Google Inc. (NASDAQ:GOOG, NASDAQ:GOOGL) investors have plenty of reasons to love the company, but based trictly on the balance sheet, YouTube isn’t one of them.
MarketWatch just published an article called “Viewers don’t mean profit for Google’s YouTube,” highlighting the fact that despite its impressive user base of more than 1 billion, the video site is hardly churning out profits.
As the article puts it:
“The online-video unit posted revenue of about $4 billion in 2014, up from $3 billion a year earlier … as advertiser-friendly moves enticed some big brands to spend more. But while YouTube accounted for about 6% of Google’s overall sales last year, it didn’t contribute to earnings. After paying for content, and the equipment to deliver speedy videos, YouTube’s bottom line is ‘roughly break-even,’ according to a person with knowledge of the figure.”
While this is obviously something to be aware of if you’re thinking of investing directly in Google stock, there’s a broader lesson to take away for tech sites and social apps across the board: Namely, that popularity is a stickier topic than we’d like to admit (as some of us learned in high school).
The costs of such popularity are one consideration to highlight; in this case we have the familiar beast of content costs, which have been a concern for Netflix (NFLX), for example. Providing great content is great in theory — but it doesn’t come cheap.
Beyond that, though, the MarketWatch article explains that Google executives wants users to “turn on YouTube the way they turn on television” — a dream that most of us can probably testify is rarely the case.
Google Stock Needs More Than Users
This raises a point that comes up with increasing frequency in the tech world: the relevance of a “user.” There’s a big difference — one that eventually impacts the bottom line — between 1 billion users who treat YouTube like TV and 1 billion who happen to randomly click on a YouTube link only to exit a few minutes later.
My favorite take on the subject comes from Ev Williams of Twitter (TWTR), who begins a post on Medium by writing: “I was recently quoted as saying, ‘I don’t give a shit’ if Instagram has more users than Twitter.” He quickly goes on to explain why the measurement of users isn’t particularly illuminating:
“My rant was the result of increasing frustration with the one-dimensionality that those who report on, invest in, and build consumer Internet services talk about success …
Ask any junior high student which rectangle is bigger, one that is three inches wide or one that is two-and-a-half inches wide, and they’ll tell you it’s a nonsensical question unless they have more information — specifically, the height.
And yet, we literally say one company or service is ‘bigger’ based on a single number — specifically, number of people who have ‘used’ it in the last 30 days. Even without getting into how ‘use’ is defined, this is dumb.’
While broadening the base of users is important for YouTube, as the MarketWatch article repeatedly points out, defining “use” and actually changing “use” is far more important when it comes to the bottom line. The entire issue reminds me of this tweet, which (ironically) comes from a Google VP:
The bottom line: There’s hardly a straight line between money and users, even when we try to draw one. These numbers from Google are just the latest proof.
As of this writing, Robert Martin did not hold a position in any of the aforementioned securities.
