Google’s parent company, Alphabet, released earnings on Monday. For the first time, the company more specifically broke out YouTube and Google Cloud’s revenues, which gives us better insights into the growth of the overall ad business and how much Google is investing in Cloud to be its next big cash cow.
What We Learned
Google acquired YouTube in 2006 for $1.6 billion. In 2019, YouTube brought in $15 billion for Alphabet. Nice return, huh?
Investors speculated that YouTube’s ad revenue would be larger, and those same investors were subsequently disappointed by the news. But I don’t know any company — or person — that would complain about having a $15 billion side hustle. And that’s basically what YouTube is for Google’s ad business, as search still accounts for roughly 60% of all revenue for Alphabet. And relative to competitors, YouTube is by far the biggest game in town. For example, Twitch, a live streaming gaming platform with 140 million monthly users, is rumored to have revenue just short of $500 million — a fraction of YouTube’s business.
On the cloud side, we learned that Google Cloud brought in almost $9 billion for the company in 2019. And Google is beefing up investments in Cloud — the company is hiring thousands of new employees to continue innovating to try to upend Amazon and Microsoft’s dominance.
Big Questions Loom For Google Going Forward
There are two critical questions that will have to be answered by new Alphabet CEO Sundar Pichai over the coming quarters:
- Will YouTube and Cloud be the new stars of Google’s business? There is greater competition in the digital advertising landscape — Amazon’s ad revenue increased 41% in Q4. Google has captured a significant share of search ad dollars globally, but there is not a ton of room left for future growth in search. Part of the reason for breaking out YouTube ad revenue is to give a greater focus on the part of the ad business that will have solid growth over the long term. And with investments in Cloud and its “other bets,” Google wants to show the world that it is more than just an online ad giant. A key metric to watch for: Does search advertising continue to drop as a percentage of total revenue for Alphabet? And does that number decrease due to decelerating search ad revenue growth or accelerating revenue growth in YouTube and Cloud?
- Will regulatory investigations stifle Google’s long-term growth? US state attorneys general have opened an antitrust investigation into Google that asks: Is Google demonstrating anticompetitive behavior in the search engine and digital advertising markets? Google’s recent announcement about phasing out third-party cookies in Chrome could be further anticompetitive behavior if it uses its dominance in the browser and advertising markets to force advertisers to play by Google’s rules. Google has not released much detail about the Chrome update, but it will have to tread carefully to avoid irking antitrust investigators. As third-party cookies fade, I expect a graveyard of adtech companies that are wholly reliant on third-party data, further eliminating Google’s competitors. There are a lot of ifs and news to come on this, but it is likely the biggest hindrance to Alphabet’s future growth — especially as it faces investigations into privacy violations in Europe in addition to the US antitrust investigations.
Thanks to my colleague Steph Liu for contributing to this blog post.