- YouTube advertising revenue was compiled into a long-term projection by UBS.
- The demographic data and audience comparisons to broadcast media imply comparable scale.
- Near term data suggests acceleration in ad sales, as such Google's next phase of growth will be driven by YouTube.
Clearly, I'm a pretty big fan of Alphabet Inc-C (NASDAQ:GOOG), both in terms of the investment upside and relative risk to reward when compared to other opportunities. However, it has become difficult to quantify the separate reporting units without separate accounting disclosures, which makes the company a little less predictable.
Thankfully, an in-depth report came from UBS in the past week, which attempts to estimate the separate revenue contribution from the various app segments. Of course, these are just estimates and not exact figures on the company’s consolidated segment results. Even so, I can imagine that that these approximations bring us closer to understanding the revenue contribution from YouTube and how it could potentially sustain mid-teen revenue growth for the consolidated Alphabet umbrella.
Eric Sheridan from UBS estimates that the incremental revenue from YouTube represents a small component of the total revenue mix, which sounds weird given the higher pricing of pre-roll ads relative to paid search clicks. Even so, Google’s more mature Search opportunity represents a higher percentage of the mix given the nature of content consumption on the web and the duration of search as a function across mobile and desktop applications. People will always need a search utility to find new sources of information and since Google owns the primary OS to the mobile web, the company’s market position as the primary search provider remained constant for the past decade.
And while YouTube is a nascent business, it seems the modeled growth assumption of YouTube is suspected to remain at roughly a 20.96% average growth rate for the next four years. That’s fairly impressive, and from what I understand a lot of this is driven by the demographic mix shift to online content, which is driven by millennials due to demographics and increasing patterns of consumption from older and younger audiences.
By FY’20 it’s estimated that YouTube alone will generate $27.4 billion, which would make the app roughly comparable to Facebook’s FY’16 consensus revenue estimate of $25.55 billion.
While YouTube isn’t that big currently it’s worth mentioning that the collective licensing revenue paid out to YouTube partners by 2020 is estimated to be $14.05 billion given the 55 to 45 revenue split with YouTube keeping 45%. Now, obviously $14.05 billion spent on content must produce something, and quite frankly that’s what gets me excited about YouTube, because the level of quality will likely increase in response to feasibility dynamics for higher production content.
Furthermore, it’s worth noting that the consumption of online content has shifted to the 25-34 age demographic. This demographic spends the most amount of time watching online television, which has correspondingly lead to an increase in engagement across digital video devices in the past five-years. While the level of engagement is increasing, the quality of content is now shifting to full-episode originals that are paid for via subscription revenue from YouTube Red. While the subscription product is in its early stages, I believe the talent/quality pool of original studios/creators puts YouTube in a position to develop more niche-oriented channels that can compete with linear television thus sustaining the current trajectory of declining cable channels.
It’s also worth noting that the top 10 most popular science and food YouTube channels had similar subscription figures to comparable cable channels over the past five years. The non-linear format, ease of functionality, accessibility and quality of content has allowed YouTube to break into the mass market.
While adoption of YouTube has been limited among the older age cohort, it’s worth noting that YouTube has the younger audiences kept captive due to limited incomes of millennials and the high rate of unemployment for what’s considered the most educated age demographic, but also the most economically challenged in the past 50 years. With limited discretionary income and with many re-labeling generation Y as the boomerang generation where kids return home after college, I get the impression that cable viewership is becoming marginalized in favor of online streaming due to constraints on entertainment spending. Since YouTube is free and only requires a broadband connection, it plays into the prevailing mentality of cord-cutting in favor of lower-cost online entertainment alternatives.
Growth continues to accelerate as Morgan Stanley anticipates that time spent within the United States will grow by 42%, which is the highest reported growth rate over the past two years. Given the acceleration of growth, population dynamics and continued platform investment into content, YouTube seems pretty well positioned. And while it’s not going to drive immediate sales/earnings results due to lack of meaningful contribution to total operating profit/revenue mix, the long-term scale/growth dynamics makes me incrementally positive given the declining trajectory of desktop search and slowing penetration of Android devices in rest of world.
As such the next pillars of growth involve video, enterprise applications and Android app store. These three categories will offset the eventual stagnation of search revenue. As such, I continue to reiterate my buy recommendation on Google.