Peter Kafka

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Is YouTube Still a Money Pit? Or Is Google Just Really, Really Modest?

A year ago, Google CFO Patrick Pichette predicted that YouTube, the company’s famously unprofitable video site, could be “very profitable” in the “not long, too long distance future”. So has that happened yet?

Pichette won’t say. “Look, we don’t comment on YouTube. What I can tell you is that we’re incredibly pleased by its trajectory,” he told an analyst during the company’s Q2 earnings call today, adding ““Reading the tea leaves, it’s a great business for us.”

Which is pretty much what Pichette said a year ago. So has anything changed?

It’s possible, theoretically, that YouTube is indeed profitable, but Google doesn’t want to break out the numbers for the unit because doing so might shed too much light on the rest of the company’s business. If so, then we may never know if the world’s biggest video site moves from money pit to money maker.

But my hunch is that Google would very much like to be able to tell analysts that its big, long-term bet on the site has paid off. And that it finally has the big new revenue stream that Wall Street is always looking for.

Pichette did mention that the company has spent $100 million in the YouTube/Viacom copyright case it appears to have won, and that it considers the money well-spent. Not only does it make the company feel good about itself, but it should make it easier for it sell ads to skittish buyers.

Meantime, if you want to assess YouTube’s financial performance, you can either rely on optimistic noises coming from the company or third-party estimates — Citigroup thinks it will be a billion-dollar business next year.

Or you can just visit the site yourself, where you’ll be confronted with an ever-increasing barrage of ads, including the dreaded pre-roll ads that YouTube once talked about with disdain.

And then you get to decided for yourself what that means.

EARLIER:

Here’s the first crack at Google’s Q2 earnings: The search giant generated revenues of $5.09 billion and adjusted earnings of $6.45 a share. The Street was looking for $4.99 billion and $6.52 per share.

Shares are down more than 2 percent in the aftermarket, as investors digest the numbers.

Mark Mahaney’s “cheat sheet” can help you interpret results:

Eric Schmidt’s take:

Google had a strong second quarter. Solid growth in our core business and very strong growth in our emerging businesses drove 24% revenue growth year over year. We saw strength in every major product area, as more and more traditional brand advertisers embraced search advertising and as large advertisers increasingly ran integrated campaigns across search, display, and mobile. We feel confident about our future, and plan to continue to invest aggressively in our core areas of strategic focus.

And here’s Google’s story in chart form, via documents it released in advance of its earnings call:

2010Q2_google_earnings_slides

I’ll be liveblogging the earnings call starting at 4:30 eastern:

As with Q1, we’re not getting Eric Schmidt on this call: CFO Patrick Pichette is steering.

Pichette: “Overall, we’re very pleased with results”.

Playing up display growth, highlights Omnicom deal.

“Very impressive growth” at YouTube, with brand advertisers spending more. And we love that Viacom ruling! “It’s not for us, but just the users and the Web in general.” We’ve put in $100 million to win this case.

More shout outs for mobile, cloud initiatives. Nothing in the way of specifics.

Still spending on people, products. Added more than 1,000 people, some through AdMob, other deals, but mostly by hiring engineers.

Pichette walking through financials, which you can see for yourself here.

Product boss Jonathan Rosenberg is up.

Discussing new “Caffeine” search infrastructure, which offers 50% faster results, plus revamped user interface. Check out “oil spill,” he suggests.

Per earlier calls, “we’re putting more wood behind fewer arrows” and much of that is apparent in all the search improvements we’re making.

But as search gets better, we need to improve ads, too. Because better search leads to fewer ad impressions.

So we’ve added new ad formats, focusing more on quality. Can ad pictures, local address, phone #, etc. Obvious stuff like making phone numbers very visible on mobile ads, etc.

Talking up display, and push to get advertisers to embrace “audience model”. Pushing remarketing, etc.

Same Android stat they’ve been using for a while: Activating 160,000 handsets a day. Rosenberg’s favorite is the Sprint EVO. Android now boasts 70,000 apps, up from 30k in April

“I hope you played with our special Pac-Man Google”. Followed by Rosenberg making upsetting “goop goop” sound, which I think is supposed to sound like Pac-man. But really, it’s more of an Alka Seltzer thing.

Q&A:

Operating expenses are up sequentially. What accounts for that?

Pichette: Some it is bonus accrual, but mostly increase in headcount and some marketing.

Paid click growth: How much of that is from mobile today v. last quarter. Traffic acqusition costs are down. Going to keep heading that way?

Rosenberg: Yes, mobile clicks are growing faster than anything else.

Pichette: TAC shouldn’t increase, and obviously MySpace deal ending… [left unsaid — if we do do another News Corp. deal, we won’t spend anything like the $900 million were supposed to fork over in the last deal (but didn’t actually have to do)]

[Missed next question, apologies]

How much are you investing in Android? And why are you doing it, where will you make money?

Pichette: Android cost.. “It’s not material to the company”. Many of the big developments, like Droid X, being done outside company. So that makes it a “formidable” return” for us.

Rosenberg: Why are we doing this? Because the most popular app on smartphones is the browser, and people search on that browser more than they ever have.

