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YouTube's Smaller and Growing Slower Than Instagram

By Adam Levy - Feb 6, 2020 at 7:45AM

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YouTube is looking to take on the Facebook app in new direct-response advertising opportunities.

Alphabet (GOOG -0.56%) (GOOGL -0.53%) broke out results for the YouTube and Google Cloud segments of its Google business for the first time ever in its fourth-quarter earnings report this week.

Investors were disappointed in the amount of revenue for YouTube, which has over 2 billion monthly active users. The video-sharing platform generated $15.1 billion in ad revenue in 2019 and accounted for a considerable portion (about 13%) of Google's total ad sales last year. 

Management has historically held up YouTube as a driving force behind its Google revenue growth (after mobile search) before it started breaking out the results of the individual property. Indeed, ad revenue grew 36% in 2019, faster than the 17% overall growth for the Google Properties ad business.

But YouTube's results are considerably weaker than those of Instagram, a competing social advertising platform. Facebook (META -0.47%) doesn't publicly break out revenue for its Instagram property, but it was estimated to generate between $14 billion and $20 billion in ad sales last year by various analysts. Importantly, Instagram is exhibiting much faster growth than YouTube, and its strengths are in the exact areas Alphabet's management highlighted as opportunities for growth.

Three teens in an outdoor setting all looking at their smartphones

Image source: Getty Images.

Shopping on YouTube

Alphabet and Google CEO Sundar Pichai was quick to highlight the potential of shopping ads on YouTube during the company's fourth-quarter earnings call. "People can now easily buy products in YouTube's home feed and in search results," he noted. "With all the related content YouTube, like unboxing and beauty videos, this is a format people love and it delivers a simple in-video buying experience."

To be sure, social commerce is an under-tapped market for YouTube. And with Google's recent efforts to step up its shopping platform, there are plenty of synergistic opportunities for the company to sell YouTube ads to merchants also using Google Shopping. Pichai said the company quadrupled the number of U.S. merchants on its shopping platform last quarter compared to Q4 2018.

But Instagram is basically a window-shopping app for some users, and Facebook has taken several steps to capitalize on that behavior. During the company's fourth-quarter earnings call, CEO Mark Zuckerberg said commerce is one of his three main product focuses for the company. Management is being deliberately slow with the rollout of Instagram Checkout, but the potential for the seamless shopping experience on the photo-sharing app could be massive.

While Google has some opportunities to develop advertising products for merchants on YouTube and move some of its Google Shopping partners to buy ads on the platform, it's going up against a stiff competitor in Facebook.

Fighting for direct-response advertisers

Beyond just commerce-focused advertisements, Alphabet's management noted an opportunity to grow direct-response advertisements on YouTube. Those are ads with a specific call to action -- for example, signing up for a newsletter or downloading an app. 

Brand advertising currently accounts for the majority of revenue from ad sales on YouTube, but direct response is growing faster. "I think direct response is a huge growth area for us," Pichai said.

Facebook presents itself as a tough competitor for direct-response advertisements, as the social network's built up products around those types of ads with a specific focus on the small- and medium-sized businesses to whom they most appeal. Likewise, marketers have built best practices for maximizing the capabilities of Facebook. 

While Facebook and Google's ad-targeting capabilities may be on par with one another, Facebook has an edge because it's designed products that convert better and marketers know how to design advertisements for Facebook and Instagram.

Still, that leaves a lot of potential juice to squeeze out of direct-response ads on YouTube. If YouTube invests in new products and targeting capabilities, marketers may jump at the opportunity to buy valuable ad inventory at prices lower than Instagram or Facebook. But unless YouTube can consistently convert at levels comparable to or better than Instagram and provide strong returns on ad spend, its growth will never catch up to the social media company.

YouTube is certainly an important piece of Google and a key growth driver of ad revenue, but its size and growth compared to the competing social advertising platform is a disappointment for investors.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Alphabet (C shares) and Facebook. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Facebook. The Motley Fool has a disclosure policy.

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