Google is planning to enter the online video rental market by making selected content available on YouTube for rent. YouTube’s selection of quality content such as TV shows and films is currently limited due to restrictions from studios that do not want their content distributed for free or monetized solely from advertising. The new rental service could entice studios to distribute more of their content through YouTube.
Large YouTube Audience
YouTube competitors Apple (iTunes) and Netflix have been much more successful in monetizing premium content compared to YouTube. However, YouTube’s natural advantage is its large reach consisting more than 430 million internet visitors.
Improving YouTube Monetization
Despite YouTube’s reach, its monetization rates are low compared to Google search. YouTube earns about $1 from advertising for every 1,000 page views on YouTube.com compared to nearly $34 earned by Google from advertising for every 1,000 searches. If successful, the new rental service can help drive up monetization rates which can impact YouTube’s value.
If 1% of YouTube’s 420 million users rent videos through YouTube on average once a month at a rental price of $3 per video, it would increase the site’s annual revenues by about $150 million and increase the implied revenue per page view by 15 cents for every 1,000 page views. A 1% rental conversion rate would imply 4.2 million rental customers on YouTube which is only a fraction of the 14 million monthly subscribers on Netflix where the average subscriber spends $13 per month and rents 6 DVDs per month.
Given YouTube’s large audience, it may be possible for its rental customer base to exceed that of Netflix. With 5% monthly rental conversion, YouTube would have about 21 million paying customers or 50% more than the 14 million subscribers of Netflix. A 5% rental conversion would increase the implied revenue per 1,000 page views by 75 cents.
We estimate that YouTube currently constitutes about 2%.of Google’s stock price. You can modify our forecast for YouTube’s Revenue per Page View to see how its significance can change if monetization improves.