Follow up Q: What about search on browser vs. search in apps?

[They don’t really answer this question, but..]

Rosenberg: Android search up 310%.

Pichette: Mobile search is up 500% in past two years.

Can you talk about macro economic evironment, and the $3 billion commerical paper offering you just announced?

Pichette: We’ve made no decisions on share buybacks, other ways to return capital, but we do talk about it all the time.

On Macro: We’ve seen no impact of what’s going on the macro world to us. For last 3, 4 quarters, we’ve said we feel really pleased with our performance.

How much cash is international vs. US?

Pichette: 50/50.

Talk about advertiser/user adoption of new ad format on site?

Rosenberg: Click to call ads on high-end mobile doing very well. Click rates increase 6% when you add phone #. Sitelinks also making progress (type in “Sears” and you’ll see more useful links, etc). Also adding seller/merchant ratings, and that’s doing well.

Sales boss Nikesh Arora: Ad format is catching up to quality of search results. So that’s “definitely helping”. Also, let me talk about display! New formats giving us more and more inventory on YouTube, and richer ads, too, which allow us to charge more. There’s more appetite for this stuff, and they perform better for advertisers, which means we can “price them better” — ie charge more.

[Missing this Q as well.]

Is Android and mobile a defensive strategy? Also, we keep hearing that Android infrastructure and support not as good as it should be. What can you do to improve app marketplace, for instance.

Pichette: Android is both offensive and defensive for us.

As far as support for vendors, developers, “we’re investing heavily” for that (but remember, those costs are “not material”.

Questioner and Pichette not understanding each other, but seems that questioner wants Google to have a more vibrant app marketplace.

Rosenberg: This is at a “nascent” stage, and there’s a lot more infrastructure that needs to be built to support commerce, and we’re working on that.

Were there any big one-time expenditures that we should know about?

Pichette: Our recruiting machine that we started to build, now you’re seeing full flow-through. But in addition to people, we have a lot of legal costs this quarter “because of a lot of legal activities that we’ve taken” so that’s some of it.

Last year you said YouTube was close to profitability. Any news?

Pichette: “Look, we don’t comment on YouTube. What I can tell you is that we’re incredibly pleased by its trajectory.” Followed by many superlatives to describe YouTube. “Reading the tea leaves, it’s a great business for us.”

[And another question I’ve missed]

Paid clicks are up 15% y/y. That’s pretty consistent for past couple years. What’s keeping that rate that robust?

Rosenberg: Biggest thing is continued secular shift from offline to ROI-based online search ads.

[Still. Missing. Questions.]

Costs per click came down a bit this quarter. Why?

Rosenberg: I can tell you what pushes CPC up: I don’t see anything from user behavior that’s obvious. Conversion rates are good, and that helps push them up

A question about China.

Pichette: We’re basically in the same place as the last time we talked. We have our liscense, but I want to reiterate, revenue from China is not material for us. But having said that, we had “decent” revenues there from Q2.

Click-through rate on mobile vs. PC?

Rosenberg: We don’t break those out. But the big difference is that on mobile, people are less likely to consumate transaction, because process is more “time-consuming and onerous”, and to fix that we’re going to have to work hard.

Can you talk about the Omnicom deal and display?

Arora: Sure! More and more people shifting to “audience buying” — ie buying bodies no matter where they are, as opposed to a certain publisher (which is bad news for premium publishers, though Google argues that this is not the case).

And that’s what we’re working with Omnicomn on — getting that money into our AdX exchange.

Can you talk about search remarketing?

Arora: We don’t do that. We do remarketing on display ads.

Talk about M&A strategy please:

Pichette: We evaluate based on talent, intellectual property, and price. Price is least important, but we do care – at a certain point, it’s not worth it. We’re also looking for M&A that helps us accelerate our existing roadmap. AdMob is an example of that, so is On2. But there are many cases where we look at them, and don’t buy them. “We often say no.”

Back to YouTube: Seems obvious that majority of views are monetized. How can you fix that and does Viacom deal change that?

Arora: YouTube is five years old….we monetize it many different ways. Home page, individual videos, etc. We need to be able to sell the ads legally, so we’re doing deals with publishing groups, etc. …More broadly, we’re in the very very early stages of video advertising. Right now, most of the ads are repurposed TV ads. But people will create more interactive ads, and we’ll get better at targeting and personalization.

Pichette: On Viacom: Still appeal process, so can’t comment on specifics. But! The Judgement gives us more room for experimentation. See, for instance, those amazing Old Spice ads.

Please rank opportunity for YouTube vs. Ad Exchange vs. Google Display network, etc.other products.

Arora: All complimentary. Not prioritizing one over the other.

Pichette: Thanks to all the Googlers who make all of this possible. “Two thumbs up!”

 


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I think the NSA has a job to do and we need the NSA. But as (physicist) Robert Oppenheimer said, “When you see something that is technically sweet, you go ahead and do it and argue about what to do about it only after you’ve had your technical success. That is the way it was with the atomic bomb.”

— Phil Zimmerman, PGP inventor and Silent Circle co-founder, in an interview with Om Malik