Is YouTube Red A Real Threat To Netflix ?

by Trefis Team
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On December 2, The Wall Street Journal reported that YouTube is seeking streaming rights to TV series and Movies to bolster its new subscription service. [1] On October 28, YouTube had launched its ad-free paid subscription service called You Tube Red for $9.99 a month. [2]  By adding TV shows and movies to this service, YouTube Red will now directly compete with the streaming giant Netflix (NASDAQ:NFLX) , which currently has more than 40 million subscribers in the U.S. and with aggressive international expansion plans hopes to be present in nearly 200 countries by the end of 2016.  While YouTube Red’s differentiation currently is in terms of original content being offered without ads and offline play functionalities, its subscription rates are slightly higher than those of Netflix. With TV shows and movies in its offering and its popularity with current viewers, YouTube’s subscription model definitely has the potential to attract young users, thus impacting Netflix’s market share.

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You Tube’s Popularity Can Impact Netflix’s growth

U.S. streaming services constitutes nearly 70% of Netflix’s valuation, in our estimation. A key driver of this valuation is company’s U.S. streaming subscribers and we expect this figure to increase from around 45 million in 2015 to more than 60 million by 2022. For international markets, we expect this number to reach 70 million by 2022.  However, with You Tube Red now entering this space, Netflix will have to face higher competition and this could impact the growth in its subscribers.

YouTube’s popularity can be gauged with the fact that it has over a billion users and YouTube mobile reaches more 18-49 year olds than any other cable network in the U.S. [3] If even 10% of YouTube’s users subscribe to YouTube Red over the next five years, it could have 100 million subscribers and come very close to Netflix’s Trefis estimated number of subscribers.

Original Content Could Be The Key Differentiator In Future

Given that YouTube will offer TV shows, movies, and that its content will be compatible with handheld devices with an offline play functionality, YouTube Red should have everything that Netflix currently offers, along with its own original content. YouTube has the “YouTube Space” production facility, which is focused on generating original content.  As of March 2015, this facility produced over 100,000 videos, which have generated over 1 billion views. [4]

Netflix has shown its commitment towards high quality original content by planning to triple the number of hours of original content (320 hours) in 2015 compared to 2014. This strategy has improved viewer perception of the company and it is no longer considered as solely a content aggregator.

Although YouTube is a late entrant in the streaming services space, it appears to have an advantage in terms of its huge library of original content and its popularity with the younger audience. We believe in future, a focus on good quality original content will be the key differentiator in this market.  Whether YouTube Red will be able to capture Netfilx’s market share will depend primarily on the quality of content offered by both players.

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Notes:
  1. YouTube Seeks Streaming Rights To TV Shows, Movies, The Wall Street Journal, December 2, 2015 []
  2. Meet YouTube Red, the ultimate YouTube experience, YouTube Official blog, October 21, 2015 []
  3. You Tube Statistics, Company Release []
  4. YouTube Statistics, Company Release []
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