“There’s something happening here,
But what it is ain’t exactly clear…”
-Buffalo Springfield, “For What It’s Worth,” 1967

Late yesterday, Alphabet released its Q2 ’21 earnings. Included was the single snippet of financial information for YouTube that Alphabet began reporting a couple of years ago: “YouTube ads,” which represents YouTube’s global advertising revenue (non-ad revenue such as YouTube TV and YouTube Music subscriptions, etc. are not included). YouTube’s ad revenue for Q2 ’21 was $7.002 billion, which was 84% higher than the $3.81 billion Covid-affected Q2 ’20 ad revenue, and 94% higher than the $3.60 billion pre-Covid Q2 ’19 ad revenue.

Yes, Covid dampened Q2 '20 ad revenue, as management had previously said. But still, you read those numbers right. An 84% year-over-year increase. On a very large prior number.

Consider a little comparative context for YouTube's $7 billion quarter: YouTube’s ad business alone is nearly the size of Netflix’s entire global subscription business, which generated $7.34 billion in revenue in Q2 ’21. But two years ago, Netflix’s Q2 ’19 revenue was $4.92 billion, which means over the past 2 years, Netflix has increased its second quarter revenue by $2.42 billion, or 49%.

YouTube has increased its ads revenue alone by nearly $3.4 billion, or 42% more than Netflix. Since Alphabet does not disclose YouTube’s specific expenses, it is impossible to calculate its profitability. But because virtually all of YouTube’s content comes from third party creators while Netflix’s annual content tab is approaching $20 billion, suffice it to say YouTube’s ad business is far more profitable than Netflix’s subscription business. It is also fair to project that in Q3 ’21 YouTube’s ad revenue will exceed Netflix’s subscription revenue.

As always, Alphabet management revealed just enough on the earnings call to give a sense of what’s driving YouTube’s incredible performance (and Alphabet’s own, which was hardly shabby itself, with revenue up 62% in Q2 ’21 to $61.9 billion) while leaving plenty of room for guessing. Alphabet’s management isn’t going to win any big awards for transparency any time soon, but with the YouTube ad revenue disclosures, at least we’re getting some insight as to what’s propelling YouTube's results. It’s also worth noting YouTube’s share of Google’s total ad revenue (which includes Search, Network and YouTube) increased from 12.7% in Q2 ’20 to 13.9% in Q2 ’21.

To help understand things, Alphabet's SVP and Chief Business Officer Philipp Schindler said upfront in the earnings call (slightly edited for brevity):

"Let's move to YouTube, which had a great quarter with strong growth in both brand and direct response. We've seen three key trends.
First, brand. YouTube is helping advertisers reach audiences they can't find anywhere else. YouTube's reach is becoming increasingly incremental to TV, and this audience dynamic is a huge win for brands. In fact, Nielsen found that US advertisers who shifted just 20% of spend from TV to YouTube generated a 25% increase to the total campaign reach within their target audience while lowering their cost per reach point by almost 20%. These combined effects of approved reach and efficiency are helping advertisers get the most out of their brand investments.
Second, direct response. Advertisers are turning to the platform to generate demand and drive transactions. Like Malaysian Ed-Tech platform Mindvalley, which focuses on personal growth and learning, increased their investment in TrueView for Action, and now, Video Action as people turn to YouTube in record numbers to learn. In Q2, this generated 600,000 plus leads, with 20% coming from the US.
Third, YouTube is uniquely positioned to drive both massive reach and action. We're seeing more advertisers adopt a full funnel approach to scale their businesses with increased efficiency."

