How Google Could Be Losing Control of YouTube
Google may be known for Internet search and its Android operating system, but YouTube definitely ranks among its most valuable assets. According to analysts at Jefferies, YouTube is 50% more valuable than Netflix, or worth up to $40 billion. With such value, it's important that Google protect such an asset. But unfortunately, there are indications that Google is losing control of the very thing that makes YouTube so valuable -- and that's content.
The YouTube model
The business model of YouTube is simple: Multichannel providers and regular users upload videos, consumers watch those videos, and then YouTube and the video owners share the advertising revenue based on the viewing volume of YouTube users. With more than 1 billion monthly viewers, and more than 6 billion hours of videos watched each month, Google creates a lot of advertising revenue from YouTube. Google shares advertising revenue with content creators, which thereby keeps content makers eager to produce unique, enjoyable videos.
While Google doesn't report financial information for YouTube, Jefferies figures that YouTube's total revenue will grow 50% this year, to $5.9 billion, and can increase to nearly $9 billion by 2016.
What's the problem?
The problem that Google now faces is that competing companies now see value in its business model, and perhaps, more importantly, in its top content creators, as well. Below is a table of two top multichannel providers -- Maker Studios and Fullscreen -- that have recently been acquired, or have sold controlling stakes of their company.
Reported Views per Month
(up to) $950 million
$200 million-$300 million
Maker Studios and Fullscreen are very similar companies. Both act as a platform that works with YouTube content creators to increase video success. For example, Maker Studios is responsible for 6.5 billion views per month, but those views derive from its 55,000 content creators. While Fullscreen doesn't disclose its number of content creators, it does work with companies like NBC and Fox through its subsidiary Channel Plus.
According to comScore, Maker Studios and Fullscreen are Nos. 1 and 3, respectively, for total unique viewers on YouTube as recently as August. Further, Maker Studios is estimated to command more than 40 minutes per viewer in a typical month, according to comScore, which is more than double that of Fullscreen.
Aside from Maker Studios and Fullscreen, there are smaller content providers like Machinima, Tastemade, and Creativebug that have either been acquired, or have sold controlling interests in recent months.
What does this all mean?
There are a couple of ways that investors can look at such interest from companies like AT&T and Disney for multichannel providers. Either the acquirers are satisfied with the YouTube business model and see the potential for long-term returns through revenue sharing with Google, or these enormous channels are being purchased as the first step to start competing services to YouTube.
While YouTube has an estimated 300 million daily viewing hours, according to The Information, losing the likes of Maker Studios and Fullscreen would be significant based on their collective monthly views. The noted acquisitions involving these multichannel providers has all been within the last year, but has been robust and rather aggressive on behalf of the acquirers.
Therefore, given the financial success of YouTube, it might make sense that a major media company like Disney would want a piece of YouTube's video empire, thus buying the rights to 55,000 content providers and YouTube's top partner by unique viewers. Also, with AT&T planing to acquire DirecTV, and showing a clear interest in video content, it might also be reasonable to suggest that it has an interest in eventually competing with YouTube, as well as in the Internet space.
Other looming threats
Google is not only potentially losing leverage over its top content providers, but it's also facing a market where new Internet video platforms could arise. Aside from AT&T and Disney, Google must also contend with the growing threat of Netflix and Amazon .
Netflix is investing $3 billion on content in 2014. Meanwhile, Amazon.com signed a multi-year content deal with HBO for an undisclosed price, which The New York Times reports is worth about $300 million. Amazon also bought game streaming platform Twitch for nearly $1 billion back in August. Both companies are making big bets to add new content to their respective platforms. Meanwhile, top content creators for YouTube are being bought out by companies that could also become competition.
One of YouTube's strengths has always been its ability to attract original and unique content at little cost, by simply sharing revenue. However, with multichannel providers now having acquisition appeal, and the likelihood for future platform options, Google might find itself either having to provide larger revenue sharing, or investing heavily in acquiring its own unique content for YouTube.
The landscape for YouTube is quickly changing to an environment where Google might be losing control over content creators. This could very well alter and cause significant shortcomings in the high expectations that are placed on YouTube as a business.
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The article How Google Could Be Losing Control of YouTube originally appeared on Fool.com.Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Google (A shares), Google (C shares), Netflix, and Walt Disney. The Motley Fool owns shares of Amazon.com, Google (A shares), Google (C shares), Netflix, and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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