Has YouTube Valuation Hit An Inflexion Point?

  • YouTube has seen declining usage trends suggesting that a saturation point has been reached.
  • The decline in viewership may result in declining ad-revenue unless Google offsets this decline with a higher eCPM pricing for video.
  • However, Google’s success isn’t too dependent on YouTube as Search and Android are likely to sustain high growth rates.

Youtube growth may be stalling

YouTube has seen the biggest decline in active usage out of all of the major social networks. While this doesn’t render Google (NASDAQ:GOOG) a bad investment, it certainly highlights Google’s greatest weakness as the company isn’t very adept at creating great social experiences.

YouTube growth might be slowing

Social platforms active usage changes

Source: Global Web Index

Looking over the data, YouTube usage statistics has declined by 8% over the previous year. YouTube generated $5.6 billion in ad-revenue in fiscal year 2013, according to eMarketer (I’m using eMarketer statistics, because Google doesn’t break-down the financial performance of YouTube).

The ad-revenue of YouTube is inconsequential when compared to Google’s search business. However, the eCPM of video is much higher than other categories; therefore if impressions drop by 8%, the ad-revenue will be impacted pretty significantly leading to a negative effect on YouTube valuations.

To quantify the impact, an 8% reduction in impressions will translate into a $448 million decline in revenue from this specific segment. This specific business was thought to be immune to mobile; however more specialized applications that focus on TV content consumption have emerged. Furthermore, crowd source applications like Vine and Instagram are growing at a really rapid rate.

Furthermore, YouTube recently topped a billion users. As many of you are well aware, Facebook has had difficulty with growing its user base following a billion users. According to Global Web Index, Facebook has reached 82% saturation of the 16-64 demographic (excluding China). Therefore, once monthly active users push past the billion mark it becomes significantly harder to grow active users.

Furthermore, Google is notorious for being cheap, so YouTube is unlikely to turn into a premium content hub like Amazon Prime, or Netflix. The content costs are just too high. YouTube is getting squeezed by smaller more specialized mobile applications along with video-on-demand applications. The deathly combination may turn YouTube into more of a low-growth high margin cash cow.

Also, many of the most popular channels on YouTube are composed of individual comedians, along with video game casters. Currently, YouTube has 119 paid channels; the paid channels aren’t anywhere near the level of cable television programming. So cord cutting in favor of YouTube TV shows isn’t like to occur either. Therefore, YouTube’s primary niche comes from individual video producers, nothing super high budget can really scale that effectively on YouTube. Also, YouTube doesn’t want to pay for really expensive content either.

However, on the bright side, YouTube may be able to offset the decline in impressions through higher pricing on its video ads. Furthermore, this niche is likely to be retained as the quality of the content is quite high, despite being user generated. Therefore, YouTube’s financial performance in fiscal year 2014 may consolidate, rather than outright decline. However, determining whether this will be the case will be exceptionally hard as Google doesn’t breakdown YouTube specific figures.


YouTube is a core Google property. While the mobile product has had an impressive run, growth is unlikely unless if Google increases pricing to offset declining engagement. While, YouTube will remain a low growth business Search and Android are likely to sustain high growth rates.

Also, PC refresh has indicated that there’s healthy demand for larger form factor devices. The death of the PC may have been over exaggerated; therefore ads that tend to work on bigger screens may stabilize in pricing at some point in the future.

To see Google’s latest stock price movement, click here (NASDAQ:GOOG)

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