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British statesman Winston Churchill never watched YouTube, nor was he a financial analyst. But Churchill’s quote that Russia “is a riddle, wrapped in a mystery, inside an enigma” fits YouTube, the video website owned by Alphabet’s (GOOGL) Google.
Ad-supported YouTube is a revenue juggernaut. Some analysts estimate sales will swell 30% to 40% in 2016, to about $9 billion.
But is YouTube profitable? Google has never said. Nor does it disclose viewership data or other financial metrics beyond a few broad statements.
“There’s substantial uncertainty, particularly over the profit levels at YouTube, whether it’s break-even or if they’re doing modest operating margins,” RBC Capital analyst Mark Mahaney told IBD. “They have a lot of content royalty costs, massive bandwidth costs, storage costs, processing costs.
“My guess is that with YouTube’s scale, they’re reasonably profitable, like double-digit margins, but there’s no way of knowing,” Mahaney said. He thinks investors crave a “clean look” at YouTube’s financials.
Bank of America Merrill Lynch last year valued YouTube at $70 billion or more. That would be more than 40 times the $1.65 billion that Google paid for YouTube in 2006. BofA predicted YouTube’s revenue will hit $13 billion in 2017.
Its 1-billion-plus users and massive video library buoy Wall Street analysts’ faith. They could place YouTube in a sweet spot to capture TV advertising dollars, as they shift to online video from broadcast networks and cable.
Broadcasters snipe at the quality of YouTube’s videos, aiming to hold on to TV advertising. Competing in subscription-based services vs. the likes of Netflix and Hulu would take big content investments. Not knowing YouTube’s costs, margins or growth history will make it hard to gauge how it’s meeting the challenges — and the potential for a blow to its value to Alphabet, whose overall market capitalization approaches $500 billion. Alphabet stock closed Friday at 747.60, up 1.5%.
Costs already are rising. YouTube pays partners that generate traffic for YouTube. A popular site for music videos, YouTube is also renewing its agreements with major record labels. The Recording Industry Association of America in March charged that YouTube pays much lower royalties than Apple (AAPL) Music and Spotify.
Observers speculate Google has sought streaming rights to on-demand TV shows and movies to bolster YouTube Red, its new subscription service. Some media reports suggest Google could go a step further and buy rights to live TV channels, making it a more direct foe of pay TV providers such as Comcast (CMCSA), AT&T (T) and Verizon Communications (VZ). Google is usually mentioned when broadcasting rights to major sports are up for grabs.
So far, though, this has all proved to be mostly idle speculation. Analysts say Google has not been bidding aggressively to win streaming rights. It’s not clear whether YouTube, long the top video site overall in unique visitors, aims to be the No. 1 aggregator of all video, says Joel Espelien, an analyst at the Diffusion Group, a video-focused research firm.
“YouTube’s DNA is in free video with ads, and that’s difficult to change,” Espelien said. “But also they don’t want to be thought of as the cat video guys. They want the YouTube brand in a mass-market context. So they experiment buying rights.
“But subscription VOD/premium video is different (than free). It’s hit-driven. There’s no HBO without ‘Game of Thrones.’ I’m not sure YouTube can monetize rights. There are questions over recouping content investments. If YouTube bought (live) NFL rights, they could lose their shirt.”
It is, however, getting more aggressive with original content. YouTube plans to release 15 to 20 original series and movies this year. But its originals are not big-budget shows like Netflix’s “House of Cards.” YouTube’s originals are mostly spun off from a roster of young stars who have found an audience with their free videos on YouTube.
YouTube has focused on developing online personalities such as video game player PewDiePie, music video specialist Smosh and style guru Michelle Phan. Driving much of the traffic to YouTube, analysts say, are multichannel networks such as Fullscreen, Maker Studios, SonyBMG and Whistle Sports. Google has bought stakes in multichannel networks such as Vevo and Machinima, analysts say, to ensure their content stays on its website.
