Tech

Shira Ovide is a Bloomberg Gadfly columnist covering technology. She previously was a reporter for the Wall Street Journal.

Rani Molla is a Bloomberg Gadfly columnist using data visualizations to cover corporations and markets. She previously worked for the Wall Street Journal.

Susan Wojcicki will forever be part of Google's history. The company literally started in her home and garage, which she rented in 1998 to two graduate students, Sergey Brin and Larry Page.

Now in her third decade at Google and entering her fourth year as YouTube's CEO, the 48-year-old executive has the best shot in 2017 to prove YouTube can translate its huge audience into more revenue and to lead the remaking of television into a video-everywhere model that appeals to a younger generation weaned on smartphones and Netflix.

It feels cruel to ding a business that has more than a billion monthly users globally, has become a verb and generates multiple billions of dollars in revenue each year. Yet Wojcicki hasn't changed the fact that YouTube helped popularize digital video but hasn't yet lived up to its enormous financial potential. 

TV Loses Its Crown
Internet ads, including those on YouTube, are expected to overtake TV in 2017 as the world's biggest advertising medium
Sources: Estimates from ZenithOptimedia and Bloomberg Intelligence

Consider this: Facebook Inc. is on track to generate more than $27 billion in revenue this year, nearly all from advertising messages on Facebook and Instagram. That will work out to an average of about $16 for each person using Facebook and its sister app, Facebook Messenger.

Parent company Alphabet Inc. doesn’t disclose YouTube’s revenue or specific user numbers, but we can make some rough assumptions. Research firm eMarketer estimates YouTube will generate about $5.58 billion in 2016 revenue, excluding the share of advertising dollars YouTube splits with the companies that make its web videos and with distribution partners. If YouTube has somewhere between 1.2 billion and 1.65 billion monthly users, that is roughly $3.50 to $5 in revenue from each user.

Internet ARPU-01

Granted, YouTube's business model is different from that of Facebook or Google web search. For one, YouTube doles out a significant chunk of its revenue to the creators of many of its videos. But the gap exists, and it spotlights the broad challenge for Wojcicki: YouTube could be so much more as the world's biggest web video hangout tethered to the internet's best money machine. 

The opportunity is there if Wojcicki can take advantage of it, because the winds are blowing in YouTube's favor. Younger people are spending less time watching traditional television and more time glued to their smartphones -- including YouTube. Advertising revenue will eventually follow those viewers into digital video hangouts.

Wojcicki has also continued YouTube's success in reshaping entertainment by coaxing large media companies such as NBC Universal to devote more programming to YouTube, and by minting YouTube personalities like PewDiePie and Lilly Singh, whose videos can draw more people than those from traditional entertainment companies.

Stay Tuned
YouTube's opportunity is to close the gap between the share of time Americans spend watching digital video compared with television, and the relatively outsized share of advertising dollars spent on TV
Source: Bloomberg Intelligence and eMarketer

Fulfilling YouTube's potential lies in building a bridge to television, where 40 percent of advertising budgets are spent and where the rules of the game have sometimes eluded Google. Yes, huge audience size matters, but so does the mix of large numbers of people, the kind of people that the advertisers want to pitch to, and the shelter of programming that advertisers want to get behind. Google and YouTube have never fully embraced the rules of so-called brand advertising. 

Under Wojcicki, YouTube has been working to change that. YouTube two years ago started to let advertisers plant their commercial messages next to popular video channels from professional entertainment companies or personalities, separate from the flood of mass market videos. It's not perfect, but the new advertiser option made YouTube operate a bit more like TV, and analysts say the ad rates YouTube generates are in the same range as television ad prices.

Go for the Bronze
Marketers in a recent survey said ads on Google and Facebook generate the biggest bang for their buck -- with YouTube in third place. YouTube has more to do to convince advertisers of its value.
Source: RBC and Advertising Age
Note: Based on a September 2016 survey of 637 advertising-industry professionals.

YouTube is working with the advertising industry on standardizing viewership ratings across traditional television and web video -- another step to get advertisers comfortable with YouTube. YouTube is also creating a new business model, with the creation of its first significant subscription video service -- and soon to be a second -- including programming exclusive to YouTube. That makes YouTube dip into the same business as cable television and Netflix. 

Even while the winds are at YouTube's back, it has more competition than ever for people's leisure time and advertisers' money. Facebook, Netflix, Snapchat, AT&T, Twitter, Amazon, Verizon, Apple and many of the traditional TV networks are also vying at least to some degree with their own digital video features, and in some cases for the same crop of professional new media stars and the advertising money that follows. 

Wojcicki has in her favor Google’s limitless resources, and growing credit from advertisers for catering to their needs. YouTube has already changed entertainment and the internet. Now for YouTube to get to the next level, Wojcicki has to bridge the canyon between the worlds of TV and the web. No pressure.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. I acknowledge that shockingly little financial information is known about YouTube, so estimates of YouTube's revenue could be wildly off base. The assumptions on YouTube monthly users are based on YouTube's initial disclosure of first crossing 1 billion monthly users in March 2013. Since then, Google has continued to say only that YouTube has "more than" 1 billion users each month. Facebook's monthly user count has increased roughly 66 percent since March 2013. If YouTube grew at the same rate, then it may have roughly 1.66 billion users. If YouTube's monthly users increased by only 20 percent since March 2013, then that would mean about 1.2 billion users.

To contact the authors of this story:
Shira Ovide in New York at sovide@bloomberg.net
Rani Molla in New York at rmolla2@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net