The Value of YouTube
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Google (NASDAQ: GOOG) does not disclose sales or profit margins coming from YouTube and, probably for that reason, many analysts and investors are underestimating the true value of the video platform and its long term potential in the video streaming business.
The discussion about video steaming companies is mostly centered on companies like Netflix (NASDAQ: NFLX) and Hulu, while Amazon.com (NASDAQ: AMZN) is considered another big player with strong potential to compete. However, while these companies are struggling to add more content to their platforms, YouTube users do the work by themselves.
We may say that user uploaded content is not as valuable as what Netflix, Hulu and Amazon are providing and that´s certainly true on a per unit basis. However considering the whole platform, I wouldn´t dare to say that YouTube is less valuable than any of these streaming video businesses.
There is a lot of unattractive content uploaded daily on YouTube, but people are uploading 48 hours of content per minute for almost no cost to the company. And many YouTube videos have become really relevant over the last years; Justin Bieber started his career as a YouTube phenomenon, to name one famous example.
According to data from comsCore, YouTube is the most watched video platform in the US by a wide margin. And the New York Post reports that YouTube currently has an audience of 800 million users around the world who watch some three billion hours of content a month. If you have a lot of content and a lot of viewers, I say you have a business with some seriously big potential, even if you are providing the service for free.
Television has been in the business of providing free content to viewers through decades while making some serious money from advertising. Conveniently, Google is the undisputed leader in the global online advertising business, so that makes a very interesting combination with exciting long term potential.
Furthermore, YouTube is not only a video streaming platform; it’s also a social network: people upload content, share that content, comment on the videos, follow each other, etc. In YouTube you can follow your favorite band´s official channel and some unknown person from another country which uploads funny videos of a dog doing stupid things. You don´t need to think too much about it, because it’s free, and that makes for a great way to discover interesting things.
The network effect is a crucial factor behind the success of the platform: if you are uploading content you want to go where the viewers are, and as a viewer you value quantity and diversity. More users add value to the service, which also attracts more users, which leads very strong competitive advantage.
As if all this weren´t enough, YouTube has slowly been entering the paid content business, which doesn´t mean leaving its existing business behind, but adding a new service to a huge and popular distribution platform.
The fact that YouTube numbers are not known with certainty doesn´t mean investors should disregard the importance of such a powerful platform. After all, if you buy Google at current levels you are paying a P/E ratio below 18, which doesn´t sound excessive at all for the online search powerhouse. If you add into that equation the tremendous potential of YouTube, things could look quite interesting from a long term perspective.
acardenal owns shares of Google. The Motley Fool owns shares of Amazon.com, Google, and Netflix. Motley Fool newsletter services recommend Amazon.com, Google, and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.