YouTube, Still Unprofitable, Will Expand into Streaming Market

December 03, 2015
By: Kyle Piscioniere

YouTube is looking to acquire licensed content for its streaming service, and cable companies should be terrified. Undisclosed sources told The Wall Street Journal that YouTube will be expanding its content base, which will put it in direct competition with Hulu (News - Alert), Amazon, Netflix, and other content licensers and producers.

Until now, YouTube has been best known for short-form, user-generated video content. The business model is simple: users upload videos, YouTube plays ads before those videos run, and the user and YouTube split the ad revenue. Cat videos, serialized vlogs, movie trailers, and other sub-five-minute videos have been YouTube’s bread and butter since its inception.

But YouTube’s parent company, Alphabet Inc. (read: Google (News - Alert)), has a problem. Like so many big names in tech, YouTube still isn’t profitable. That’s despite one billion viewers a month. A select few YouTube celebrities earn a living off their YouTube channel, but ad revenue doesn’t cover the infrastructure and operating costs of such large-scale video hosting.  Even more troubling, most users don’t visit YouTube to access YouTube-specific content; they use it as a repository for other content creators’ videos, accessed via third-party sites.

To climb toward profitability, YouTube recently launched its own streaming service: YouTube Red. The $9.99/month service is modeled after other streaming services, and offers a sort of Spotify (News - Alert)-Hulu portmanteau. Red subscribers get ad-free videos and streaming music, with 10 exclusive shows and movies in production right now. Depending on the reception of those exclusive productions, YouTube may continue to produce exclusive Red content.

However, instead of gambling on its own content, YouTube is first seeking streaming rights to existing properties. The WSJ reports that the company is in talks to secure undisclosed franchises and content. As a subsidiary property of Alphabet Inc. (read: Google), YouTube already has inroads with Hollywood producers.

But YouTube will now be competing with Amazon, Netflix, Hulu, and cable companies to secure exclusive licensing contracts. Each of these services wants a monopoly on their content; if you want to watch Back to the Future, Amazon wants to be the only legitimate service from which to get it. That competition is fierce and profitable. Online television will generate $51.1 billion in revenue in 2020, according to Digital TV Research Ltd.

All of this looms ominously over the cable industry. With the convenience, scope, and low prices of streaming services, cable is seen as a necessary evil rather than an optimized service. Even the big names in cable television – Comcast, Verizon (News - Alert), HBO – are offering streaming services now. Those streaming services have yet to catch on with the same popularity as Netflix, Hulu, or Amazon, though. 

YouTube has an incredibly large user base. It’s a household name backed by hefty investments from Google. Streaming will be a massive refiguring of the YouTube business model, but the company has hired former Netflix and MTV executives to oversee the transition.

It won’t be long before YouTube joins the streaming service fray. It’s going to capitalize on its overwhelming user base, its passionate and exclusive creators, Google’s dominance, and new streaming market savvy.

Good luck, Comcast (News - Alert)




Edited by Maurice Nagle