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YouTube Ads Could Be a Boon, Blip for Google

Analysts mull whether the ad revenue from videos will be a trickle or a stream.

Can

Google's

(GOOG) - Get Alphabet Inc. Class C Report

new YouTube video ads meaningfully pad the search company's bottom line?

That's what Wall Street's been trying to figure out since Google announced last week that its popular video-sharing site will carry discreet ads on some videos.

The most direct, back-of-the envelope calculations seem to suggest that the ads will fall short of moving the needle right away on a company from which analysts expect revenue of nearly $16 billion next year.

But if advertisers take to the new ad format, and if YouTube maintains its impressive growth, video ads could be a major source of revenue for the company a few years out.

And while online video-ad spending initially will likely come out of Internet ad budgets, the category could get a major boost earlier if advertisers begin shifting even a small fraction of their TV ad budgets into online video ads.

Though Google's video ad launch has invited a wide range of speculation about how much the new format can bring in, most estimates have been paltry, considering Google's size.

In a note to clients on Thursday, UBS analyst Ben Schacter estimated that the move could bring Google an additional $120 million. Blog AlleyInsider.com pegged the number at $108 million for the midpoint between its most bearish and bullish scenarios.

Even $120 million would be only about 0.75% of Google's expected 2008 revenue.

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But in his best-case scenario, Piper Jaffray analyst Gene Munster sees the company making $1.1 billion over the next year. And while that analysis assumes rates rising to $40-per-thousand views, along with high-ad placement and YouTube growth rates, the view may be closer to correct if advertisers end up taking to the new format. Piper Jaffray makes a market in Google shares.

That's because if advertisers were to shift even 2% of the $81.9 billion that UBS estimates will be spent on television ads to the new video category -- about $1.6 billion -- the rates Google can charge could get a huge boost. UBS makes a market in Google shares.

The $20-per-thousand views Google is initially charging is comparable to rates charged by other high-end display media ads, says Kelly Harris, an account supervisor at ad agency GSD&M, whose clients include carmaker BMW.

But though the ads cost as much as other display ads, their rich video quality allows advertisers to embark on new techniques that are difficult to achieve with other types of advertising.

BMW, for example, is running ads that feature one of its cars -- just as it might on television. But a longer, more intricate campaign features a series of videos meant to be entertaining, which are only later revealed to be BMW ads.

While having the potential to be a powerful way to connect with customers, this second type of ad would be a riskier expense on television.

The ads are being run on a trial basis, and BMW is currently not paying for them, Harris says. But the company is keeping a close eye on the results, and the new format so far "seems like a fantastic opportunity to find new, emerging ways to connect proactively with consumers," Kelly says.

Along with advertising in a way that's not possible on TV and at a fraction of the cost, other elements are likely to lure television ad dollars to online video ads.

The 18-to-35 male demographic -- much coveted by advertisers -- is spending more time online and less time watching TV.

Additionally, the spread of digital video-recorders means that a growing number of television viewers can fast-forward through commercials -- a move not applicable online.

Google's latest move, in other words, may be more meaningful on several fronts than believed on the Street.