Google Inc (GOOG)’s Video Prospects Are Phenomenal

Google Inc (NASDAQ:GOOG)’s video asset, YouTube, is showing signs of explosive growth in monetization. The video-sharing platform’s mega user base loves watching videos, according to their own discretion. YouTube has a rock-solid presence in mobile, which gives it an edge in competing for video advertising dollars on mobile. And more importantly, marketers are jumping on YouTube’s bandwagon to reach their target audience effectively, thanks to newer ad formats like TrueView, which allows the user to skip or watch the ads.

Google Inc (GOOG)

YouTube is supremely well-positioned

Google Inc (NASDAQ:GOOG)’s leading video site, YouTube has racked up more than 1 billion monthly users who watch more than 4 billion hours of video each month. And this leading video platform gets more than 70% of its user traffic from outside the U.S. as well, and 25% of its total views are on mobile. In the U.S., mobile views make up a whopping ~40% of its usage.

A leading YouTube executive disclosed that ad sales on mobile devices tripled in the last six months, and some analysts have estimated that mobile video ad sales alone contributed ~$350 million to YouTube in the last six months. This shouldn’t come as a surprise as mobile usage across the globe has picked up steam rapidly, and YouTube has a lead over other ad-supported services like Hulu.

According to eMarketer, U.S. mobile video-ad sales are expected to grow to $2.69 billion in 2017, which is roughly a 10-fold increase from 2012. And YouTube is in pole position to earn the lion’s share of that pie by stepping up competition with rivals.

Consumers and advertisers dig YouTube!

As a result, YouTube is increasingly enabling top brands to target consumers in the multi-screen world, as more consumers watch videos on tablets and other devices. The usage of YouTube by viewers has increased by more than 50 million hours a day from the previous year, largely driven by the younger generation.

And Google Inc (NASDAQ:GOOG)’s management is expecting that online advertising will exceed 50% of total advertising in the next five years or so, owing to the rapidly increasing number of Internet-connected devices and the rising number of video ads stemming from the phenomenon of TV Everywhere. Therefore, YouTube will be a major beneficiary of this secular shift for video ads to be portrayed on the Internet instead of TV Channels.

According to comScore, ~182 million U.S. consumers watched 38.8 billion online content videos in April-2013, and the number of video ad views online hit an all-time high of 13.2 billion.

Top U.S. Online Video Content Properties
April-13(Content Videos Only)
Property Total Unique Viewers (000) Videos (000)* Minutes per Viewer
Total Internet : Total Audience 181,934 38,751,621 1,201.9
Google Sites 154,553 13,022,807 401.0
Facebook 62,730 740,844 25.2
VEVO 52,906 613,278 39.2
NDN 45,294 497,673 81.0
Yahoo! Sites 45,111 368,957 72.0
Viacom Digital 43,661 436,319 46.4
Microsoft Sites 42,219 538,009 43.1
Amazon Sites 36,900 142,413 19.1
AOL, Inc. 36,115 625,801 60.3
Turner Digital 34,914 307,316 48.5

Source: comScore (5/13)

According to Internet World Stats, there are ~245 million Internet users in the U.S., and 74% of this audience is watching online videos. The outlet of choice is clearly YouTube as 63% of the U.S. Internet audience or 154 million users have watched videos on YouTube. A closer look at the table above shows that YouTube gets a lot more time per user compared to other sites with 33.4% of all online minutes, or 401 minutes per viewer. YouTube has been trying to figure out ways to increase the session length of users, because more minutes per viewer would translate into a lot of incremental advertising dollars.

Google Inc (NASDAQ:GOOG)’s rival in the Internet space, Facebook Inc (NASDAQ:FB) is a distant second in terms of viewers and in terms of the number of videos shared. Only a fraction of Facebook Inc (NASDAQ:FB)’s users in the U.S. use embedded videos to share on the largest social platform in the world. And Facebook Inc (NASDAQ:FB) is trying to get a piece of the video advertising market as well. The social media giant recently rolled out a video ad format to enable videos in the page posts by advertisers who like the video format.

YouTube on mobile and TV

In March 2013, the YouTube app was used by more than half of the smartphone users in the U.S. or 70 million people, which represents a Y/Y growth of ~42%, according to Nielsen. Higher penetration rates of smartphones and tablets in the U.S. and across the globe will lead to more users utilizing the mobile app of YouTube, which will lead to incremental mobile ad dollars for the company.

Also, YouTube is increasingly being adopted by TV manufacturers as an app for their offerings. YouTube is a great source of user generated content (UGC) and would be a great add-on offering along with over-the-top offerings like Netflix, Inc. (NASDAQ:NFLX) and Hulu. However, it is unlikely that YouTube will directly compete with TV networks, due to the high quality content and live events provided by the channels on cable. YouTube did try to organize its platform into channels to give a more TV-like feel, but that is unlikely to have a material positive impact overall. It will lead to more video advertising dollars, however, as more gaming consoles and Rokus are used to stream on TV, especially by the younger demographic.

Paid subscriptions for video

YouTube now has more than 1 million channels that are generating revenue. These content creators have been repeatedly asking YouTube to allow them to charge subscription fees to the 1 billion+ monthly user traffic. YouTube recently introduced a small-scale pilot test with a select group of partners by allowing them to charge user subscription fees ranging from $1-$10 a month, after a trial period of ~2 weeks.

This is likely to have very minimal impact on Google Inc (NASDAQ:GOOG)’s overall fortunes but would entice more high-quality content producers to jump on board, which would help Google to earn more revenue from display advertising. In the last twelve months, Google generated revenues of ~$32.5 billion from its own websites, and many investors are widely estimating that annual revenues from YouTube are in the $4 billion-$5 billion range. YouTube plays a pivotal part in Google’s display advertising fortunes, as it provides a whole suite of video, interactive and other, newer ad formats to advertisers, which has been a major driver of YouTube’s fortunes.

Going forward

YouTube can monetize its user-generated content by just hosting the video and paying out the revenue share portion of ~55% to the content creator. As more and more content is uploaded on YouTube, the company’s hosting costs will scale down, which will lead to higher margin ad revenues for the company across desktop and mobile. It will get substantial tailwinds down the road from higher Internet speeds from projects like Google Fiber, which will enable higher quality and faster streams on YouTube. Clearly, the company has years of double digit growth rates ahead.

The article Google’s Video Prospects Are Phenomenal originally appeared on and is written by Ishfaque Faruk.

Ishfaque Faruk has no position in any stocks mentioned. The Motley Fool recommends Facebook and Google. The Motley Fool owns shares of Facebook Inc (NASDAQ:FB) and Google Inc (NASDAQ:GOOG). Ishfaque is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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