Google Unlocking Significant Potential By Launching YouTube Gaming Service

  • A year after Google failed to acquire Twitch, it launches a competing service from YouTube.
  • Google started to unbundle YouTube services with Kids and Gaming as the first service to be offered independently.
  • YouTube Gaming has the impressive potential of almost $3.5B in revenues after 2.5 years.
YouTube Gaming

YouTube has been one of Google’s (NASDAQ:GOOGL) most significant assets since it acquired the streaming video service in 2006. Google kept YouTube mostly unchanged for a long time and focused its efforts to increase YouTube's core business revenues by attracting more audience and driving higher ad sales by penetrating new geos and expanding to new platforms and devices. As shown in chart 1 below, YouTube's expansion to almost every platform, operating system and device was successful as it is now, by far, the most visited multimedia portal in 2015 with more than 70% market share.

Google_chart 4_061415

Unbundling YouTube Services

Now, when YouTube has stabilized its leadership position, it can turn its attention to generating additional revenue streams from something other than ad sales. The natural place to start is a premium ads-free service for $9.99 per month that provides a Spotify/Apple Music experience and supports Google's efforts in the streaming music market. YouTube's next steps are less obvious, but it seems like Google will start to unbundle YouTube services. In February, YouTube announced the release of a new app (currently available in the U.S. only) and website targeted to provide children with a safe and secure access to video content that suits their age. In addition to offering parental controls, YouTube Kids partnered with industry leaders like DreamWorks TV, Talking Tom and Friends, National Geographic Kids, Thomas the Tank Engine, and more to provide content that is appropriate for kids.

Beyond the socially aware cause, YouTube could attract advertisers of children's products to the new service and even charge them a premium for allowing them to address this particular audience quickly without going through several processes of fine-tuning their ads' audience preferences in the general channel. As a second phase for this unbundling process, YouTube announced YouTube Gaming, targeted at the gamers community. The new service will allow gamers to share content, live-stream gaming sessions, comment, and interact among themselves in a dedicated new app and website. The business logic behind the new gaming service is similar to the logic behind YouTube Kids: advertisers want to address particular groups efficiently, and YouTube could charge a premium for ads on this platform. Both children and gamers are considered important audiences for advertisers, and by offering dedicated services for these audiences, YouTube is creating a unique market offering.

For both of these audiences, YouTube transfers existing content from the traditional site to the new dedicated sites and adds unique features that meet the target groups' needs - either parental control and safe content or live streaming sessions and live commenting options that enhance the user's experience - and should attract them to the new sites in the future. Even though I mention children's and gaming apps together, they face different competitive difficulties. As most children’s content companies or broadcasting channels already offer their content in YouTube, YouTube’s new service faces very little competition. However, on the gaming front, YouTube faces fierce competition from Twitch, a company that was acquired last year by Amazon (NASDAQ:AMZN) for $970M.

Twitch offers a large number of channels sorted by game titles and consoles and allows users either to broadcast their gaming sessions or to view and comment on live or uploaded game videos. Monthly, Twitch has more than 100 million unique viewers and more than 1.5 million unique broadcasters, making it a highly active and vibrant community. Twitch presents ads in a large variety of methods such as featured games, homepage takeover, leaderboards, within a video and traditional newsletter spots. The top 5% of broadcasters are Twitch's influencers who have a loyal base of viewers and receive certain perks such as a cut from the ad revenues they generate and independent advertising campaigns.

By launching YouTube Gaming, the company combines a number of features it has already, either within YouTube or from Google: instant messaging capability from Gmail, live commenting and social abilities from Google+, streaming capability from YouTube Live Events, and ads sales platform from AdSense/AdWords. All the features and capabilities mentioned above are already mature, stable, proven in previous YouTube/Google projects, and easy to implement. YouTube already has an influencers model running so it could adopt Twitch’s model and even attract Twitch’s top rated influencers to YouTube Gaming by offering slightly better perks. YouTube already has a vast network of advertisers and strategic partners that have made the gaming app profitable from day one. Moreover, all the content in YouTube Gaming is broadcasted for free by the users who drive very little spending on content creation if any.

Revenue Implications

As shown in chart 2 below, under very conservative estimations, Twitch has generated almost $5B in 2015 for Amazon. Assuming that YouTube will launch Gaming in August and slowly ramp its number of users, minutes watched, and average video length, the new service could generate approximately $3.4B in 2017 for YouTube in advertising only. An ads-free premium service will generate slightly higher revenues. That's not bad business at all, even for a tech giant like Google.

Google_chart 5_061415

YouTube Gaming, together with YouTube Kids, could generate significant additional revenues for YouTube and Google that could result in stock price appreciation in the long run. Discussions about whether video gaming is a sporting event or not brings this matter to the general public awareness and could drive an increase in viewers and broadcasters as well as larger advertising deals that could make this business even more meaningful for YouTube. As Google has many other projects running in parallel, including autonomous vehicles, smart glasses, e-payment processing service, etc., the exact impact of YouTube gaming on total Google revenues and stock price is hard to assess. However, an impressive start and substantial adoption rate could make YouTube Gaming a catalyst for Google’s stock price increase.

Conclusions

Social video gaming is a significant trend in the gaming community that is currently dominated by Amazon’s Twitch. After Google failed to acquire Twitch in the past, the company combines some existing features and capabilities to launch a new, dedicated YouTube Gaming app and website. The new service has a massive revenue potential of almost $3.5B in annual revenues after 2.5 years, powered by very little operational expenses that might turn it into a catalyst for Google’s stock price.

Disclosure: The information provided in this article is for informational purposes only and should not be regarded as investment advice or a recommendation regarding any particular security or course of action. This information is the writer's opinion about the companies mentioned in the article. Investors should conduct their due diligence and consult with a registered financial adviser before making any investment decision. Lior Ronen and Finro are not registered financial advisers and shall not have any liability for any damages of any kind whatsoever relating to this material. By accepting this material, you acknowledge, understand and accept the foregoing.

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