How YouTube Can Add $50 Billion To Alphabet’s Revenues By 2020

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According to Trefis estimates, YouTube makes up nearly 18% of Alphabet’s (NASDAQ: GOOG) value. While most of YouTube’s revenue stems from online ads, it did generate some revenues from its subscription services as well. We estimate that the company disbursed close to 70% of the revenues to video content producers as part of its content sharing agreements. Despite the popularity of YouTube, Alphabet continues to explore avenues to boost YouTube’s revenues. In the recent quarters, the company has launched new services, which includes a paid YouTube subscription cable service called Unplugged that would offer customers a bundle of cable TV channels streamed over the Internet and live TV streaming. Through the launch of these services, the company is trying to disrupt the global video-on-demand (VoD) industry, which is projected to reach $91 billion by 2020. Furthermore, the launch of such services is attracting customers away from the Pay-TV space, which is witnessing a decline in subscriber numbers due to cord cutting initiatives. In this note, we explore the revenue that YouTube can add to Alphabet’s top line by the end of the decade.

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Online Ads Will Be The Mainstay For YouTube In The Future

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TV ad spending currently leads all other ad spending, but this is set to change in 2017, when online ad spending is expected to overtake TV ad spending in the U.S. and worldwide. By 2020, digital ad spending is expected to account for nearly half of total media ad spending. According to IAB, spend on digital/mobile video ads is expected to increase by 67% in the 2015-2017 period, driven by explosive growth in online video consumption.

YouTube’s consumption has risen by around 80% CAGR, in terms of hours watched, over the 2014-2016 period. [1] The site gets over 30 million unique visitors per day and 5 billion videos are watched on YouTube every day. This is allowing the company to attract advertising dollars that were previously allocated to TV. YouTube has been able to target TV ad dollars with the increasing channelization of its services. We expect that the company will eventually be able to charge rates that are comparable to TV rates for ads displayed on premium videos that can be viewed on TV screens. Currently, we estimate that YouTube’s CPM (Cost Per 1000 impressions) for its ads will grow from $6.53 in 2016 to $14.50 by the end of our forecast period.

Video On Demand Subscription Services Can Boost Top Line In The Future

While Alphabet does not disclose specific financials for YouTube, we estimate that YouTube generated nearly $19 billion in 2016. We currently estimate that YouTube’s revenues will increase to $50 billion by the end of our forecast period. This is based on an assumption of 1.6 billion users worldwide that will view over 5 trillion videos by 2020. In addition to the online ad revenues, subscription services such as YouTube Red (ad-free) and Unplugged will add to the company’s top line. We currently estimate that YouTube will capture 5% (or $5 billion) of the Subscription VoD market. However, if YouTube’s share in SVoD were to increase to 10%, the platform could add $5 billion to YouTube’s topline by 2020, and our price estimate can rise by 5%.

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Notes:
  1. You know what’s cool? A billion hours, February 27 2017 []