There are several underlying trends shaping the advertising industry as we know it. Digital advertising is already on its way to take the crown from TV advertising, content consumption on mobile devices has already pushed desktop to the background and, now, videos are taking a major portion of our time, sending written content to the background.
Google’s parent company, Alphabet Inc. (GOOG, Financial) (GOOGL, Financial), is the world’s largest advertising company with annual revenues fast approaching $100 billion. Revenues have more than tripled, from $23.65 billion in 2009 to $90.27 billion in 2016. That strong growth surge is nowhere close to the end. Digital advertising is expected to grow at double-digit rates until 2020, and Google is going to walk away with a bulk of that momentum.
Video content is also on the rise due to increasing internet speeds, the shift from desktop to mobile and exposure to video-on-demand services such as Netflix (NFLX, Financial) and public video platforms. Although there are several competitors to YouTube, not one even comes to close to the size and scale it has achieved.
According to StatisticBrain, YouTube has 1.325 billion users with 300 hours of video uploaded every minute. The sheer number of uploaders on YouTube shows the clear control it has over the public video market.
Unfortunately, Alphabet does not break out YouTube’s specific numbers, so there is no way to know if it is profitable or not. But, as long as the consumption and user base keep ticking, YouTube will be inching closer to profitability if it is not already profitable. As digital ad spending shifts to mobile, a bulk of that will move into video content. As video consumption rises, the ad revenue from YouTube should rise along with it.
If Netflix is the king of streaming video on demand, then YouTube is the undisputed king of public video. No other competitor comes close. Both companies are already in a position of strength, which will allow them to keep moving forward.
But one thing we cannot afford to forget is that, despite their respective size and reach, neither unit is extremely profitable. If that is the case with the segment leaders, it is not hard to imagine what it is like for smaller competitors. On the positive side, that does mean both YouTube and Netflix can continue to enjoy their rapid rise for the next several years despite being in what are becoming extremely crowded markets.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
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