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Should Netflix Be Afraid of YouTube?

By James Brumley - Updated Mar 15, 2021 at 2:20PM

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The short-form streaming platform is growing its reach in a place nobody would have expected just a few years ago.

YouTube is slowly but surely becoming a key entertainment venue on TV sets in people's homes rather than just on computers and mobile devices.

To be clear, it's still far from being the king of television. Even with pandemic lockdowns in place, viewership numbers from Nielsen show streaming accounted for only 25% of TV usage time in the second quarter of last year, with Netflix (NFLX 3.07%) being the most-watched streaming service. But a preponderance of evidence suggests that an unlikely YouTube is actually making inroads where it seemingly shouldn't.

Shareholders of YouTube parent Alphabet (GOOG -0.05%) (GOOGL 0.03%) should be thrilled, particularly after last quarter's earnings report. And yes, Netflix investors should be at least a little concerned -- as should owners of other streaming stocks.

Concerned man staring at a computer screen.

Image source: Getty Images.

Plenty of TV time

In a blog post published last week, YouTube's chief product officer, Neal Mohan, said that in December 2020, "over 120 million people in the U.S. streamed YouTube or YouTube TV on their TV screens."

It's a curious but forgettable footnote by itself, but a detail that takes on much more meaning in light of other details.

One of those details is found in Conviva's fourth-quarter report on how consumers entertained themselves during the last quarter of 2020. The market research outfit touted YouTube as the only social platform to increase viewing time in all four categories of content it monitors (entertainment, media, brands, and sports). Connected TVs had a lot to do with that.

In the same vein, eMarketer reports connected television's total YouTube views in the third quarter of 2020 accounted for 34.4% of the platform's views, up from 27% about a year earlier, and well up from 18.3% the year before, and 12.2% the year before that.

YouTube shows strength in the growing AVOD market

While the trend has been underway for some time, it's only recently reached the tipping point to where it can't be ignored by the cable television industry or the streaming industry: YouTube is starting to draw some serious advertising dollars.

Looking back to last quarter's results fleshes out the idea: During the three-month stretch ending in December, YouTube's ad revenue grew 46% from $4.7 billion a year earlier to nearly $6.9 billion last quarter. For perspective, that's only 15% of Google's total ad revenue, and a smaller fraction of the $70 billion or so advertisers hand over to the U.S. television industry in years not impacted by a global pandemic.

The disparity is the core of the opportunity, however, and it's an impressive opportunity given a detailed backdrop for the television advertising industry.

Simply put, the line dividing traditional television advertising budgets and online or ad-supported video advertising budgets is blurring in a way that favors the streamers. Media research outfit Zenith estimates worldwide ad-supported video on demand (or AVOD) advertising spending will grow at an annual clip of 8.4% through 2023, jibing with AVOD growth outlooks from MoffettNathanson Research and Digital TV Research. This is in contrast to traditional cable TV's advertising revenue in the United States, which had been near stagnant for years, but started to sink a year before the COVID-19 pandemic took hold.

This makes something else YouTube's Mohan said so incredibly interesting. In the same blog post he points out: "According to Comscore, 82.5 percent of CTV reach in the U.S. falls on only five streaming services: Netflix, YouTube, Amazon Prime, [Walt Disney's] Hulu, and Disney+, but only two sell ads. 41 percent of all ad-supported streaming watch time in the U.S. happens on YouTube."

Connect the dots

But Netflix is a premium ad-free service whereas YouTube is a free ad-supported platform. Right?

Sure, but don't dismiss the potential for these dividing lines to continue to blur. A Deloitte survey taken a couple years ago puts things in perspective, suggesting the average viewer will digest about eight minutes' worth of ads per every hour of video if it makes that content free. 

Ampere Analysis also noted last year that U.S. consumers are apt to stack about five streaming services on top of another, with as many as eight separate services being possible. Again though, they won't necessarily be paying for all of them. Some of them are going to be piped in for free, subsidized by television commercials.  

It's overstating things to say YouTube's growing reach spells doom for Netflix, Amazon Prime, or Disney's streaming services. But in a market that's quickly becoming hypercompetitive and is increasingly crowded -- subscription fatigue is very real -- it's not too soon to put your finger on the pulse of the obvious trend. Consumers are only going to spend so much money on video content in any given month.

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