YouTube Red WIll Drive Google Revenue, But Not The Bottom Line

  • Google has launched YouTube Music App to help YouTube users access its vast music video library.
  • People who sign up for Music App will get a 14-day free trial for YouTube's ad-free access.
  • YouTube Red has good revenue potential but not-so-good profit potential for Google.
  • Google, however, might finally be able to make money from YouTube after it improves its ad-targeting methods on the platform, something the company plans to do soon.

Google's (NASDAQ:GOOG) anticipated YouTube Music App has gone live in the U.S. on both Android and iOS devices. The app provides a tailored experience for users to access content within YouTube’s vast music video library. The app will let users not only access standard music videos but also embedded lyrics, karaoke tracks, and concert footages. People who sign up for the Music App will get a 14-day free trial with Google’s recently-launched YouTube Red which allows them to view YouTube free of ads.

YouTube Music app is, therefore, geared towards helping more people sign up for YouTube Red. YouTube Red is Google’s response to Apple giving a leeway for ad-blockers to be incorporated into its popular Safari browser. Ad-blockers cannot block YouTube videos, so users who need ad-free access to their favorite music on YouTube have little choice than to sign up. Google charges $10/month for the new service, which also offers users the ability to listen to music offline.

YouTube Red appears to be packaged better than Spotify, the most popular subscription music service on the planet with 60 million users and 15 million paying subscribers, many more than Apple (NASDAQ:AAPL) Music’s 15 million users. Just like YouTube Red, Spotify charges users $9.99 per month for the service.

Good revenue potential

YouTube Red has good revenue potential, if Spotify’s experience is anything to go by. Spotify finished 2014 with 45 million people who use its free ad-supported service, and another 15 million paying subscribers. Spotify realized revenue of $1.22 billion in 2014, or 45% Y/Y growth, which translates to $81.33/year per subscriber.

YouTube is a much bigger video platform than Spotify, with an estimated 1 billion monthly users. A recent survey by Adobe and PageFair found that 144 million people used ad-blockers in 2014, or roughly 5% of all Internet users. Assuming 5% of YouTube users sign up for YouTube Red, and Google monetizes the service at roughly Spotify’s rate, then YouTube Red could add $4 billion per year to Google revenue, which is equal to the amount of revenue that YouTube brought in for Google in 2014.

The number of people using ad-blockers grew 70% Y/Y in 2014. Assuming YouTube Red’s subscribers grow at roughly the same rate, or even at Spotify’s 45% top line growth rate, then the service could turn out to be pretty lucrative for Google.

The revenue potential for YouTube Red is certainly great. What about the profits? Well, While YouTube Red undoubtedly has great revenue potential, the same cannot be said for its profit potential. Spotify reported a net loss of $197 million, up from $68 million the previous year, which implies that its losses are growing even faster than its top line. Spotify attributed those mounting losses to its expanding workforce, and the fat royalties the company has to pay to music labels. Spotify says that it has paid a total of $2 billion in music royalties since 2008.

Google has already signed a large licensing deal with Merlin which carries thousands of Indie labels. Although Google does not pay royalties directly to songwriters, it does give a 55% revenue cut to YouTube content creators. Google will give a similar cut to its content partners on YouTube Red, which will severely limit the amount of money it can actually make from the platform.

Improved targeting

Despite bringing in revenue of $4 billion in 2014, YouTube only managed to break even after deducting content costs. The biggest reason why Google is unable to make decent money from YouTube ads is due to low CPM rates on the platform, which in turn is as a result of poor ad targeting. Google only uses data from DoubleClick channel for ad-targeting purposes on YouTube. The big problem here is that DoubleClick represents just 30% of Google’s revenue, which leaves the company in the dark regarding the user preferences of most of its YouTube users.

But all that could change when Google changes its YouTube ad targeting methods. Google plans to use data from its core website for ad-targeting on YouTube soon. Better ad-targeting will allow YouTube to command better CPM rates which might in turn allow the platform to become profitable.


Whereas YouTube Red has decent revenue potential, its profit potential might not be as great. But with better ad-targeting, Google might finally be able to make a profit from YouTube.

Brian Wu Brian Wu   on Amigobulls :
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