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Can Alphabet’s YouTube Keep up the Strong Growth Rate?

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Jan. 24 2017, Updated 7:39 a.m. ET

YouTube plays increasingly crucial role in revenue math

Of the various metrics Alphabet (GOOGL) will report as it releases 4Q16 results on January 26, YouTube will be one of the business segments most closely watched by analysts because of the increasingly important role the video service is beginning to play in generating advertising revenue for Google.

In the company’s 3Q16 earnings call, Alphabet finance chief Ruth Porat, who joined the company from Morgan Stanley (MS), made sure to highlight the star role that YouTube is playing in Google’s earnings. Porat said that the company has seen YouTube “continue to grow at a very significant rate.”

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If YouTube can sustain that robust growth, Google believes it stands a better chance of gaining from the growing spending on digital video advertisements as marketers shift their budgets away from traditional TV channels to online, where their target audience, Millennials, can more easily be reached.

According to the estimates of research firm eMarketer, US spending on digital video ads surpassed spending on traditional TV ads for the first time in 2016. The firm cites digital video ad spending at $72.1 billion, as compared to $71.3 billion for TV.

Can YouTube remain YouTube?

But the big question is whether YouTube can stand up to the growing competition and defend its market share while sustaining robust growth. YouTube is not only competing for publishers against emerging rival services by Twitter (TWTR) and Facebook (FB), but also for viewership.

Given the challenges with YouTube’s preload ads for video monetization, Facebook is expected to adopt mid-roll ads that are more likely to be viewed than preload ads, which many digital video viewers tend to skip. This strategy might help Facebook to steal creative publishers from YouTube as its video platforms prove to be more lucrative in generating ad revenue.

Alphabet’s YouTube is also up against paid subscription rival services by Sony (SNE), DISH Network (DISH), Amazon.com (AMZN), and Netflix (NFLX).

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