GOOG Alphabet Inc

By Patience Haggin 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (February 5, 2020).

If YouTube were a stand-alone company, it would be among the biggest advertising players in the world. Yet the online video service isn't as large as many outsiders expected.

Those were the revelations Monday when Google detailed YouTube's financials for the first time in its fourth-quarter earnings report.

There is a lot Google didn't say -- for example, how much profit or loss YouTube makes. But this much is clear: YouTube is an advertising and streaming juggernaut, and Google's 2006 acquisition of the startup for $1.65 billion was one of the great bargains of Silicon Valley history.

YouTube logged $15.1 billion in 2019 revenue, according to figures released Monday by parent Alphabet Inc. The company said a majority of those revenues get paid out to content creators. YouTube's ad revenue landed on the lower end of Wall Street estimates. Citi analysts had earlier pegged it at $19 billion, while some other analysts had projected it was upward of $25 billion.

"When there's a black box, people's imaginations can run wild. And I think that explains why expectations were all over the place," said digital-ad consultant Ratko Vidakovic.

Regardless of Wall Street's expectations, as a separate business YouTube would be the third-largest seller of advertising behind Google's flagship online businesses and Facebook Inc.

YouTube's ad business -- on a gross basis, before the payouts to creators -- is larger than that of Comcast Corp., which reported about $13.9 billion in 2019 advertising revenue across several different businesses. It is also larger than Amazon.com's $14.1 billion "other" revenue, which includes its ad business.

YouTube's $4.72 billion in fourth-quarter revenue isn't far from that of Netflix Inc., its subscription-supported rival. Netflix reported fourth-quarter revenue of $5.47 billion. Both YouTube and Netflix reported similar growth rates of 31%.

The numbers give YouTube investors and executives reasons to salivate over untapped room for growth. YouTube takes in between $7 and $8 a year in advertising for each of its two billion global users -- monetizing them at a rate lower than other social networks. Facebook, for instance, took in $8.52 per user just in the fourth quarter alone. For users in lucrative markets like the U.S. and Canada, it took in more than $41 per user.

Alphabet Chief Executive Sundar Pichai said on the earnings call that this left the company "significantly more room" to generate revenue from those users.

Among the bright spots in the disclosures: YouTube's subscription services beat expectations. YouTube's $3 billion in non-advertising revenue is mostly subscription revenue, Mr. Pichai said. Live-TV service YouTube TV has over two million paid subscribers -- a figure that would make it about the eighth most popular pay-TV service, right behind traditional cable providers.

YouTube's paid music and premium services has over 20 million subscribers -- a figure that puts it in fourth place globally, behind Spotify SA, Apple Inc. and Amazon.

Many questions about YouTube's overall business remain unanswered, including its geographic revenue breakdown, what share of advertising customers are large brands, its cost of revenue and how much it spends policing content.

Ruth Porat, Alphabet's chief financial officer, said in the Monday earnings call that YouTube has additional costs beyond the payouts to creators, including for infrastructure, networking and content responsibility efforts. She didn't provide a breakdown of those costs.

YouTube's ad-revenue growth slowed in the fourth quarter -- a surprise considering that the holiday season typically delivers a boom quarter for ad-supported businesses.

Competition from Bytedance Inc.-owned video-sharing app TikTok could have been a factor in the fourth-quarter slowdown, said Brian Wieser, global president for business intelligence at ad agency GroupM, owned by WPP PLC.

YouTube disclosed annual ad revenue going back as far as 2017. Several large advertisers fled the platform in the spring of 2017 after news reports showed their ads were appearing next to content promoting hate speech and terrorism. The exodus may have dented YouTube's revenues in that year, providing favorable comparisons for Google to showcase to Wall Street in the ensuing years, said Mr. Wieser. Google reported $11.2 billion in YouTube ad revenue for 2018, up 37% from 2017.

Rob Copeland contributed to this article.

Write to Patience Haggin at patience.haggin@wsj.com

(END) Dow Jones Newswires

February 05, 2020 02:47 ET (07:47 GMT)

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