A Blog by Jonathan Low


Jul 29, 2019

Just How Big Is YouTube?

YouTube, Amazon and other video, film and streaming services are often reluctant to release data about their operations and profitability. Which is raising questions about their reach and impact. JL

Daisuke Wakabayashi reports in the New York Times:

Even though financial analysts on Wall Street think YouTube makes about as much money as the Gap, General Mills or Netflix, the video service’s financial results are a secret.YouTube does not disclose revenue, profitability, how many ads it runs alongside videos, user numbers and how often those users visit the site.That secrecy has led to growing frustration among analysts and investors. “Companies usually pull back disclosure when items turned negative."
YouTube probably generates $16 billion to $25 billion in annual revenue, making the video service big enough to crack the top half of the Fortune 500.
But that’s just a guess. Even though financial analysts on Wall Street think YouTube makes about as much money as the Gap, General Mills or Netflix, the video service’s financial results are a secret. They are lumped in with the rest of Google, an even larger internet company that last year generated $137 billion in revenue.
That secrecy has led to growing frustration among analysts and investors. Three months ago, Alphabet executives pointed to issues with YouTube as a factor in disappointing financial results in the first quarter.
“I think their reticence to provide information borders on paranoia, as if they would be admitting failure if they allowed us to discover whether one of their businesses was performing more poorly than expected,” said Michael Pachter, an analyst at Wedbush Securities.
Big tech companies have been under pressure from regulators and lawmakers to provide more insight into how their businesses operate. The lack of disclosure around YouTube’s finances is a reminder that some of them have actually made understanding how they make money more difficult over the last year.
[The Justice Department will open an antitrust review of big tech companies.]
In November, Apple announced it would stop disclosing iPhone sales figures. The company had been providing that data for a decade. But now that iPhone sales are slowing, Apple argues that they are no longer representative of the strength of the company’s overall business.
In July, when Facebook reported slower than expected growth in users for its main service, the company’s chief executive, Mark Zuckerberg, disclosed a new, more positive metric: 2.5 billion people used at least one of the company’s apps — Facebook, Instagram, WhatsApp or Messenger — in June.
The obfuscation of information that investors want more of has become a “foundational practice” by tech companies, said Gene Munster, a managing partner at Loup Ventures, a venture capital firm, who was a financial analyst for 20 years. “Companies change the disclosures to change the narrative and make it more difficult to get to the things investors want to know.”
When it reports financial results, Alphabet groups YouTube with other Google properties like search, the Google Play app store and Gmail. Analysts who follow the company say putting everything under Google makes it hard to parse out the performance of YouTube, especially because search remains the biggest business at the company.
YouTube does not disclose revenue, profitability, how many ads it runs alongside videos, user numbers and how often those users visit the site — all metrics that would help an investor “understand the health of the business and its growth trajectory,” said Mr. Pachter.
“I don’t think the company provides anything that helps us understand the business,” he said.
More details around YouTube’s business may confirm that it does not compare favorably to Facebook in key metrics for gauging its popularity, such as how long users stay on the site and how frequently they visit, Mr. Pachter said.
An Alphabet spokeswoman, Winnie King, declined to comment for the story.
When Alphabet last reported quarterly earnings in April, the company stunned investors as revenue came in $1 billion below Wall Street expectations.
In response to a question from a financial analyst about the company’s first-quarter shortfall, Ruth Porat, Alphabet’s chief financial officer, said growth in clicks for YouTube ads had “decelerated” because of tighter restrictions in early 2018 on what videos could carry advertising. Ms. Porat said YouTube had made “important” and “strong” contributions to revenue, but was not more specific.
When Sundar Pichai, Google’s chief executive, spoke about YouTube in the call, he announced new features or policy changes that for the most part had already announced. The new information he did reveal — such as viewership of Super Bowl commercials was up 60 percent on YouTube — was a narrow sliver of YouTube’s business.
Companies in the United States have significant leeway in determining what information is considered “material” and has to be disclosed in financial results reported to regulators.

In 1976, the Supreme Court in TSC Industries v. Northway established the definition of material as information that would have been considered important to a reasonable investor. The definition, however, was vague, and companies have generally been allowed to make their own decisions about what would be important to a reasonable investor.
When big tech companies have offered more insight into their far-flung operations, it has been well received by Wall Street.
When Amazon disclosed revenue and profit for its high-margin Amazon Web Services unit in 2015, it eased concerns about the company’s ability to turn a profit.
Last year, Google surprised analysts on an earnings call by announcing that its Google Cloud business had surpassed $1 billion in quarterly revenue. At the time, Google had been fighting the perception that its cloud business was struggling to make inroads against A.W.S. and Microsoft’s cloud-computing competitor, Azure.
“Companies usually pull back disclosure when items turned negative, and then they try to offset with more positive disclosure,” said Mark Mahaney, an analyst at RBC Capital Markets who follows Alphabet and other internet companies.
He said he did not expect Alphabet to change its disclosure for YouTube anytime soon. But Mr. Mahaney said — frustration aside — that he did not believe more detail about YouTube’s business would alter investors’ perception of Alphabet.
Investors generally see YouTube accounting for about 20 percent of Google’s revenue. There are more questions around YouTube’s profitability, but he said the general view was that it was “modestly profitable but not dramatically so.”
Starting in July 2017, the Securities and Exchange Commission sent three letters to Alphabet asking, among other things, for an explanation on why it does not need to break out YouTube from Google.
In its response, Alphabet said that since Larry Page, its chief executive, did not receive weekly updates on how YouTube’s business performed to assess the performance of Google, the disclosure requirement was “not applicable.”
Alphabet also said detailing its advertising revenue by different product areas was unnecessary because its goal was to sell one product — online advertising — regardless of how a customer paid for it or where that ad appeared.
In January 2018, the S.E.C. said it completed its review with no further action.
Marcia Narine Weldon, a lecturer in law at the University of Miami who specializes in compliance and corporate governance, said the arguments made by Alphabet to the S.E.C. for not disclosing YouTube separately “don’t hold water.”
“I’m surprised that the S.E.C. hasn’t pressed it more,” said Ms. Narine Weldon. “It’s a legitimate question for shareholders given the size of the business.”


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