Why Did YouTube Launch YouTube Red?



YouTube’s video advertising business

Before looking at the reason Alphabet’s (GOOG) YouTube is pursuing content streaming rights, it’s important to consider why YouTube launched YouTube Red in the first place. We should look at this particularly considering that YouTube’s core business of video advertising is doing exceedingly well. YouTube has more than a billion users globally.

Currently, YouTube offers a wide array of free videos in various languages, appealing to diverse audiences around the world. It makes it an attractive medium for advertisers to target niche audiences.

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YouTube’s video advertising revenues expected to decline

YouTube has maintained its leadership position in the US video advertising market over the years. According to a report from eMarketer, YouTube will continue to maintain its top position in the years to come, although its share in the US video ad market will decline to some extent. As the graph above shows, it’s expected that YouTube’s share of the US video ad market will fall from 20% in 2015 to 17.7% in 2017.

This fall is expected due to increased competition from Facebook (FB) and Twitter (TWTR). Facebook has become a serious player in the video ad market. So far, it’s been focusing on autoplay video ads in its users’ news feeds. However, it’s also started to experiment with other video formats such as Suggested Videos.

With the launch of its autoplay feature, even Twitter is looking to leverage this fast-growing market. Videos play automatically on a user’s timeline but are muted as the user scrolls down the timeline.

Alphabet has stated in its 3Q15 earnings call that YouTube is seeing a need to provide premium content to its users. That could have prompted YouTube to launch its subscription streaming service and introduce a new revenue stream in the process.

The iShares US Technology ETF (IYW) holds 18.4% of Apple (AAPL). For investors interested in application software exposure, IYW has an exposure of 40.2%.


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