The glass-half-empty view of Alphabet's (GOOGL) YouTube revenue disclosure: YouTube's current revenue is less than what many had estimated.
The glass-half-full view: Alphabet grew its revenue by 18% last year in spite of getting a smaller contribution from YouTube than what many thought it was getting. And considering what's known about YouTube usage and Google's strategy for monetizing the platform, YouTube still has considerable headroom to grow.
As many readers are probably aware, Alphabet broke out YouTube's ad revenue for the first time in its Q4 report on Monday. The online video giant's ad sales were reported to be up 31% annually in Q4 to $4.72 billion, and to be up 36% in 2019 to $15.15 billion (9.4% of Alphabet's 2019 revenue).
Alphabet also disclosed that YouTube's non-advertising revenue -- fueled by its 20 million-plus YouTube Music and YouTube Premium subscriptions, and to a lesser extent by its 2 million-plus YouTube TV subscriptions -- is now on a $3 billion annual revenue run rate.
Though YouTube is clearly a massive business, it's not quite as big as many analysts estimated it to be in recent years. A July New York Times article asserted (citing analyst estimates) that YouTube "probably" generated between $16 billion and $25 billion in annual revenue, while a May Wall Street Journal article noted that analysts estimate YouTube "now sells at least $15 billion in advertising annually." We now know that YouTube only crossed that threshold in Q4 2019.
Moreover, with YouTube having disclosed last May that it has more than two billion monthly logged-in users, Alphabet's Monday disclosures suggest that YouTube produced less than $8 in ad revenue per user in 2019, and less than $9 in total revenue per user.
For comparison, Facebook (FB) disclosed last week that its average revenue per user (ARPU) in 2019 for monthly users of one or more of its main platforms (Facebook, Instagram, Messenger and WhatsApp) was $25.57, with more than 98% of this revenue coming from ads. While we are talking about four platforms here rather than just one, two of those platforms (Messenger and WhatsApp) currently produce very little revenue.
On Tuesday afternoon, Bloomberg reported that Instagram generated about $20 billion in revenue in 2019, citing people familiar with the matter. With Instagram possessing one billion monthly active users as of mid-2018, the report suggests Instagram is currently producing 30% more revenue than YouTube in spite of having only 50% to 60% as many monthly users.
YouTube's usage disclosures also suggest the platform remains under-monetized for now. Back in Feb. 2017, YouTube said that it's seeing more than 1 billion hours of viewing per day. Given how YouTube viewing has kept growing since then, there's a good chance that number is near or above 1.5 billion today.
But even at just 1.3 billion hours per day, YouTube's 2019 ad revenue would imply that it produced a mere 3.2 cents worth of ad revenue per hour of viewing last year. For comparison, research firm Ampere Analysis estimated in 2016 that an hour of TV viewing produces on average $0.30 worth of ad revenue in the U.S., $0.25 in the U.K., $0.14 in Germany and $0.09 in Italy. And in the U.S. at least, TV ad rates (as measured by the cost of delivering 1,000 ad impressions) have grown at a high single-digit annual percentage since then.
This isn't a strict apples-to-apples comparison: A fair amount of YouTube viewing involves content that isn't advertiser-friendly, and a lot of it also takes place in emerging markets where (due to lower average incomes for consumers) video ad prices are lower. Still, the delta that exists between YouTube and TV viewing monetization looks pretty excessive right now, and is quite likely to narrow in the coming years.
Certainly, the fact that YouTube -- aided by the tons of user data that both YouTube and its parent company possess -- can deliver targeted ads to consumers in a way that traditional TV networks can't works in favor as it tries to improve ad monetization. So does the fact that it can -- through a direct response ad business that was said on Monday to be growing much faster than YouTube's total ad business -- directly drive activities such as e-commerce transactions and app installs via ad clicks.
Meanwhile, comments made both recently and earlier by CEO Sundar Pichai, CFO Ruth Porat and YouTube chief Susan Wojcicki have made it pretty clear that YouTube isn't being run to maximize its near-term revenue. With YouTube both keen on driving further viewing growth and sensitive to the content controversies and advertiser boycotts that have occasionally flared in recent years, it has from all indications remained fairly cautious about how many ads it shows to users, as well as where it shows them.
This is worth keeping in mind as Alphabet's stock sells off following a Q4 revenue miss that had much to do with hardware sales pressures. As YouTube viewing keeps growing, and as online platforms grab a larger and larger chunk of video ad spend amid cord-cutting and TV ratings declines and as YouTube also continues seeing traction for its subscription services, its revenue should keep rising at a brisk pace for at least the next several years.