Google’s Chromecast Can Bolster Its Online Video Ad Revenue

Google (NASDAQ:GOOG) recently launched Chromecast, a dongle that allows users to stream videos from a phone or tablet to their TV using Chrome and is priced at $35. While the launch of this product is still in early stages, we think that it is worth examining Google’s motivating factor behind such a product. We think that with Chromecast, the search giant is aiming to capture a bigger share of the online video advertising market, which is slated to reach $9 billion in the U.S. by 2017. ^[1] Moreover, Google is struggling to gain traction in the mobile ads space, and this product could potentially augment its mobile ads revenues.

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Mobile Online Video Ads – A Big Opportunity

According to comScore, Google currently leads the online video content industry. In June 2013, Google sites ranked as the top online video content property and had over 158 million unique viewers for its videos. ^[2]

While TV ad spending is expected to exceed $75 billion by 2017, video online ad spending is expected to exceed $9 billion by 2017, according to eMarketer. ^[1] TV and digital video advertising spend are converging as multi-platform and multi-screen video advertising are increasingly getting integrated. Additionally, digital video ad spend is increasing at a faster pace and much of this growth is coming from mobile devices. According to eMarketer, mobile ads share in online video ad spending is expected to increase from 12.6% in 2012 to over 29% by 2017.

Mobile ads revenue per impression (RPM) lags PC and TV RPM as advertisers are  concerned that the smaller screen size on mobile devices make display ads seem more obtrusive and less appealing to consumers. According to The State of News Media, RPM for the mobile platform can range $4.42 from $0.88. ^[3] Additionally, revenue per impression for TV was $24 in 2012, according to TVB. ^[4]

With Chromecast in its product portfolio, Google can further strengthen its position in online video streaming. A user who streams video online using his mobile device can now cast the video on his big TV with this latest device. We believe that with the launch of Chromecast, Google can charge higher RPM for ads displayed on videos. Currently, we estimate RPM for the YouTube division will grow from $3.69 in 2012 to $ 11 by the end of our forecast period. If Google can increase RPM to $18 by the end of our forecast period, our stock price estimate will increase by 5%.

Chromecast Can Bolster Unique Visitor Count

Additionally, mobile is key for Google’s growth over the long term because more users will access Internet via mobile devices in the coming years. As casting of videos from mobile devices to large screen TVs gains traction, we anticipate that more users are likely to use mobile devices to watch videos online that will boost the unique visitor count. The number of unique visitors is vital for Google’s ad revenues as more people visiting the website generally translate into more pages viewed across Google’s websites. We currently project the page views per users to rise from 116 to 177 per month by the end of our forecast period. If the page view per user were to reach 220 per month due to the adoption of Chromecast, this would increase our price estimate by an additional 3%.

We  currently have a $865 price estimate for Google, which is inline with the current market price.

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1. Online Video Ads Moves Front And Center, May 14 2013, www.emarketer.com [↩] [↩]
2. comScore Releases June 2013 U.S. Online Video Rankings, July 2013, www.comscore.com [↩]
3. The State of New Media Report, www.stateofthemedia.org [↩]
4. TV Cost & CPM Trends- Network TV Primetime, www.tvb.org [↩]