner deal already a dim memory in media-land, such a deal should not be ruled out.

Though both of these strategies would see YouTube's founders . . . and Sequoia . . . happily enriched, neither would prove that YouTube is not just a Bubble 2.0 business model. But the Cassandras could still be silenced. Google recently guaranteed News Corporation $900m in shared revenue by 2010 after out-bidding Microsoft and others to be the search provider for MySpace and other News Corporation sites. A similar deal could see YouTube's business model validated overnight.

And while MySpace's growth seems to have reached a plateau in recent months, YouTube is still growing strong, out-pacing the teens' diary site, suggesting that YouTube could command an even higher price. This would see YouTube move out of the red and into the black on one deal alone, and still leave the company free to figure out other ways to monetise all that free content its users are giving it.

Feargal McKay is Dublinbased web consultant and former accountant