Dilemma Of YouTube’s Unplugged TV Part 2: How Much Revenue Can Ads Based Model Add To Topline?

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In the previous note, we explored the challenges Alphabet’s (NASDAQ: GOOG, GOOGL) YouTube might face in monetizing its content through a Subscription based Video on Demand (SVoD) service. In this note, we explore the how the new service can disrupt the cable TV business through an alternate model of advertising based VoD and cannibalize TV ads dollars.

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Global Ads Market

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The global ads market is estimated to at a compounded annual growth rate of 5.62%. [1]

Total Ads Market

The primary reason for this growth will be the increase in ad spending in regions such as Asia Pacific. Furthermore, with increasing use of the internet in under-penetrated regions such as Africa and part of Asia, the online ads industry will fuel the growth in global ad spending.

TV Ads Versus Online Ads

TV ad spending currently leads all other ad spending in the industry. But this trend is set to change by 2017, when online ad spending overtakes TV ad spending in the US and worldwide. [2] The expected trend in 2020 is as follows:

TV ad Spending Trends

Online Ad Spending trend

YouTube Can Disrupt The Cable Services

By launching its Unplugged service, YouTube is trying to disrupt the existing method of distributing content through cable TV. Cable TV providers charge users a fixed monthly fee for streaming basic channels, while premium content can be accessed by paying an additional fee. YouTube is working on the paid subscription service called Unplugged that would offer users a bundle of (limited) cable TV channels through the internet. Since, the infrastructure for providing TV channels over the internet exists, YouTube can forgo the fixed monthly subscription. Trefis believes that YouTube has the reach and means to monetize video content through ads.

YouTube Can Target TV Ads’ $44 Billion Through Unplugged Ad-Based Service

YouTube has over a 1.3 billion users, which gives its access to a captive audience. The proposed unplugged services would first be launched in the U.S. Initially, YouTube plans to offer the SVoD service to the 133 million households in the country to find a firm footing in the $20 billion online TV streaming subscription industry.  ((Read about subscription revenue for YouTube here))

However, many regions in which YouTube offers its streaming services have very low per capita income, the company will have to implement an alternate monetization model to generate revenue. As YouTube implements a robust architecture to offer online cable streaming services and this service is rolled out in other parts of the world, it is possible for the company to introduce the ad-based online cable streaming services, which is widespread in the world. As a result, the service can disrupt the $197 billion TV ad industry, which is expected to grow to $212 billion by 2020.

We estimate that YouTube can disrupt $44 billion worth of TV ads through the soon to be launched Unplugged Service based on the following calculations. This TAM is 66% higher than the projected $26.79 billion SVoD industry.

YouTubeTAM

Considering the fact that YouTube is the most visited video property on the Internet, it can corner a higher market share in the cannibalized TV ad industry. If YouTube can monetize 40% of its user base through new ad-based service, it can generate $17.79 billion revenue by 2020. This can lead to 20% upside to our price estimate over our projection time frame.

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Notes:
  1. eMarketer []
  2. Digital Ad Spending to Surpass TV Next Year, March 8 2016 []