Alphabet Inc (NASDAQ:GOOGL) has always had a bit of a tricky balancing act managing its YouTube operation. The acquisition has certainly been one of Google’s finest over the years. And YouTube represents a significant portion of the value in GOOGL stock today.
However, right from the time of its purchase, YouTube has also been controversial. Back in 2006, the $1.65 billion purchase price seemed high. Like with Facebook Inc. Common Stock’s (NASDAQ:FB) purchase of Instagram, analysts viewed the price as wildly ambitious at the time.
Facebook quickly proved the doubters wrong on Instagram. Alphabet, however, has had a much longer road in developing YouTube into a star performer.
YouTube: Amazing Viewership Growth
Bulls on GOOGL stock have to be enthused looking at YouTube consumption patterns. As recently as 2013, YouTube racked up a comparatively modest 200 million hours consumed. This moved to 300 million in 2014, half a billion the next year, and fully a billion in 2016. YouTube is really taking off now.
The company’s efforts have been working, but advertiser defections and controversial content scandals have tarnished YouTube’s star a bit. In response it’s pivoting into more original content, leading to more direct competition with the likes of Netflix, Inc. (NASDAQ:NFLX) and Amazon.com, Inc. (NASDAQ:AMZN).
Arguably one of the biggest appeals is that YouTube has a little of everything. The quality of content ranges widely, for sure. However, browsing Youtube brings a level of spontaneity and creativity that you rarely experience watching professionally-produced content.
In niches such as music and movie reviews, for example, YouTube creators have obtained passionate followings and helped shape the broader culture. This sort of organic content is incredibly valuable to YouTube, particularly in connecting with millennials. It’s authentic in a way that scripted TV is never going to be.
That said, Google’s recent move to de-monetize a lot of content creators threatens the ecosystem. Earlier this fall, YouTube began removing ads from much of its video content, taking the ax to anything deemed too controversial for corporate sponsors.
This has left a lot of content creators that discuss violent, political, sexually explicit or otherwise hot-button topics without a revenue stream. Google appears to be trying to get around this by underwriting at least 40 of its own original shows.
This may also serve to drive more users to its subscription model YouTube Red service. This may work, but there’s plenty of competition from media creators nowadays. YouTube is moving away from a sure thing; being the leading home of all the world’s amateur video to a much more competitive and uncertain model.
YouTube Had To Do Something
I don’t necessarily blame YouTube for this strategic switch. The site has been hit with increasing advertiser defections lately. YouTube has multiple issues that are not just limited to running ads against potentially offensive content.
The advertising system lacks transparency. Advertisers are complaining that they aren’t sure what videos their ads are running against. Claims of botnet video views, and manipulated or incomplete data abound. And the controversial video scandals just keep coming.
Recent reports confirmed that Google will be hiring more than 10,000 employees to police YouTube content, trying to ferret out offensive videos. This comes after reports that numerous content creators were earning money on YouTube with videos that appeared to show child abuse and other offensive content involving minors.
Still, I’m not sure that pivoting YouTube to scripted content and a subscription service is quite the answer. YouTube got to where it is riding user-created content. They risk losing a lot in de-monetizing many of their most passionate creators.
Five years ago, YouTube tried a similar strategy, dropping $100 million on original content from celebrities such as Shaquille O’Neal. It didn’t do much to move the needle for GOOGL stock though.
It’s Not All Bad News For YouTube
Scripted content aside, there’s plenty of positive developments for YouTube. In addition to the tremendous traffic growth, Google is doing more to turn these hours streamed into cold cash. The introduction of unskippable 6-second pre-roll ads, for example, has been a boon.
The company’s ad visibility rate has spiked from 66% to 95% in recent quarters. YouTube is also doing incredibly well at making its appearance in the living room. It is quickly partnering with the smart TV makers to get YouTube prime placement.
While YouTube is doing great on mobile, the much larger screen size makes advertising more effective outside of the phone setting. It’s hard to tell exactly how much money Google is minting off YouTube since it doesn’t break out revenues and profits on such a granular level.
In the past, we heard that YouTube wasn’t that successful from a monetization standpoint due to low levels of ad penetration on videos.
YouTube: Still A Key Driver For GOOGL Stock
However, Google has gotten far more effective in the ad game on YouTube over the past couple years. And the site’s traffic growth is simply amazing, up 400% since 2013. It’s certainly hitting some serious economies of scale with that level of growth.
I still suspect its profit margin isn’t that high on YouTube given the significant bandwidth costs. And hiring 10,000 new employees for content policing also hurts. But with traffic growing at an almost triple digit annualized rate, YouTube is still a star for GOOGL stock.
The company’s ad scandals are problematic. It needs to get better on content policing in a hurry. And watch how its content creators react as demonetization continues across broader reaches of the site’s videos.
All that said, management is taking proactive steps to keep YouTube growing and friendly for advertisers. I’m not sure the original content initiative is the best idea, however YouTube has shrugged off other missteps before. Overall, YouTube is performing well, and is a bright spot for GOOGL stock owners.
At the time of this writing, the author held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.