Wedbush Equity Research analyst, James Dix wrote in a research note to investors that YouTube is the fastest-growing billion dollar business of Google Inc (NASDAQ:GOOG). However, he believes that the size of YouTube is not yet enough to provide a substantial growth driver for the search engine giant or to serve as a meaningful marketing platform for major advertisers.

youtube

Dix estimated that YouTube would account less than 10 percent of the revenues of Google Inc (NASDAQ:GOOG) for 2013. It will also represent a lower percentage of the company’s operating profit.

According to Dix, YouTube’s growth benefits from certain initiatives and the increasing advertiser’s demand for online advertising over the past two years. He predicted that the video platform would grow faster outside the United States, which accounts ~50 percent of revenue despite having only ~30 percent viewing. He also noted that the video viewing on YouTube would continue at an average of around 10 minutes per day across its global user base, which is still insufficient to be meaningful for most brand marketers.

Dix emphasized, “YouTube’s platform for large-scale delivery of, commenting on, and sharing of video is of increasing strategic importance, as Google’s search and display platforms look for a step up in brand marketing growth.”

He explained that although YouTube’s viewing is small in comparison with TV viewing, YouTube’s viewing is large in terms of time spent on other social/sharing platforms.

In addition Dix noted, “Reflecting YouTube’s continuing focus on attracting brand spending, the rollout of the TrueView video ad format (e.g. to mobile in 3Q13) has been well received, resulting in CPM’s on this format comparable to TVs. Roughly 65% of  YouTube in stream ads are now skippable.” He also pointed out that YouTube’s monetization spread to a larger share of mobile devices including the updated YouTube app for iOS in the second quarter of 2012, and the greater ad penetration of Android devices on newer versions of the operating system since the older version did not support YouTube ads.

Furthermore, Dix noted that all of the Advertising Age Top-100 brands have advertising campaigns on YouTube and it has now more premium content than 1-2 years ago, and it has an increasing number of deals with content providers such as sports leagues or networks. He expects You-Tubes growth will come primarily from traditional CPM-based sales, and programmatic buying of video will likely be an increasing important driver of its growth.

According to Dix, Google Inc (NASDAQ:GOOG)’s leading platforms, such as YouTube in video, Android in mobile, and Google Inc (NASDAQ:GOOG) in search could contribute over-all marketing spending in real-time basis by addressing wasted reach and missed prospects.

Dix also pointed out that the search engine giant could benefit from leveraging “database of affinity” to transforms branding campaigns into performance campaigns since search is the single largest performance-marketing platform of the company.

Dix remained constructive on the shares of Google Inc (NASDAQ:GOOG) citing the company’s strong revenue growth and continued progress in reducing CPC declines, and the potential for higher valuation due to its strategy to expand its revenue base further into spending by brand marketers.