YouTube: Well-Positioned for Long-Term Growth

Google's YouTube will be the biggest beneficiary of the expected growth in online video advertising.

May 30, 2014 at 5:00PM

Google's (NASDAQ:GOOG) YouTube platform is by far the biggest and most influential player in the online video advertising market. Consumers are increasingly leaning toward watching videos online, as the rapid growth in mobile devices continues. Estimates from ZenithOptimedia suggest that the online video advertising market will grow to as much as $10 billion annually by 2016. YouTube will likely be the biggest beneficiary of this trend. 

Robust growth
YouTube saw fantastic growth in 2013, as gross revenue surged 51.4%. Google doesn't disclose revenue for YouTube as a separate line item, but according to estimates from eMarketer, YouTube earned gross revenue of $5.6 billion in 2013, up from $3.7 million in 2012. After paying content creators on its platform, YouTube earned net ad revenue worldwide of $1.18 billion and $1.96 billion in 2012 and 2013, respectively. 

YouTube disclosed that 75% of its in-stream ads are now skippable using the TrueView ad format. More than 1 million advertisers use Google's YouTube ad platforms, mostly comprised of small businesses. Google's management has stated that much of the explosive growth in YouTube's ad revenue have been due to the TrueView ad format, in which an advertiser pays only for those ads which a user watches. 

YouTube can get much bigger through better targeting. Marketers heavily favor targeted ads, as evidenced by Google's consistent double-digit growth in revenue from search ads. Higher utilization of targeted ads on various Google and AdSense partner sites should translate into much higher growth in video ad revenue for Google. 

Global reach
YouTube incentivizes users to upload content by sharing a majority of the ad revenue generated from their content. As a result, the amount of content being uploaded has surged to 100 hours of video every minute. The company should continue to see strong growth in user-generated content, or UGC.

Its large audience is viewing in excess of 6 billion hours of video each month. YouTube has tremendous reach worldwide -- more than 80% of its web traffic comes from outside the U.S. And according Nielsen, YouTube reaches more U.S. adults ages 18-34 than any cable network. According to comScore data, YouTube's reach among the U.S. Internet video audience stood at 83.7%, or 156 million users, which shows the company's broad reach in the domestic market. 

Bigger bets on online video
Growth in the online video market is attracting more investment in the space. Yahoo! consistently ranks among the top five video publishers, and now the company is ramping up its video content offerings. Yahoo! will launch two new comedy shows on its Internet portal, and it also struck an agreement with the world's largest live events company, Live Nation, to stream live concerts daily. Yahoo! and Live Nation will split the advertising revenue derived from the online video sales 50/50. 

In addition, Walt Disney (NYSE:DIS) bought a company called Maker Studios for $500 million. Maker produces video series on YouTube. Disney has a significant presence in online video properties due to its ownership of leading content platforms such as ESPN, ABC, etc. and its partial ownership of Hulu. Making such a sizable bet on the prospects of a major producer on YouTube goes to show the value of online video and YouTube, in particular.

The heightened interest in online video by newer players in the market like Disney and Yahoo! can be attributed to the pricing of online video ads. According to Media Dynamics, the average online video ad carried twice the price of a national TV commercial. Cost per thousand impressions, or CPM, ranged on average between $20-$23 for online videos of various lengths. A national TV 30-second commercial had an average CPM of $9-$10.  

In the display advertising market, roughly half of all the ad dollars go to the five leading companies: Facebook, Google, Yahoo, Microsoft, and AOL. YouTube's strong metrics across the board will aid Google in running even farther ahead of the pack. 

Going forward
YouTube has built a gigantic user base and is clearly the 800-pound gorilla in the Internet video space. The company has thousands of content creators who are uploading huge amounts of video every minute, and YouTube is a preferred destination for leading brand marketers trying to reach millennials. The company should continue to earn the lion's share in the online video advertising business.

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Ishfaque Faruk has no position in any stocks mentioned. The Motley Fool recommends Google (A shares), Google (C shares), Walt Disney, and Yahoo. The Motley Fool owns shares of Google (A shares), Google (C shares), and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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