Analysts break down the complicated impact on YouTube of the coronavirus, which is a 'double-edged sword' for the video platform's business

Analysts break down the complicated impact on YouTube of the coronavirus, which is a 'double-edged sword' for the video platform's business

susan wojcicki
  • YouTube's business will both benefit and take a hit from the coronavirus outbreak as more consumers spend time on its platform, but advertisers trim budgets in the face of a slumping economy.
  • The video platform relies primarily on advertising for its revenue, though the company did draw in 16.6% of its earnings from subscriptions and other non-advertising revenue last year.
  • Business Insider spoke to analysts at Jefferies, Edward Jones, Evercore ISI, and MKM Partners to learn more about the new coronavirus' impact on YouTube.
  • Click here for more BI Prime stories.

Wall Street analysts say the coronavirus outbreak will both help and hurt YouTube's business this year as consumer engagement on the platform spikes, but advertisers cut back on spend.

It's a "double-edged sword," said Brent Thill, a managing director at Jefferies who works on its software and internet research team. "More time at home means a lot more content consumption on YouTube, but some advertisers we speak with are freezing budgets in the interim given the [coronavirus] situation. Some are having supply chain issues, so advertising is also in lockdown."

Marketers say engagement on video platforms like YouTube and TikTok has been up in recent weeks as socially isolated consumers spend more time online. The influencer-marketing agency Obviously said it observed a 27% increase in engagement on sponsored videos on TikTok between February and March.

"Everyone's social distancing," Obviously CEO Mae Karwowski said. "We're just consuming so much more content."

Kevin Rippey, the cohead of internet equity research at Evercore ISI, estimated that there's been somewhere between a 20% to 30% increase in engagement on YouTube during the coronavirus outbreak, noting that streaming companies haven't released data yet on the average time spent on their platforms this month.

Increased engagement on YouTube would normally boost the company's advertising and subscription revenues, but most marketers are cutting back on spend as the economy continues to slump.

Advertising remains the main source of revenue for YouTube, driving $15 billion in earnings last year versus $3 billion from subscriptions and other non-advertising revenues.

"Ad demand has otherwise collapsed in verticals like travel," Rippey said. "In categories like retail or apparel, we're seeing a meaningful decline in demand as well," he said. "What does this mean for advertising revenue? Probably unclear at this point other than to say the longer this goes on, the worse this gets."

Travel and events-based advertisers have been cutting spend in categories like influencer marketing, while some brands, like those sell services associated with productivity and remote work, have continued to spend. One ad agency reported seeing between a 20% and 60% cut in ad spend as its clients respond to economic fallout from the coronavirus outbreak.

"Certain sectors of the economy I would expect to cut back on advertising," said Dave Heger, a senior research analyst following the communication services sector at Edward Jones. "The online platforms could see cutbacks faster because a lot of that is bought programmatically so you can pretty quickly dial back. Where it will take longer is on traditional broadcast and cable where there's a fairly good chunk of ad slots that's bought upfront."

Rippey estimated that ad spend from brands most vulnerable to the effects of the outbreak could drop by as much as 70% or be eliminated entirely until companies have more clarity on the duration of the public health crisis. There are also companies that are likely to increase their ad spending during the outbreak, including mobile game applications and home fitness brands, he said. "The app install category is a large one, though probably larger for Facebook than it is for Google," he noted.

Some analysts said that online platforms like YouTube could win new ad business from advertisers cutting back on spend in other categories like events marketing and outdoor advertising like billboards.

"If there's a zero-sum game, some companies like YouTube may benefit near-term," said Rohit Kulkarni, an analyst at the equity research firm, MKM Partners. "Given that large freeways are empty right now, the likelihood of incremental ad spend on billboards is not going to be high," Kulkarni said.

YouTube also has the problem of growing misinformation that the company needs to proactively contain, which may increase costs near-term, he noted.

For more information on the economic impact of the coronavirus outbreak on the advertising and marketing industries, read these Business Insider Prime posts:

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