Will Alphabet Inc (NASDAQ:GOOG)’s YouTube Red Take A Toll On Legacy YouTube?

Initially, there is a thin line between Alphabet Inc (NASDAQ:GOOG) (NASDAQ:GOOGL)’s YouTube Red (paid) and YouTube (free) in terms of content. Alphabet said that 99% of the existing YouTube publishers have agreed to cross sell their content on YouTube Red platform. YouTube Red is clearly Alphabet’s strategy to join the over-the-top video movement that has made Netflix, Inc. (NASDAQ:NFLX) and others rich and popular. Will Alphabet spell doom for its ad-fed YouTube in favor of subscription revenue?

Alphabet Inc (NASDAQ:GOOG)’s core business (Google) is built on digital advertising. Through YouTube, the company serves ads against digital videos and shares revenue with content producers. When announcing YouTube Red, Alphabet stated that the move was an answer to what its video fans wanted. YouTube Red is YouTube without ads but supported by subscription fee of $10 per month.

Jostling for a slice of the future

Because of the dynamic nature of the digital world, Alphabet cannot afford to miss the boat in the subscription video wave. In any case, the likes of Netflix and Amazon.com Inc. (NASDAQ:AMZN) have made subscription video a lucrative business. However, you also see that YouTube Red is more of a hedging strategy than a growth move. It seems Alphabet is taking early measures to ensure that it is on safer grounds if ad-fed video offering loses its traction. As an ad-fed business, Alphabet is cautiously optimistic about the rise of subscription video services because it can significantly disrupt its core business.

Perhaps Alphabet is betting that transition to subscription video will be gradual and take many years before ad-fed video services completely fall out of favor with consumers. The fact that most of the content currently available on YouTube will also be accessible through YouTube Red shows a thin line between the two video services. Nevertheless, producers will naturally favor posting their content on YouTube Red because of more predictable revenue on the subscription platform.

The tough question of the YouTube Red move

With exclusive content growing on YouTube Red, current YouTube consumers will be pulled to the subscription service, abandoning the free ad-supported YouTube. However, can Alphabet stand the death of legacy YouTube? What impact will the rising practice of skirting ads have on Alphabet’s other ad-fed businesses? These are tough questions that Alphabet management will have to struggle to answer as the company embraces subscription video offering.

It seems that while YouTube Red is a sensible move by Alphabet to be part of the future in digital video distribution, the disruption could be far-reaching and at magnitudes beyond anticipation.

Neha Gupta

Neha Gupta has been in the financial space for over six years now. Gupta earned her MBA degree from Symbiosis Centre of Distance Learning in 2009 and her passion for finance led her to pursue Chartered Financial Analyst (CFA) course. She has successfully completed Level II of her CFA. She is a veteran in article writing, which is depicted in her numerous pieces published on SeekingAlpha, Nextiphonenews, InsiderMonkey, MarketWatch, and Techinsider. Her crisp and eloquent writing finds its best place in Researchcows, where emphasis is given on developing rich content for various websites, products, business plans, trainings, and book writing.

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