When investors think of how Google, the Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) subsidiary, makes money, they think "advertising." Google generates revenue from other sources -- selling subscriptions and devices, for example -- but its moneymaker is ads.
So it shouldn't be a surprise Google is refocusing some of its efforts on advertising. Its latest moves are offering an ad-supported version of Google Music for Google Home owners and plans to offer YouTube Premium content and future original series to everyone with ads.
The company has had modest success selling subscriptions. YouTube TV, for example, has over 1 million subscribers. But management clearly sees an opportunity to generate additional revenue by using an ad-supported model. Not only could moving to more ad-supported content boost revenue for Google in the near term, it might be able to open the door to more premium advertising opportunities in the future.
Getting something for the investment
YouTube invested a lot of money in video content over the past couple years. While not as much as some companies trying to get a streaming service off the ground, YouTube's budget was rumored to be in the hundreds of millions per year -- not chump change.
If YouTube premium subscribers are stalling, the company has an incentive to maximize revenue through ad-supported streaming windows. And management says there's a lot of demand for its shows. "'Cobra Kai' is the most in-demand digital original series in the world right now," Kate Stanford, head of global advertiser marketing at YouTube, wrote on the company's official blog.
YouTube is better-positioned than just about anyone else to monetize its content through ads instead of subscriptions. YouTube has 1.8 billion users on its ad-supported platform. And those users generated an estimated $15 billion in revenue last year. It has the right combination of an audience to distribute content to and the ad platform to monetize them.
Google faces a similar situation with its music-streaming service. It offers record labels a revenue share, but most music-streaming contracts also include an up-front guarantee. If Google isn't attracting a lot of subscribers, offering an ad-supported version of Google Music will help it grow streaming revenue. Meanwhile, including free streaming with Google Home devices might convince non-owners to buy a device, offering Google another touch point in consumers' lives.
Opening new opportunities
Google's decision to offer YouTube Premium content via its ad-supported platform gives it more premium content for its Google Preferred program. Google Preferred gives marketers the opportunity to only advertise against the top 5% of content on YouTube. That prevents situations where brands see their products advertised next to objectionable videos.
YouTube originals aren't the only content Google is planning to include in the Google Preferred program. The company is also opening up YouTube TV ad inventory to Google Preferred advertisers. As a distributor, YouTube TV gets about 2 minutes of ads per hour of television programming.
That sets the table for Google to expand its Google Ad Manager business for television advertising. The company currently has a small presence in the massive $70 billion television advertising market, where it competes with Comcast's Freewheel. If Google can connect Google Preferred demand with Google Ad Manager supply, it could win a larger share of the broadcast market.
A bigger push into the television ad market could give Google a boost right as it's seeing its ad revenue growth slowing again. The company's first-quarter results disappointed shareholders with its fourth consecutive quarter of decelerating ad revenue growth. At the very least, a bigger push into ad-supported services, instead of exclusively offering subscriptions, ought to help stymie the decline.