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Why YouTube Is Twice as Valuable as Netflix
Alphabet’s rising-star division has torrid revenue growth and billions more viewers than television—and it’s just getting warmed up.
By Jack Hough
YouTube star Jenna Marbles
Last February’s Super Bowl delivered 114 million U.S. viewers, making it the most-watched television broadcast in American history. In June, a YouTube user uploaded a video of toddlers playing in a tub of colored balls, then naming the colors. It has been watched 249 million times. In fairness, the football game went for hours, while The Ball Pit Show is about two minutes. But then, the game is over, while the video is still running—and it doesn’t even rank among the 25 most-watched YouTube clips this year.
At the top, with 1.3 billion views, is a music video from rapper Wiz Khalifa featuring a song from the seventh installment of The Fast and the Furious film franchise. Your middle-age reporter, not one for rap or racing, had a look. If it were television, he might have seen a commercial for, say, Gatorade, based on the video’s youthful content. Instead he got a discount offer from Brooks Brothers. He recently bought suits there, as it happens, and was thinking about shirts.
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Investors should take a fresh look at YouTube, for three reasons. First, it is growing at an astonishing pace.
Parent company Alphabet GOOGL (ticker: GOOGL), which changed its name from Google in August, doesn’t break out YouTube results in its quarterly reports, but earlier this year it noted that viewing time had jumped 60%, year over year, and that mobile viewing time had doubled. Television, meanwhile, has been holding steady only with viewers age 50 and up, while the 25-to-34 cohort spent 8.6% less time watching it last quarter than a year earlier, according to Nielsen. Over four years, that group’s viewing time is down nearly 24%.
That’s a long-term challenge for television, because spending among Americans peaks around age 45, and marketers work to establish brand loyalty decades sooner. Also, most of the world watches far less TV than America. YouTube gets 80% of its views from outside the States.
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The following six YouTube stars together have about twice as many subscribers as Netflix.PewDiePie, aka Felix Kjellberg of Sweden, is a former hot dog vendor who has led on subscribers since 2013. He made over $7 million last year, and with 3.4 billion fresh views so far this year, he could come close to doubling his pay.
Ribald, comic videogame commentary with occasional help from a girlfriend and a pug.
The second reason investors should tune in to YouTube is that the money is following the viewers.
Netflix stock (NFLX) is up 141% this year, making it the hottest issue in the Standard & Poor’s 500 index. That’s because it’s a fast grower: Revenue is expected to climb 23% in 2015, to $6.8 billion. But YouTube, with more than 15 times as many users, could ring up nearly $9 billion this year, and it’s growing faster.
Netflix stock (NFLX) is up 141% this year, making it the hottest issue in the Standard & Poor’s 500 index. That’s because it’s a fast grower: Revenue is expected to climb 23% in 2015, to $6.8 billion. But YouTube, with more than 15 times as many users, could ring up nearly $9 billion this year, and it’s growing faster.
Netflix recently raised the price of its standard streaming service by $1 a month to $9.99, suggesting a strong competitive position. YouTube recently rolled out its own subscription service, but in the near term, much of its revenue growth will come from advertisers simply catching up to viewing trends. Revenue per average YouTube viewer could double in five years. Put it all together, and if YouTube were a separately traded company, it could be worth $100 billion, or double Netflix’s recent stock-market value.
That brings reason No. 3. Alphabet stock has surged 44% this year because the company has done two of the three things investors have long demanded. It is returning cash to stockholders; in October, it announced a $5 billion share buyback. And it has slowed annual cost growth, to 9% last quarter, from 28% a year earlier. Now investors want to know more about how the company invests and how its individual businesses are doing.
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Observations on parents, gamers, zombies and more, spoken in high-speed Spanish.
YouTube and Alphabet did not make any executives available to Barron’s for interviews, but Alphabet says it will begin more detailed reporting with its fourth-quarter results, expected in late January. That could get more investors thinking about the sum of the company’s parts, much the way Amazon.com (AMZN) this year has broken out growth for its flourishing cloud business and watched its share price more than double.
Alphabet stock, recently at $760, has a good chance of hitting $1,000 over the next year, for a gain of more than 30%.
YOUTUBE, WHICH was bought by Google nine years ago for $1.65 billion, is a Website for sharing both amateur and professional videos. A good example of the former is the 19-second Me at the Zoo, uploaded in 2006. In it, a 25-year-old reveals, “the cool thing about these guys is that, is that they have really, really, really long, um, trunks. And that’s, that’s cool.” The cool thing about the speaker, Jawed Karim, is that he really, really co-founded YouTube.
