(By Mani) Google, Inc.'s (NASDAQ: GOOG) YouTube remains an underappreciated asset for the search giant. YouTube is one of the best plays on the migration of TV ad budgets to Online.
Google generated over $6 billion in gross display advertising revenue in 2012, making it the largest display advertising company on the Internet and YouTube positions Google extremely well for the strong growth in video advertising.
YouTube, which was bought by Google in November 2006 for $1.65 billion, was estimated to have generated approximately $4 billion in revenue in 2012 and is expected to grow at a rate of at least 20 percent a year.
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"Given the property's very large scale and innovation track record, we think it (YouTube) could generate up to $5 billion in revenue in 2013, with the new Paid Channels offering an additional $1 billion long-term revenue opportunity," RBC Capital Markets analyst Mark Mahaney said in a client note.
A variety of factors, including an increase in Internet bandwidth, the decreasing cost of storage, and the proliferation of low-cost but high-quality camera equipment are combining to increase the amount of Online video traffic rapidly. Some of this traffic is likely cannibalizing traditional TV viewing.
Due to the rise in the amount of time spent viewing online video, time spent watching traditional TV appears to have stagnated. However, that the time spent watching traditional TV still dwarfs the time spent watching Online/Mobile Video, but the situation could change drastically in the coming years.
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"The natural consequence of the ramp-up in Online video viewership will most likely be a migration of TV ad budgets online. This migration represents an enormous opportunity given the size of the Television Advertising pie," Mahaney said.
In 2012, Television Advertising was about $200 billion global market, more than twice as large as all of Internet Advertising.
There are some indications that ad dollars are already beginning to shift from TV to Online video. According to a study by Adap.tv and Digiday, 72 percent of online video ad buyers saw their budgets increase in the first quarter of 2013 and 39 percent of those whose budgets increased shifted funding from their TV budgets. The average increase for those buyers who saw their budgets go up was 53 percent, a truly healthy growth rate in an online Ad industry that is growing mid-teens.
The reasoning behind this shift may just be the effectiveness of online video ads. According to a study published by eMarketer, 75 percent of ad agency executives surveyed thought that online video was a more effective ad platform than TV.
"As one of the ubiquitous Internet Video properties, YouTube stands poised to take advantage of this Ad spend migration in a big way. Clearly, YouTube is one of Google's most valuable assets," Mahaney noted.
However, because Google discloses relatively little about the video portal's contribution, it may be under-appreciated in the marketplace. No matter which way you slice it, YouTube has clearly reached a massive scale in terms of its reach to consumers.
In March, Google disclosed that YouTube had reached the 1 billion Monthly Active User (MAU) mark, which coincidentally, is darned close to the size of Facebook, Inc. (NASDAQ: FB).
The monetization level of YouTube is clearly increasing. On the fourth quarter earnings call, Google noted that the top 100 global advertisers on YouTube spent 50 percent more in 2012 compared to 2011, implying that YouTube's total revenue base likely grew 60 percent plus in 2012.
"It's clear that YouTube takes advantage of long-tail video viewership with its diverse set of user-uploaded content, but the platform also gives the opportunity for "professionally" generated videos to attain tremendous scale," Mahaney said.
YouTube have seen numerous improvements over the years in terms of the user experience as well as on the advertiser side with significant growth in ad format offerings, which have helped to bolster YouTube's popularity with both groups.
Most recently, the introduction of paid channels will not only give advertisers more choice in monetization models but will also allow for different types of content – perhaps more long-form, professionally-produced content.
Another innovation, which has improved the site for both consumers and advertisers, is the TrueView ad format. Under this format, viewers are shown a pre-roll video ad but have the option to skip the ad after a certain number of seconds. Advertisers only pay for the impression if the User continues to watch the entire advertising video. The format seems like a win-win in terms of effectively targeting ads.
"The potential migration of TV ad budgets Online, YouTube's massive scale, and its track record of innovation all lead us to believe that the video portal is a major revenue contributor for Google," Mahaney added.