Recently Launched YouTube Red Could Lead To Strong Monetization

  • Throughout the years, YouTube hasn’t maximized its full financial potential in generating revenue solely from display ads.
  • This year, YouTube started to aggressively unbundle services and seek new paid subscription models.
  • Creating a new revenue stream will strengthen YouTube’s positioning within Alphabet.
  • In the long-term, spinning off YouTube to unlock additional value will not come as a surprise.

One of Alphabet Inc-C (NASDAQ:GOOG) strongest web assets is its successful video sharing platform, YouTube, which is also considered the second largest social network after Facebook (NASDAQ:FB) in terms of monthly active users. YouTube monetizes its significant online presence by displaying ads, similar to many other internet giants like Facebook, Yahoo (NASDAQ:YHOO), Twitter (NYSE:TWTR), Google Search, and more. However, as YouTube got bigger and ad-blocking apps became more popular, the video content giant needed to ramp up a new revenue stream to back up its display ad earnings and increase the total amount of revenue YouTube generates from its unique market position.

In the beginning of the year, YouTube started to unbundle its services when it launched YouTube Kids, a video channel targeting kids that features a unique, curated selection of kid-friendly content. The new YouTube Kids app allows YouTube to offer advertisers a unique market and guarantees access to the specific target audience of children and parents.

Meanwhile, other websites and social networks offer access to the same target audience by slicing and dicing its total audience data. Later in the year, YouTube launched YouTube Gaming, a platform targeted at the gamer community that allows them to share, stream, and discuss video gaming live. As discussed in an earlier article, YouTube Gaming is a direct competitor to Amazon (NASDAQ:AMZN) Twitch, which is currently leading this emerging and vibrant market. The new gaming app allows YouTube to gain market share from Amazon and generate additional ad revenue by appealing to a specific, targeted audience that many advertisers are trying to attract.

Two months ago, YouTube took another step toward accelerating the site’s monetization by introducing an ad-free subscription-based service called YouTube Red, which is an evolution of the former YouTube Music Key. YouTube offers the new Red service for a monthly fee of $9.99, which is on par with the prices of Netflix (NASDAQ:NFLX), Hulu, and Amazon Prime Instant Video; however, it currently provides less content than the other services.

To beef up its content library, YouTube has two alternatives—the first is to produce exclusive original content solely for YouTube Red subscribers like Netflix, Hulu, and Amazon do. However, it might be difficult to pull together and engage enough viewers to justify the production costs, as Yahoo recently learned when it shut down its original video content business. The second alternative is to purchase the rights for successful series and movies to create a basic content library that can rival the competition’s.

I believe that this second option is the right decision to start with. YouTube might have an enormous amount of content; however, charging $9.99 per month to provide just ad-free service for subscribers (for most content) is not enough to attract Netflix or Hulu subscribers. YouTube already has an extensive relationship with all the major studios, which could assist the company as it starts its streaming business. This is where YouTube is targeting right now—creating its preliminary video content library, which other players already have. If YouTube can manage to bring not only classic content but also up-to-date, recent productions to its platform, it might be a decent competitor in the streaming market.

These changes in YouTube are very exciting for Google/Alphabet investors, who have waited years for management to monetize its unique leadership position and go beyond the traditional display ads. Creating a new revenue stream is very important to YouTube as a subsidiary and standalone company that will be impacted by the rise of ad blockers.

In the long run, YouTube seems to be a valid candidate for the first significant spin-off from Google/Alphabet. For Alphabet’s investors, the growth potential in this business is another catalyst to hold the stock for the long run. If YouTube Red succeeds in attracting a large subscription base, Alphabet’s investors could unlock additional value from spinning it off.

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