A good example of a professional clip is the most-watched one of all, Gangnam Style, featuring the quirky dancing of Korean singer Psy. It’s going on 2.5 billion views, but its lead isn’t safe. Among 14 videos with more than a billion views, nine have been uploaded since the start of 2014. Many of the most-watched clips are music videos, because users like to cue up their favorites and use the site as a radio station. There are scripted shows, home videos, how-to clips, movie previews, and gaffes—comedian Steve Harvey crowning the wrong Miss Universe contestant was a clear favorite over the past week.
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Scripted and costumed send-ups of Star Wars, waterboarding, cats, and much else.
But trying to categorize what YouTube viewers like misses the point. That’s the burden of television executives: trying to predict public tastes, and then putting capital at risk to test their predictions. YouTube gets its content free and simply splits the advertising revenue 45/55 with its “celebrities,” with the stars getting the larger share.
It’s a machine that reflects public tastes, for better or worse, in real time. Few TV execs could have predicted the unboxing craze, in which users open and play with toys on camera and, well, that’s it.
One of last year’s top YouTube earners, visible only as a pair of nicely manicured hands, pulled in an estimated $5 million. Her top hit, nine minutes of using sparkly Play Doh to make doll dresses, has been watched more than 400 million times. This year, a 26-year-old Swede with salty language and slick video editing skills, who calls himself PewDiePie, is likely to make more than twice as much. He hasn’t cracked 100 million views on a single video, but he puts one up almost every day and has 41 million subscribers, versus six million for the Play Doh lady.
That means he has hundreds of videos with five million views or more—smash hits by TV standards.
Cumulatively, his clips—dancing with his dog, eating marshmallows with his girlfriend, playing videogames, and so on—have been watched 10 billion times. The planet, keep in mind, has seven billion people.
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Lip synching, ninja satire, musings on racial stereotypes, and a viewer-requested armpit shave.
YouTube is popular, in part, because it had an early start and enjoys a clear network effect: Video publishers go where the viewers are, and viewers go where the videos are. Like Google, it’s a clean and fast-loading site, which makes it painless to use. It’s also social. Users can write comments on videos, and more important, discover what others are watching. Advertisers like YouTube for its customization as much as its reach. “You can effectively build your own TV network,” says Mike Henry, chief executive at OpenSlate, which tracks data on hundreds of thousands of YouTube channels, or collections of videos from single publishers. His software goes beyond counting views to measuring things such as a YouTuber’s consistency and ability to influence viewer decisions. It can pair companies with channels that are safe for their brands and watched by likely customers.
Alphabet itself can target campaigns by demographics, location, and more with help from login data from its other sites, such as Gmail. Unlike television, it can track consumers after they leave YouTube as they evaluate products on other sites. Also unlike television, where advertisers buy airtime in bulk before shows start, YouTube allows them to start off small, anytime. One of the biggest selling points for advertisers is TrueView, the feature that lets video watchers “skip this ad” after five seconds.
Viewers who stay have chosen to do so, which makes them valuable. Those who go aren’t annoyed by the brand, and advertisers get five free seconds in which to make a pitch.
Alphabet reports that all of the top 100 global brands have recently run TrueView ads, that spending among top advertisers has been growing at 60% a year, and that the number of customers for video ads has been climbing by 40%. Yet YouTube is under-earning, relative to its potential. Ken Sena, an analyst at investment bank Evercore ISI, estimates that YouTube will serve up more than 543 billion video ads this year at a cost per thousand of $13.50, combined with over 815 billion display ads that run with videos, at $1.95 per thousand. That works out to nearly $9 billion in gross revenue before YouTube pays its video creators their cut.
Assuming 1.3 billion users, that’s around $7 in revenue per user— Twitter (TWTR) territory, and well behind Facebook (FB) $11, to say nothing of $106 for Netflix and $198 for flourishing AMC Networks (AMCX), with its zombie hits. Sena predicts rising revenue per user for many online advertisers in coming years, with YouTube hitting $13 by 2020.
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Drunk magic tricks and thoughts on facial hair and avocados, for starters. GM was a recent advertiser.
It isn’t an especially lofty target. YouTube today serves 19% of the Internet’s videos, but only 9% of video ads. By 2020, the business could haul in $28 billion annually, keep about half after paying video creators, and still be growing by 20% a year. Sena reckons that YouTube is worth $85 billion today, or more than $65 per user, but notes that number could be conservative. It assumes that YouTube users aren’t much more valuable than Twitter users, even though the former tend to tune in for over 10 times as long as the latter.
It’s not clear that investors realize that YouTube brings in perhaps 15% of Alphabet’s revenue, and that it could approach 25% by the end of the decade. Alphabet has probably been running the business near breakeven to invest in infrastructure, workers, research, and new products. Over time, it can pull back on investment as revenue swells, unlocking profit margins that are on par with the company’s plump average.
