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YouTube as a Streaming Hub? Why Such a Deal Could Be Big for Alphabet

Take it with a grain of salt, since Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) has neither confirmed nor denied it. But if news website The Information's report is accurate, YouTube could soon allow customers of streaming services like Netflix (NASDAQ: NFLX) or Walt Disney's (NYSE: DIS) Disney+ to access their content using YouTube's interface.

The development would push the video platform deeper into a lucrative arena, but an arena that isn't exactly in Alphabet's wheelhouse. Alphabet's YouTube enjoys an edge on other names in the space, however, including powerhouses like Netflix. That is, the sheer scope of its reach means millions of prospective paying customers are just a click or two away from signing up.

Alphabet is holding a very big net

The extent of YouTube's grasp on the global video market depends on how you measure it. If you're talking only about paid subscriptions, Netflix rules: The platform is regularly accessed in 87% of U.S. households. Prime Video, from Amazon.com (NASDAQ: AMZN), is running a distant second, with 53% of the nation's homes using the service. Disney's Hulu isn't too far behind with a 41% penetration rate, all according to estimates from eMarketer. YouTube doesn't factor in because (with the exception of YouTube TV and YouTube Premium) it's mostly a non-subscription platform.

Image source: Getty Images.

In terms of sheer reach though -- as measured by how much video content the average person sees on a typical day -- YouTube is a beast. Globally the site (and its premium ad-free version) boasts an average of 2 billion monthly users who watch a stunning 250 million hours' worth of video every single day and make YouTube one of the top five most visited websites in the world.

That's not counting YouTube TV, which now has roughly 2 million subscribers.

For comparison, Streaming Observer determined early last year that Netflix served up 165 million hours' worth of video content per day to a paid customer base then numbering around 140 million. YouTube still technically trails Netflix in the United States, though not by much. It's also catching up: eMarketer predicts adults in the U.S. will be watching 25 minutes' worth of YouTube per day by 2021. Netflix's figure by then shouldn't be too far ahead, at 30 minutes per day.

If you build it, enough will come

The YouTube funnel may be vast. But will selling third-party services be feasible when its crowd of regular users is used to paying nothing (other than time spent watching a video ad)?

It's a stretch, to be fair. Netflix and Prime Video are destinations people visit with the intent of finding something to watch. YouTube is very often a rabbit hole the web's users stumble into.

What YouTube lacks in numbers of people genuinely looking for a subscription service, though, it makes up for in expanse. Again, 2 billion people per month visit the site, and while there, they spend more than 20 minutes per day flipping through an average of more than six YouTube.com pages. That means for every couple of people who see only a few seconds of one video every few days, there's at least one who's spending an hour or more at the site every single day. Even a small portion of YouTube's regulars make up a horde that could number in the tens of millions, if not more.

Notably, consumers no longer balk at buying their entertainment from unlikely places. Apple was once a mere consumer technology middleman that happened to sell music for a commission. It's since become a digital media platform that's done well enough to prompt Netflix to look for ways to avoid paying Apple its 30% commission on new subscribers it brings to the streaming service. Amazon was purely an e-commerce company that added video as a means of spurring additional sales of merchandise. Now consumers are surfing what's available to watch through Prime Video.

And don't think for a minute YouTube has been relegated to smartphones and computers, leaving Netflix and Amazon to dominate the all-important living room television set. A new Nielsen study says Netflix is still the leader there, accounting for 31% of the streamed content viewed on actual TVs. YouTube holds second place, though, making up 21% of streamed TV set content.

What's the impact on Alphabet?

The introduction of third-party streaming services at YouTube -- if it happens -- isn't going to be a game-changer. Alphabet's core business is still search and advertising. Last quarter's top line reached $36.3 billion, $30.7 billion of which was ad-related.

Still, the introduction of other streaming services opens up interesting growth prospects. Let's assume a 30% commission to sign a new customer to a $10/MONTH service would translate into $36 worth of revenue per year. Multiply that by 100 million customers and we're talking about $3.6 billion in collected revenue.

That sort of number is certainly possible. For perspective, Netflix is the biggest name in streaming subscriptions, but its 167 million subscribers are only a fraction of the total addressable market of internet users, which is a little more than half the world.

Best of all, Google wouldn't have to give up any of YouTube's ad revenue to promote outside streaming services. It might even improve its total ad revenue by making Google's online ecosystem stickier.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. James Brumley owns shares of Alphabet (A shares). The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, Netflix, and Walt Disney and recommends the following options: long January 2021 $60 calls on Walt Disney and short April 2020 $135 calls on Walt Disney. The Motley Fool has a disclosure policy.


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