Google loves to compare YouTube to television. During Alphabet Inc’s (GOOG, GOOGL) fourth-quarter earnings call, Google CEO Sundar Pichai told investors that YouTube reaches more 18- to 49-year-olds via mobile than any cable network in the U.S, and the time users spent viewing videos multiplied in 2015.
Now, Google is making the case that television ad budgets should shift to YouTube.
In a meta-analysis of 56 case studies across Europe, GOOGL found that YouTube provided a higher return on investment 77% of the time. As such, it “recommended” advertisers spend more on YouTube.
Can Google Really Take on the $70 Billion TV Ad Market?
YouTube currently courts about $9 billion in ad spend, of which it shares the majority with creators. But the global television market is estimated to reach $77.37 billion this year. Clearly, that’s a huge opportunity for Google if it can get some of those ad dollars to shift over to YouTube.
While there’s no reason to think GOOGL is manipulating data and statistics to show YouTube is a better investment, there are reasons TV attracts so many more big brands’ advertising budgets. Yes, YouTube is currently the best investment for advertisers, but things change as soon as advertisers look to spend more money on YouTube.
YouTube uses TruView ads, which allow uninterested ad watchers to skip ads. That’s great for advertisers, since they don’t have to pay for skipped ads viewed by low-quality leads, but it limits the amount of ad inventory available. Naturally, this increases the return on investment for ad impressions that brands actually pay Google for, but it limits scalability.
This presents challenge No. 2: If ad inventory is constrained, advertisers will see diminishing returns. The result of more ad buyers as ad inventory remains relatively stable is higher ad prices, which decreases return on investment.
While YouTube watch time continues to grow, GOOG provides no details about how much of that watch-time growth is of high enough quality for brands to advertise against like they would on TV. A lot of YouTube viewing comes from the long tail of videos that individually don’t get a lot of views, but collectively make up the majority of watch time.
While YouTube provides a good ROI for brands, it might not be appropriate for brands to shift budgets away from television.
YouTube Might Cannibalize Google
A better option for advertisers may be to shift ad dollars from other digital advertisements and print advertisements to video ads.
Facebook Inc (FB) is already leading the shift, pushing video in its News Feed to get more advertisers interested in the medium. Facebook is admittedly cannibalizing its other ad business, “The video ad spend is not all incremental of course because every time we put an ad in News Feed, if it’s a video ad, it’s taking the place of an ad with another format,” COO Sheryl Sandberg noted on the company’s fourth quarter earnings call.
While those ads carry a higher price tag, they can often produce a higher return on investment than display ads or ads in print publications.
But Google’s self-interest prevents it from pointing that out. The only company generating more from digital display ads than GOOGL is Facebook with its dominant position on mobile. So, while the more apt comparison may be YouTube vs static display ads, Google decided to compare YouTube to television.
That won’t prevent savvy marketers from figuring out how to maximize the return on their ad budgets on their own. And the market is already shifting toward more social and video advertising, while TV ad budgets remain static and digital display ads eek out only the slightest bit of growth.
Google will be fine as digital advertising as whole continues to grow, and it has a hand in just about every aspect of it. But if management thinks YouTube is going to take a significant portion of ad budgets from TV, it’s going to have to do a better job of convincing marketers.
As of this writing, Adam Levy did not hold a position in any of the aforementioned securities.