Finally, finally, finally, Google provided some transparency about YouTube’s financial condition, in its Q4 ’19 and full year 2019 earnings report yesterday. YouTube’s financials have been treated as a state secret by Google since the beginning of time, with only high level usage information periodically shared.
Even yesterday’s reveal was only for YT’s advertising revenue, which came in at $4.7 billion for Q4 ’19 and $15.1 billion for the year. YT’s subscription revenues - which consist of YT Music, YT Premium includes YT Music) and YT TV (its virtual pay-TV service) - were buried in “Google other revenue.” On the earnings call, CEO Sundar Pichai said all YT subscriptions had a $3 billion annual run rate at the end of 2019.
Using some conservative assumptions and relatively quick math, it’s clear that YT’s total revenue could exceed $25 billion in 2020. As I also detail below, YT has to be considered among the best acquisitions in corporate America’s history. For Google, only the acquisition of Android (for the measly price of $50 million) could be considered more successful.
Here are my calculations:
Google disclosed that YT ad revenue in 2019 was $15.15 billion, up 36% from $11.15 billion in 2018. Keep in mind that Pichai called out “other revenue options we offer creators, including memberships, brand integrations, merchandise and ticket sales” that are going to strongly contribute to growth in the future. Then there is the impact of extraordinary events in 2020 including the Olympics and the presidential election and also the growth of connected TVs. But, to be super conservative, let’s say 2020 ad revenue only rises 25%, so $15.15 billion x 1.25 = $18.9 billion in 2020 ad revenue.
YouTube Music and Premium
On the earnings call Pichai said that YT now has “over 20 million music and premium subscribers.” However he didn’t mention what the ARPU on these subscribers is, nor any detail on how many music vs. premium subs there are, nor their ARUP. For example in the U.S. YT Premium is priced at $12/mo (which includes YT Music) and YT Music is $10/mo. Conversely, when the 2 services launched in India almost a year ago, YT Premium was priced at about $1.85/mo and YT Music was $1.42. Clearly, identifying an accurate global ARPU for each of these services, as well as a sub count is pure guesswork. Let’s just say average subs in ’20 are 25 million and ARPU is $7/mo, so 25 million x $7/mo x 12 months = $2.1 billion in 2020 YT Music and Premium subscription revenue.
Google also disclosed yesterday that YT TV ended the year with over 2 million subscribers (the very first time Google has disclosed a sub number for YT TV). The price is now $50/mo. Advertising generated from YT TV’s share of inventory it gets from TV networks is likely included in YT ad revenue. But there’s also some revenue generated from splits YT TV gets from selling premium channels like HBO and Showtime or upselling anything else.
In 2020, the number of subscribers dropping traditional pay-TV in the U.S. could accelerate to around 8.5 million, per Colin’s well-grounded estimates. Some of these people will cut the cord entirely, but some will cord-shift to a virtual operator like YouTube TV (I’ve still never seen any strong research on what the breakdown is). The virtual pay-TV industry has been in tumult; AT&T abandoned DirecTV Now, PlayStation Vue is finished and more shoes are yet to drop.
Meanwhile YT TV continues to spend gobs of money on promotion (Sunday’s Super Bowl pre-game show was “Presented by YouTube TV” and was just the latest marquee sports sponsorship). In short, YT TV will likely see its growth rate accelerate in 2020.
if YT TV averages say 2.5 million subscribers per month in 2020, which is likely very conservative, then 2.5 million x $50/month x 12 months = $1.5 billion in 2020 YT TV revenue.
$18.9 billion + $2.1 billion + $1.5 billion = $22.5 billion 2020 estimated YT revenue. And of course all of this is with pretty conservative assumptions. Further, I think it’s fair to say that after all these years of reticence by Google about YT’s performance, the decision to unexpectedly break out revenue in Q4 implies that Google is super-bullish on YT’s upside. In sum, it takes little imagination to project YT’s total 2020 revenue could more than 10% above what I’ve outlined, and therefore exceed $25 billion.
To put $25 billion in a little context, in 2019, Google as a whole had $162 billion in revenue, up 18% year over year. If Google increased revenue in 2020 by 18% over 2019, then revenue would be $191 billion. YT would account for just over 13% of Google’s total revenue.
Here’s another way to think about it: Facebook reported revenue of around $71 billion in 2019 (99% of which was advertising), and now has a market valuation of about $580 billion. If YT’s revenue were valued exactly the same way (8.2x), then its estimated value as a standalone company would be $25 billion x 8.2 = $205 billion. Now consider that Google acquired YT on October 9, 2006, a little over 13 years ago, for $1.65 billion in STOCK. If YT’s revenue hits $25 billion and its worth $205 billion (by inference from Facebook), then its value has increased by over $200 billion, a factor of nearly 125x what Google paid. For what it’s worth, in the same time period, Google’s stock has risen by around 7x. If YT generated $25 billion in revenue in 2020 it will be the approximately the same size as Netflix (though it's quite uncertain how Netflix is going to perform this year) and far bigger than anyone else in OTT.
As impressive as all of that is, there’s a case to be made that YT’s best days are still ahead. That’s because all depending upon how aggressive Google ends up being with YT TV (i.e. keeping the $50/month rate steady for a while), there’s a chance it could become the biggest pay-TV operator somewhere well down the road (I don’t mean just the biggest “virtual operator,” I mean of biggest of ALL pay-TV operators).
Aside from the subscription revenue involved, there is $70+ billion/year in existing U.S. TV ad revenue alone that is up for grabs in the Connected TV era. With its trove of user data and gigantic scale, YT TV / Google has the ability to monetize linear and on-demand TV ad inventory at higher rates than any TV network or even any other competitor (except possibly, eventually Amazon) can in the coming connected TV era. In other words, YT TV could be priced essentially at cost and looked at as nothing more than another inventory generator, with high-margin advertising being the main profit driver. Look no further than Roku for the playbook: sell the players at close to cost and then create a profitable ad business on it.
It’s going to be fascinating to watch YouTube continue evolving from its humble user-generated content origins.
(Note: I know I’m on a little bit of a math kick recently - e.g. “Quick Math Shows Comcast Missed Out On Almost $6 Billion in Revenue By Not Buying The Rest Of Hulu” and “AT&T Lost Over 1.1 Million Video Subscribers in Q4 ’19; Nearly 20% of Base in Past 2 Years.” It may be a little too nerdy for some readers, but I find it really interesting for helping put the tectonic industry shifts into better perspective. And for those of you wondering, no, it’s not Andrew Yang’s “MATH” mantra inspiring me…though I’m all for everyone “thinking harder” as well.)