They were losing money since they started because they didn't allow advertising until recently. It was a great plan: get the audience first, drawn by free uploads, no ads, and an easy way to tag videos so like videos can be found.
After they got the eyeballs, they introduced ads from advertisers beating down their door. Personally, I don't think the ads work -- I can't remember a single one I've seen on YouTube.
Google video "failed" in that it never achieved the popularity of YouTube (the number of page views).
Now, Google can run its targeted ads on YouTube, which I think will be more interesting. You watch a video of bikers doing tricks and you'll see Google ads for bikes, bike accessories, etc. on that same page. Watch a caving video and you'll get ads for Karst Sports (I'm not sure if IMO uses Google ads, but I know Karst does) and other caving-related companies. I figure they'll come up with something like their Google custom search, where you are notified if something with the key words you enter is put on the Web -- and that will translate to video subjects you are interested in.
The combination puts Google at #2 behind Yahoo in total page views and I still can't figure out how Yahoo ended up being #1. Maybe it's all those Yahoo Groups. The popularity of Yahoo is a puzzlement to me.
In a transparent move against Microsoft, Google is coming out with free online word processing and spread sheets. It's in beta now and already online, I hear.
P.S. Here's a msg from the two YouTube founders following news of their acquisition. They're probably giddy from being instant millionaires:
http://www.youtube.com/watch?v=QCVxQ_3Ejkg