How YouTube became a money machine for Alphabet
It has now been 13 years since Google acquired YouTube. In that time, what was once a fast-growing internet video startup has become an essential piece of parent company Alphabet Inc.’s advertising empire.
“YouTube was once again the second-largest contributor of revenue growth,” Alphabet Chief Financial Officer Ruth Porat told analysts in July, regarding the company’s second-quarter earnings performance. “We’re really pleased with the ongoing momentum.”
Expectations were high in 2006, when Google shelled out US$1.65 billion in stock to acquire YouTube, which at the time was less than two years old and unprofitable. The deal was not without risk, as YouTube had made enemies in the media industry over copyright concerns.
But the appeal was easy for most observers to see, as YouTube had quickly amassed an estimated 50 million users worldwide. Google reportedly beat out rivals such as Microsoft Corp. and Yahoo in the battle to buy YouTube.
“There was a clear winner in the networking and social networking side of video,” then CEO Eric Schmidt told analysts on a conference call when the deal was announced in 2006. “That’s what really drove us to begin the conversations with YouTube.”
Even with that optimism, few could have predicted just how big the business behind YouTube would become.
Analysts at Canaccord Genuity estimate YouTube will generate more than US$20 billion in revenue this year — that’s roughly the same amount of revenue as McDonald’s Corp. and it would represent an estimated increase of roughly 400 per cent in the past five years.
YouTube’s massive pile of advertising money is fuelled by all the eyeballs constantly viewing content — everything from music videos to the latest uploads from top influencers. While Alphabet does not disclose YouTube’s financials, YouTube CEO Susan Wojcicki said in May at the company’s Brandcast marketing event that more than two billion YouTube users log in and watch videos every month.
Of course, rapid growth can spur growing pains. In YouTube’s case, one high-profile concern has been the rise of hateful content on its platform — an issue Wojcicki and Google CEO Sundar Pichai are increasingly addressing.
Still, advertisers continue to gravitate toward YouTube, in part because of its appeal to younger audiences. A new survey by investment firm Piper Jaffray found 37 per cent of teens in the U.S. get their daily video streaming fix from YouTube, compared to 35 per cent for Netflix Inc. and just 12 per cent for cable television.
That’s an encouraging sign, considering YouTube’s continued focus on growing its own internet-TV subscription service, YouTube TV, which is heavily marketed to those who aren’t interested in traditional cable packages.