Since Google acquired YouTube in 2006, financial analysts everywhere have examined the $1.65 billion deal. How would Google make money from the popular video-sharing site, where, according to Google, clips are uploaded at a stunning rate of 10 hours' worth per hour?
Those who follow Google assumed the company would sell ads for the clips, but what's become clear over the last two years is that the way to do this successfully is, well, not clear.
Now Citigroup Investment Research's Mark Mahaney has stepped forward to project that Google will reap more than $1 billion in display advertising revenue over the course of 2009 by selling ads against YouTube content, Google Videos, Images, Maps and Finance, and DoubleClick.
Mahaney made his claim in a June 19 research note in which he predicted that YouTube would make Google $500 million in display advertising sales.
The analyst also said current page view trends for Google Videos, Images, Maps and Finance suggest that those sites could bring in $265 million in display ad revenue for the company. He pointed to DoubleClick, which he expects to earn $280 million, as another strong display ad contributor.
Citi believes the online display advertising in the United States will top $11.2 billion by 2010, and $22 billion worldwide, he said. While Yahoo leads at about 20 percent of this market, Google has not made much of a dent, with roughly 5 percent.
Thanks primarily to YouTube, Mahaney said he expects that to change, noting that Google will likely ramp up its ad serving on YouTube in 2008 and beyond with overlay ads.
Mahaney used MySpace as a proxy and determined that the average CPM (cost per thousand impressions) charged for ads on MySpace is $1.13.
Applying the same CPM to Citi's estimate of 725 billion (billion!) page views for 2009 (he annualized April 2008 page views of 483 billion and applied a 50 percent increase in pages viewed to arrive at the 2009 page view estimate), Mahaney and his team arrived at gross revenue of about $820 million for display ads on YouTube for 2009.
Then, he applied a 40 percent traffic acquisition cost rate to this revenue, arriving at the $500 million figure YouTube is expected to make for Google in 2009.
Mahaney applied the same formula to Google Images, Maps, Video and Finance using their combined projected page views to get the $265 million figure. DoubleClick is doing the $280 million on the strength of its core DART display ad technology.
Mahaney concluded with an observation many industry insiders believe, including yours truly: that Google is one of the best long-term Internet stocks, better positioned than eBay, Amazon.com, and currently struggling companies such as AOL and Yahoo.
The reasons? Search advertising, of course, as well as the relatively green fields of mobile search and display advertising. Oh, and he said the management is pretty good, too.
For balance, Mahaney planted some seeds of doubt, noting that it is uncertain what effect the current shifts to cloud computing and mobile device Web usage will mean for Google.
Let me allay those fears. Google is already strong in the cloud, building data centers at a rapid clip to support not only its search but also its applications business, all of which is delivered via SAAS (software as a service).
And while Mahaney said it is hard to believe that Google will match the success rate of its traditional search on mobile gadgets, I'll pose this question: What search application do you use on your iPhone, BlackBerry or Treo?
I'll bet it's Google.