He expanded further:

"Momentum is really strong across both our brand and direct response business on YouTube. Maybe let me start on the brand side. The global shift to online video and streaming continues, with over like 2 billion monthly active users now, 1 billion plus hours of video watched every day. I think we're at the forefront of this shift.
And advertisers have increasingly needed to look beyond linear TV alternatives to achieve their reach and awareness goals. And as I said earlier, Nielsen total ad ratings reach reporting has found, on average, 70% of YouTube's reach was delivered to an audience, not reached by the advertisers’ TV media. So not only are we driving improved reach, but we're also helping brands do it more efficiently.
And as a result of this, you see many advertisers re-evaluating the media mix and increasing their investments in our platforms. And as far as the direct response part goes, we're helping advertisers convert intent into action. We try to drive performance at an incredible scale.
Take an example like with video action campaigns, which is our next-generation TrueView for Action format. Advertisers are getting access to even more inventory across YouTube and our partners, all in a single automated campaign. And as I said before, we're working really hard to make YouTube not only more actionable, but also more shoppable.
So YouTube is proving to be meaningful for not just brand building and reaching a massive audience, but also for converting viewers into buyers. And what's nice is that we're seeing more advertisers leveraging brand to create demand and direct response to convert it. So they're basically using the funnel very, very smartly.
And then to the second part of your second question, the YouTube TV ads, for example. This part, we're really trying to bring the - well, connected TV is - let me phrase it from a connected TV part. I think that's easier.
It is really the fastest growing consumer service that we have. And that growth started before the pandemic and has frankly solidified since. And in the US, we have over 120 million people watch YouTube on TVs every month, and that's up from like 100 million last year. We're number one in reach and watch time among ad-supported streaming services. So we're very, very happy with the development that we're seeing here."

He continued later on the call:

"Yeah. Look, there's a ton of commercial intent across YouTube, and it was a shopping destination before COVID. I mean, think un-boxing videos, product reviews, make up tutorials and so on. And throughout the pandemic, we've really seen more shoppers turn to the platform for ideas, inspiration and really help them decide what to buy. And a number of shopping capabilities' already underway, and we're working really hard to make it easier for users to discover and buy directly on YouTube. And I mentioned how a merchant can globally add their product feeds now right into video action campaigns, and brands and shoppers alike are loving it, and we've also done beta testing this, for example, with Discovery Ads.
And last quarter, I mentioned how viewers can make purchases from their favorite creators via early experiments with brand connect and shop with product shelves, and early adopters are seeing a lot of success here. So stay tuned for more updates later this year."

To boil all of that down: YouTube has a massive audience that advertisers must reach because they’re no longer available on linear TV. But YouTube is offering far more than the equivalent of TV-like reach and awareness. It is building out the full funnel capability for advertisers to include with their ads calls-to-action to viewers, which activates their intent and converts it into actual purchase. This means YouTube is already tapping into mid-to-lower funnel ad spending, which I believe is going to be gigantic gusher of CTV ad revenue in coming years, that will eventually be bigger than the budgets simply shifting over from linear TV.

YouTube is doing all of this primarily on connected TVs where it has over 120 million viewers per month, but also across all screens. YouTube is wrapping everything up with targeting, analytics and optimization to ensure the highest possible return on ad spending in a (hopefully) brand-safe environment. On the other side of the equation, YouTube is enabling creators to be compensated in ways and at levels they could have once only dreamed about.

All of the above is being borne out in real time, translating to YouTube’s outsized performance. VideoNuze readers know that I’ve long been a huge fan of YouTube and its business model (here, here, here). Back in February, 2020 I shared a little math showing how YouTube’s total revenue (including Ads, Music, Premium and YouTube TV) could exceed $25 billion in 2020. Here’s something new to consider: in 2021 it’s possible YouTube’s advertising revenue alone could exceed $30 billion (Q1+Q2 actual + assuming 50% growth in Q3 and Q4 vs. actuals in 2020). This would also mean YouTube would have its first $10+ billion quarter in ads alone in Q4. All of this is perfectly conceivable. Btw, if you want to get silly and contemplate YouTube growing Q3 and Q4 by 75% year-over-year (still below Q2’s growth rate!), then 2021 ad revenue starts approaching $35 billion.

There is indeed something happening here. What it is, and what it will eventually become, is not exactly clear. For certain it is historic. YouTube is not only the 800-pound gorilla of video content, it is also the 800-pound gorilla of video monetization and it is well along in capitalizing on the CTV ad flywheel. And it is continually raising the bar for all other video content providers, including established TV networks, who simply must stay on a level competitive playing field with YouTube in their offerings to advertisers, or be relegated to a slow and painful demise. Admittedly, this is no easy task for them.

Behold, YouTube.