“One day YouTube will be as large as — if not larger than — most, if not all, legacy media companies,” Bernstein Research analyst Carlos Kirjner said in a research report. “It is playing a central role in the secular shift of brand advertising budgets to the Internet. Yet, we know ridiculously little about YouTube.”
All the estimates by research firms and analysts, says Kirjner, are “based more on belief and anecdotes than on truly representative data. What’s more — beyond anecdotes either shared by Google or collected through discussions with ad buyers, creators and multichannel network operators — we know very little about what is available on YouTube, what people watch and how much it gets watched.”
Google Keeps Data To Itself To Keep Advantage
The lack of transparency is unlikely to change, says Espelien. While Wall Street craves granular data, it’s not in Google’s interest to say much, he says. Content providers and advertisers get “little snippets” of information from YouTube, but not most of the data YouTube collects.
“There’s information asymmetry,” Espelien said. “It’s an advantage for them. Wall Street tries to model businesses and make forecasts, but that doesn’t mesh with tech companies trying to preserve an edge.”
Google’s broad message? YouTube is doing well. As Google CEO Sundar Pichai put it on Alphabet’s Q1 earnings conference call: “YouTube still has incredible momentum, and we continue to invest heavily here.”
The company does say YouTube has over 1 billion active monthly users, who watch hundreds of millions of hours of video each day, and that 80% of viewership is outside the U.S.
Google also hasn’t said how many subscribers it’s attracted to its ad-free, $10-per-month YouTube Red service. Google has launched a new 99-cent, three-month offer for YouTube Red — possibly a sign it’s not gaining traction.
At an advertising gala in May, Google said YouTube now reaches more 18- to 49-year-olds on mobile devices than any network, including broadcast or cable. But it hasn’t disclosed anything about what content they’re watching.
What is certain is that Facebook and Amazon — which offers its video streaming as one service in its Amazon Prime customer-loyalty package — are taking aim at YouTube, as are Snapchat and Twitter (TWTR).
Facebook and Twitter, via its Periscope service, are beefing up their live streaming, as YouTube does the same. YouTube in April began supporting 360-degree live streaming on its service.
In early May, Amazon announced a new service initially designed for “professional video producers.” Launch partners include media firm Conde Nast, the “How Stuff Works” website and Samuel Goldwyn Films. Amazon Video Direct could compete for the young creative talent attracted to YouTube. As does YouTube, Amazon offers revenue-sharing and royalties for content that attracts a certain level of traffic.
YouTube has doled out bonuses to keep its top creative stars from defecting to Facebook or others. And holding on to popular multichannel networks such as Machinima, says Espelien, remains key.
For now, YouTube’s biggest threat is Facebook, says Mahaney. Facebook has hinted at creating a dedicated video service that would get prominent play on its social networking website. But even Facebook and Amazon can’t easily match YouTube’s scale, Mahaney says.
“It’s a long-term build for Amazon,” Mahaney said. “YouTube already has a billion people who go to it on a monthly basis. It’s hard to see anyone matching them.
“Facebook has users, too, but it’s not purely entertainment, like YouTube.”
YouTube Talking The TV-Ad Language
Moreover, YouTube is best-positioned among rivals to tap into TV advertising budgets, some analysts say. That’s because Google has worked to provide improved audience measurement tools.
“Google is increasingly speaking a common language with TV advertisers on metrics that should drive increased share shift from TV to YouTube,” said Nomura analyst Anthony DiClemente in a research report.
In early May, YouTube said it would launch a new product that lets big brands automatically buy ads for the site’s hottest viral videos.
The new offering is an offshoot from Google Preferred, which enables agencies to reserve spots among YouTube’s most popular channels. YouTube ad rates are higher for Preferred than its usual rates, says Espelien.
“Along with Hulu, Preferred has the best pitch to TV buyers of any pure-play digital platform,” said Daniel Salmon, analyst at BMO Capital Markets. Hulu is a joint venture of Walt Disney (DIS), 21st Century Fox (FOXA) and Comcast.