Last week I wrote an article titled "Google Motorola Merger: Bold Predictions" (truthfully, it should have written "Google's Motorola Acquisition: Bold Predictions"), but we'll leave that out), in that article I wrote how Google (NASDAQ:GOOG) could leverage its Android platform, realizing a nice long-term return on their Motorola (NYSE:MMI) investment.
In this article I will examine how this merger will affect another one of Google's core businesses - YouTube. I will do this by examining how YouTube fits in with Google's general strategy, its current performance, and how the Motorola acquisition will raise YouTube's performance to new levels.
I think most followers of Google would agree that YouTube fits into a broader media/telecommunications strategy Google has undertaken. I would like to list all the products Google currently offers in this space (not in any particular order):
- Google TV
- Video Search
- Image search
- Google Music
- Google Books
- Google News
- Kansas City Fiber Program
- Google Voice
I am not trying to imply from this list that Picnik and YouTube play the same level of importance for Google. Obviously, YouTube currently occupies the top spot in Google's growing media empire. However, from this list we see the undeniable drive of Google to take part in every part of the telecommunications/media food chain. From content creation (both professional and amateur) on YouTube, to content delivery (where YouTube also plays a role) on Google TV, Google Music, and Google Books, to content organization (again YouTube) on video search, Picasa, image search, to service provider with the Kansas City Program and Google Voice. Google has one desire - to make its presence felt in every part of your telecommunications and media life.
The Motorola acquisition has the ability to tie a lot of the disparate services into one nice, neat package. Motorola, in addition to their well known mobile phone business, also has a successful (and profitable!) home business. In this "home business" division Motorola offers many different flavors of set-top boxes that deliver content to the end user. Through these set top boxes, which have a huge piece of the market in the USA and internationally, Google could bake Google TV, which could open the door to YouTube, and the array of other Google media businesses. Through Motorola's consumer business they can also further harness their Google Voice program, and roll out a full service telephone business.
Basically, a chronological look at Google's scheme could look something like this:
- Content created on YouTube and other places
- Content sent to you by Google Fiber
- Content comes to your house via Google/Motorola set-top box
- Content interface through Google TV.
- Content organization through various current Google media search services.
- Use Google Voice as your phone service
- Use Google/Motorola home phone as your home hardware
- Use Google Fiber network for internet service
- Use Google/Motorola modem to provide service
- Use Chrome OS (OK, I just had to) for your computer OS.
It's all a bit overwhelming, but when you take a step back and realize the range and depth of Google's ambitions in this area, and see how neatly Motorola fits into this scheme, it all becomes very clear.
After seeing how this acquisition plays into Google's overarching media strategy, we must now turn our attention to how Google plans to make money from this burgeoning media project. As noted above, Google considers YouTube as one if its core platforms. In the Q3 2010 conference call Google announced that display ads generated $2.5b on an annualized run rate (display ad revenue does not totally draw from YouTube, but YouTube makes up a large portion of that revenue), and in the most recent conference call Google announced that display ads generated $5b on an annual run rate - a 100% increase in just over a year!
As noted above, YouTube just scratches the surface in terms of Google's media/telecommunication strategy. With the Motorola acquisition they can easily facilitate YouTube's addition to the living room screen to their already dominant position on the computer screen. By packaging Google TV and YouTube in Motorola's set-top boxes they can start tapping the huge dollars both in the advertising market, and pay TV market.
According to MAGNAGLOBAL, global TV ad revenue reached $175b last year, contrast that with internet advertising which chalked up less than half that at $78.5b. Google made $37.9b last year in top line revenue, approximately half of the global internet advertising market, if they could tap into the much larger $169.1b TV market, they might have just discovered gold.
Additionally, I should note that while TV remains the top producer of global ad dollars, internet ad growth has seen tremendous growth. Not only has this growth come in the search algorithm space, but also in online display ads. Last year, video ads (which make up a subcategory within display) notched 58.8% gains, for total revenue of $4.7b. From this we see that YouTube, even without the Motorola acquisition, would see tremendous growth, now that they will more easily integrate into the living room their growth could see reach unbelievably high levels.
Although a bit afield from their core strategy, Google could use the YouTube platform to establish a foothold in the pay TV market. Google has already begun this strategy offering movie rental on YouTube, and by signing up celebrities to make more professional content available (although that might have more ad generating value to it). Because YouTube has established itself as the "go-to" place for online video, they have already built an engaged audience. The company hasn't given any indication as to the success of the current pay-per-view style program they already rolled out, but by harnessing the Motorola set-top platform, and combining it with YouTube, Google could effectively tap into the pay TV market.
The pay TV market last year notched annualized gains of $250b, and researchers expect its growth to continue as much of the world gains both the economic power, and infrastructure to support these services.
Before I turn to my conclusions, I would like to add one more point. Expected growth from the BRIC countries, and around the world, underpins my assumptions in this article, and the previous one as well. Global economic growth will drive demand for all services and products business. Google's global reach, both in terms of infrastructure and brand recognition, place it squarely in the right place to take advantage of this worldwide growth in these, and many other areas.
I have made a few heroic assumptions in this article, and its predecessor article. The main one (both financially and analytically) - that Google will turn Motorola around so it runs more like HTC and Samsung. Google has no manufacturing expertise, and to assume that in one year they can turn around a huge, money loosing company and remake it into a successful enterprise is somewhat naïve. However, for better or worse, I have belief Google can use the immense talent it has, and can recruit more talent, to really right this ship.
I think the "home business" part of this deal has much more potential. Google already has already built a money making platform, that will only grow stronger with this deal. My revenue projections in this front, while somewhat generous (delusional?) I think reflect some mode of reality in which Google could supercharge a whole new business, and effectively diversify itself away from its bread and butter search ads.
Google's dedication to building long term profitable business makes it an attractive stock to own for long term investors. Through the Motorola acquisition they will ensure long term sustainable growth for all shareholders, by firmly establishing two excellent businesses.
Disclosure: I am long GOOG.