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Rory Maher, a Managing Director over at HillsidePartners, an institutional equity boutique focused on the technology and media industries, has issued his latest report on the state of YouTube's business. In it, he details why he believes that 2013 gross revenue will likely be $3.7B for YouTube, versus his previous $5B estimate in his last report. Based on recent statistics provided by Google (NASDAQ:GOOG), he estimates video ad sellout on YouTube to be just 14% and that their channel revenue is likely at a $20M run rate. Some other highlights from his report:

  • YouTube Mobile Likely Generating $800M In Annual Revenue. We estimate YouTube's mobile business will generate just under $800M in 2013. We determine our YouTube mobile revenue figure by taking the amount of mobile videos viewed (1B per day) and apply reasonable pre-roll sellout and CPM assumptions of 10% and $20, respectively.
  • Video Ad Sellout On YouTube Likely 14%. We estimate sellout of video advertising (pre-roll, truView, interstitial, and any ad appearing within the framed video) to be 14% of videos played on YouTube given updated viewing figures provided by the Company. We calculate our estimates by taking information provided by Google on the number of hours watched annually, the length of the average video, and the number of YouTube videos with some form of monetization on them.
  • Original Channels Continue To Grow Double-Digits Monthly. We estimate subscribers of the original channels grew 14% monthly from launch until March 2013 and have grown 11% per month since then. In our opinion, recent viewership has likely been negatively impacted by competition from the new channels for eyeballs, but international expansion starting in October 2012 has likely enabled the original channels to maintain double-digit monthly subscriber growth, attractive growth in our view.
  • Strong Ad Sellout During Daytime/Primetime. We surveyed videos on some of the top rated channels during a weekday afternoon and found nearly 90% sellout in pre-roll or Truview video ad inventory on the videos we viewed.
  • Lower Sellout During The Weekend Indicates Advertisers Buying Inventory By Daypart. We found lower sellout during the weekend, highlighting how YouTube sells much of its video inventory by daypart. For example, we found 20% video ad inventory sellout during weekend mornings.
  • Channel Revenue Likely At $20M Run Rate. Advertisers we speak with indicate YouTube is receiving $20 CPMs for pre-roll and Truview packages on its original channels launched in 10/11 with new channels being added 10/12. Assuming 4 videos viewed per sub per month and 50% video ad sellout we estimate the original channels are likely driving revenue at a $20M annual run rate.
  • New Channels Have Outperformed Since Launch Vs Original Channels. We estimate the new channels launched in 10/11 have already outperformed the first YouTube channels due primarily to international distribution. For example, we estimate the new YouTube channels have accumulated 11.3M subscribers in the first 8 months since launch vs 7.6M for the first channels over the same period following launch.

The big takeaway from the report is the idea that Google will likely continue to gain share of online video, especially as viewing transitions to mobile. I think anyone would be hard-pressed not to agree with that statement. Google will continue to steal share of online video as usage moves to mobile where, as the report states, its app is superior to other online video apps and has the advantage of preferred placement in the Android OS. The transition to mobile and growth of Android has driven industry-leading growth in online video ads on YouTube, especially as advertisers have significantly increased spend on mobile video ads. For example, according to Comscore in January 2012, Google wasn't even in the top 10 online video properties in terms of ads viewed, but accounted for 13% of all video ads viewed in April 2012 and 18% by April 2013.

Even with all of this data it's still interesting to see how a huge percentage of streams served by Google every day, via YouTube, still aren't being monetized in any capacity. At some point, it would be nice if Google could just stop hosting UGC content that has zero chance of making them any money. Of course, the problem with that idea is that Google gets so much of its traffic from users visiting the website to see their own clips, that traffic would drop dramatically, even to the premium content, if they did away with the free video hosting. It's a necessary evil of being in their business, thanks to their size and scale. Free video hosting is something they probably will never be able to move away from – even though it would reduce their costs and allow them to focus on premium content that they can monetize.

Disclosure: No positions

Source: Analyst Report: YouTube Revenue Likely $3.7B In 2013, Video Ad Sellout Low At 14%