That’s one of reason Alphabet, already one of the top five U.S. companies by profit, has the potential to grow so quickly, perhaps doubling earnings by the end of the decade.
Barron’s recommended the stock at $528 late last year (“Time to Buy Google,” Dec. 8, 2014). It’s up 44% since then. Mark Mahaney, an analyst with RBC Capital Markets, has a price target of $880 on Alphabet, implying about 15% upside, which he bases on a multiple to earnings. But after the company begins reporting more details for its core businesses versus its early-stage ones, like self-driving cars and home automation, a sum-of-the-parts valuation could make more sense. Depending on the margins, that could push the stock to $1,000 a share, Mahaney wrote on Dec. 1.
AS BRIGHT AS YOUTUBE’S FUTURE appears, there are challenges. Chief among these is Facebook, which made video a priority only last year, and which last month reported it had doubled video views since spring to eight billion a day. That means it has caught up with YouTube, and Facebook is a dream platform for marketers, with gobs of user data for targeting. Judging only by recent growth claims, Facebook makes YouTube look like what YouTube makes television look like.
But the numbers could mislead. Facebook counts a video as viewed after it has played for just three seconds, regardless of whether a user has requested it. That means that when a user, say, scrolls slowly down the page past a muted, autoplaying video, it can count as a view. And that, in turn, means that Facebook has a much lower average retention rate for its videos than YouTube.
But the numbers could mislead. Facebook counts a video as viewed after it has played for just three seconds, regardless of whether a user has requested it. That means that when a user, say, scrolls slowly down the page past a muted, autoplaying video, it can count as a view. And that, in turn, means that Facebook has a much lower average retention rate for its videos than YouTube.
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Coarse chatter and laughter over footage from videogames like Grand Theft Auto V. Geico ran a recent commercial.
Worse, some YouTubers complain about rampant theft. Facebook gives videos that are embedded in its system priority over those that are posted as YouTube links. Unscrupulous click hunters can steal videos that have gone viral on YouTube and republish them on Facebook, a tactic called freebooting. Last month, one YouTube celebrity hit back with a highly produced explainer titled How Facebook Is Stealing Billions of Views, which has been watched 2.4 million times. In it, he accuses Facebook of turning a blind eye to freebooting and, as a result, gaining 17 billion extra views in the first quarter of this year alone.
Of course, YouTube, too, was once a Wild West of intellectual property theft and click-rigging before it refined how it sets and enforces standards. Facebook says three seconds is a common choice for view measurement and that it gives advertisers detailed metrics. The company says it’s building new video-matching technology to combat piracy.
Ultimately, there is plenty of room for both of these heavyweights, along with smaller video platforms like Snapchat and Twitter, to attract a rising share of TV marketing dollars. Although Facebook might have an edge over YouTube in user data, it must balance keeping its users happy with giving marketers access.
Changes made this past summer that give users more control over who shows up at the top of their news feeds, could make it more difficult for brands to get in front of users. On YouTube, seeking out videos using search is much of the point.
Over the long term, YouTube can also build an edge over Facebook in premium content. YouTube Red, launched in October, offers ad-free viewing for $9.99 a month. The service includes the ability to save and view videos offline, and gives free access to Google Play Music, which is comparable to Apple Music in song count and far ahead of Amazon Prime Music. It remains to be seen whether a meaningful number of YouTube fans will be willing to pay. If Red gains momentum, Alphabet can use the revenue to add exclusive content, and perhaps compete more directly with Netflix and Hulu.
YOUTUBE’S OPEN APPROACH to publishing videos also has a dark side. It has become a platform of choice for violent fanatics, especially jihadists. YouTube’s rules ban depictions of violence for the sake of shock or disrespect, so Islamic State beheading videos, for example, are pulled down, but not always right away because they aren’t prescreened. Incitement to violence is also against the rules, but there are gray areas.
His motivational speaking career was ended in Yemen by a Hellfire missile in late 2011, but his work lives on through YouTube. The site has removed some of al-Awlaki’s videos in past years only to have them reappear, the New York Times reported this month.
Drawing the line between free speech and hate speech isn’t easy. Neither is policing 400 hours of incoming videos every minute. But Alphabet, a company whose side projects include designing contact lenses that can measure glucose levels in tears, can figure out better ways to prevent Islamic terrorists from using YouTube as a weapon. And ad buyers should nudge Alphabet in the right direction; Procter & Gamble and Anheuser-Busch were surprised to learn earlier this year that their commercials had run against jihadist videos.
A YouTube spokeperson, in a statement, said, “We have clear policies prohibiting terrorist recruitment and content intending to incite violence, and quickly remove videos violating these policies when flagged by our users.”
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