Want to invest in one of the best, most innovative startups in the world with taking none of the risk associated with a startup, and more potential upside than many of the most popularly watched private market web names like Facebook? Look no further than the strongest brand hiding behind the Google Inc NASDAQ:GOOG" rel="nofollow" >(NASDAQ:GOOG) name: YouTube. YouTube is turning into a huge business, and were it a standalone start-up, the company would easily be one of the most valuable Internet companies and one of the most hyped. Instead we hear little about YouTube’s business other than the obligatory question and non-answer answer on each Google quarterly conference call about when/if/how much money YouTube will make.
Today, YouTube seems even more an afterthought in the narrative about Google the company than Android and Google + and I can’t help but find the irony and humor in it all. While everyone is waiting for Google’s true “social” answer, and even Google itself is out there searching (pun intended), YouTube is in fact a social, technology and media behemoth in its own right. After all, it is the place where “going viral” became the thing to do (speaking of which, here’s a cool video with Kevin Alloca, YouTube’s “trends manager” on what actually makes a video go viral).
Facebook is the startup darling of the world, Netflix at times has been the streaming superstar, and Apple is…well…the apple of everyone’s eye. Meanwhile in between watching hours of YouTube videos a day, everyone forgets that a) YouTube has an amazing business model and b) Google is both cheap and sitting on a competitive Trojan Horse. Let me explain.
The Cost of Content
I’m oversimplifying here, but in content, there are the producers, the distributors and the consumers. When anyone talks about content distribution companies, and video in particular, the cost of content is important in determining the bottom-line profit. The true advantage of streaming video is that on a relatively small fixed cost base, a distributor can reach every web-connected person on Earth. In an ideal world, that sounds like a simple and great business, but the content producers have only been willing to engage the distributors with largely one-sided terms.
The content producers know full well the value in distributing via the Internet, so they even created their own distribution service—Hulu.com. Netflix has used its DVD business, the company’s cash flow machine, in order to fund content acquisition for its streaming service. As streaming has gotten easier and more popular amongst the masses, many have fled DVDs for streaming, thus forcing Netflix to improve its content mix online. As their early contracts expired, the company found itself having to negotiate in a position of need with the studios, and since then has paid a hefty price.
Meanwhile, YouTube just keeps doing its thing. Worldwide, people view 3 billion YouTube videos per day, which for perspective is “the equivalent of nearly half the world’s population watching a YouTube video each day, or every U.S. resident watching at least nine videos a day.” While Netflix and Amazon our out paying (more like begging for the right to pay) for content, YouTube users are willingly uploading 48 hours of content per minute for FREE. Granted not all YouTube content is as desirable as the content others are paying for, but considering how many people watch videos on the site every day, it’s safe to conclude that at every minute YouTube is gaining more valuable content at no expense.
With this recipe, YouTube has become the most watched online video site by a mile (h/t toTechCrunch for the chart):
In the process, YouTube has already become a heavily entrench business with a strong brand name and strong brand loyalty. When people talk about the competition for online video success, particularly in financial circles, the competition pits Netflix against Amazon, with Apple sometimes entering the fray and Google a total afterthought. That needs to stop.
As of today, YouTube has already reached deals with CBS, BBC, Universal Music Group, Sony Music Group, Warner Music Group, the NBA and the Sundance channel, amongst others (contract list from the CrunchBase). Some of these deals were reactionary to growing pressure from content producers at the copyright infringing uploads done by YouTube users, but at the end of the day, these content deals have done a whole lot to enhance the quality of the videos available on YouTube and entrench the site as THE go to platform for video.
Notice a theme with these content deals? Many of the early deals are music-centric. There is no better place on the Web to watch high quality concert video than YouTube, nor is there a better place for an artist to debut their new song via a video (even VEVO uses YouTube), with MTV now a soap-opera-type channel lacking any coherent connection to music. Witness Cee-lo Green’s catchy release ofF*ck You with the words literally dancing across a blue projection screen. This was both a powerful and catchy way for Cee-lo to get his song out to the masses, and was a catalyst behind the song’s ascent on the pop charts.
YouTube the Platform
The Cee-lo release provides the perfect segue to YouTube as a platform. YouTube is a disruptive medium in itself, but more interestingly it has become a platform upon which other disruptions are launched. At the same time, YouTube has also become a video platform that is ubiquitous across all viewing platforms. Although a web-page in itself, YouTube is a “channel” (rather app, but what’s the difference these days?) on any web-enabled TV device from designated viewing devices like the Roku or AppleTV to gaming systems like the Xbox. The point is that YouTube has both incredible reach to its audience, and is an innovative vehicle for some of the world’s foremost innovators. Even Apple can’t deny this reality.
In addition to debuting singles on YouTube, there are successful artists who owe their entire careers to the medium. Look no farther than Justin Bieber (geez I promised myself that name would never be typed into this blog…), someone who would never have been “found” had it not been for the site. Bieber isn’t alone. Daniel Tosh has built an incredibly popular show on Comedy Central based entirely off of YouTube videos, and the Young Turks have become serious news pundits from their YouTube show.
Louis CK, a comedian with a strong cult following, used YouTube in an entirely new way by releasing his “Live at the Beacon” directly through the platform. “Lucky” Louis went on to sell this show for $5, with customers able to pay and watch instantly. This is far cheaper than a DVD retails for, and a much easier way to directly connect with an audience. The move was both highly profitable for Louis, and rewarding for his fan base.
When you have a business that works better for all the parties directly involved than the existing business model, you have a powerful force. It’s cheaper for fans, more profitable for the artist, reaches a far wider audience than anything else, and has fewer intermediaries taking a cut. Stuck in the middle is YouTube/Google easily (and happily) collecting its margin. It’s only a matter of time before more artists follow Louis down this path.
And YouTube’s appeal isn’t limited to music, comedy and entertainment. The Khan Academy is using YouTube as platform to disrupt education. While it is a non-profit that produces free, high quality educational content for view via the YouTube platform, let’s not dismiss the fact that the Khan Academy is proving the power of the platform as a way to not only reach those interested in learning, but to fundamentally change the way eager students learn. TED Talks has also used YouTube in a similar manner as a platform to bring informative, educational videos to the masses. We’re only just beginning.
YouTube and the Innovator’s Dilemma
YouTube is following the path of the Innovator’s Dilemma, and all of the dominant market leaders in the sectors impacted by the company are already on high alert (if you haven’t already done so, goread the book now, or for a short-cut read my blog post on it). YouTube has firmly entrenched itself on the low-end of the video-watching marketplace, and I mean this both in terms of Internet video, and video in the broadest possible terms. Further, YouTube has significantly deflated the cost of distribution and consumption, making both effectively free in many contexts for the content producer and the viewer respectively. In doing so, YouTube generates a fairly high margin on its advertising dollars on.
As YouTube has earned more and more money on the “low hanging fruit” (aka the free stuff) they have been able to step up their acquisition of premium, higher quality content. Some of the aforementioned deals are evidence of this. In other words, the company is using its entry level product, which has helped it gain market share, in order to fund