One of the most prominent signs that the advertising market had taken a turn for the worse in 2022 was when Alphabet (GOOGL 0.66%) (GOOG 0.56%) reported its third-quarter 2022 results showing that YouTube ad revenue shrank 2% year over year, the first ad revenue decline for YouTube since the parent company started breaking out those results in the company's fourth-quarter 2019 earnings report. Management blamed its video platform's lackluster results on difficult comparisons to the previous year's robust revenue growth and a terrible economic environment.
Some shareholders also feared that competition from TikTok, a new social media platform for sharing short-form videos, was finally pressuring YouTube's ad revenue. The fact that data.ai -- formerly called App Annie -- globally ranked TikTok as No. 1 in user engagement, the top downloaded app, and the top app in consumer spending in 2021 also had not gone unnoticed.
Things weren't any better for YouTube when Alphabet reported its fourth-quarter 2022 results, showing the video platform's advertising revenue continued its downdraft with an 8% year-over-year decline. Worse, shortly after the earnings release, long-term YouTube CEO Susan Wojcicki, the person credited for Google acquiring the video platform in 2006, announced her retirement on Feb. 16.
Considering that YouTube is its second-largest growth engine, should Alphabet investors be concerned?
Susan Wojcicki didn't leave the cupboard bare
Well before YouTube ad revenue fell, Wojcicki began crafting her counter to the TikTok challenge by developing a short-form video product, YouTube Shorts, and releasing a beta version in India in September 2020. The company released its final Shorts version in over 100 countries in July 2021.
So far, YouTube Shorts is growing like a weed. It was up to over 50 billion views per day by the fourth quarter of 2022, compared to the 30 billion it had reached in the first quarter of 2022. In addition, management might have figured out how to maintain this momentum and take viewing share away from TikTok by making Shorts a far more attractive platform for the best content creators to place their content.
Starting in February 2023, YouTube Shorts started using an advertising revenue share system, enabling its content creators to benefit from advertising growth on YouTube Shorts. This new compensation system replaces the old system, the YouTube Shorts Fund, which distributed a fixed pool of $100 million over a year to content creators. The YouTube Shorts Fund was similar to TikTok's Creator Fund compensation system, which many content creators dislike. A fixed-fund system caps the upside content creators can earn and also make content creators feel cheated.
So far, YouTube Shorts content creators have been pleased with the new and improved compensation system.
Wojcicki left YouTube in a far better competitive position against TikTok and other short-form video platforms from Snap and Meta Platforms before she passed the baton to the skilled hands of new YouTube CEO Neal Mohan, who joined Google as part of the DoubleClick acquisition in 2007 and has been part of YouTube as chief product officer since 2015.
Keep an eye on its subscription businesses
Most investors rarely discuss YouTube's subscription business because management buries the results within "Google Other Revenue," which includes revenue from the Google Play Store and hardware products like Pixel Phone, Nest Doorbells, and Google Home.
However, the video platform has several interesting subscription businesses that investors should pay attention to, like YouTube TV, which at more than 5 million subscribers, is the largest multichannel streaming platform measured by subscribers, surpassing the market share of Hulu Live in 2022, according to nScreenMedia. Additionally, in September 2022 Nielsen ranked YouTube TV the top streaming platform in the U.S. by TV viewing with an 8% market share, surpassing Netflix's 7.3% market share and Hulu Live's 3.8% market share.
The cherry on top is that it recently landed the exclusive rights to distribute NFL Sunday Ticket. Management believes the deal will produce an attractive rate of return through three opportunities, which CFO Ruth Porat talked about at the Morgan Stanley Technology, Media, and Telecom Conference in February, saying:
One is the opportunity to extend subscriber growth on YouTube TV. The second is the opportunity to offer a stand-alone premium channel subscription for the NFL Sunday Ticket, distinct from a YouTube TV subscription. And the third, which is really interesting, is the opportunity with our top YouTube creators to offer them exclusive NFL content and see what they can do.
Shareholders should also remember that the company has two other significant subscription businesses: YouTube Premium, which enables subscribers to view YouTube and YouTube Music without ads; and YouTube Music Premium, which allows subscribers to see music videos without ads. Both premium services, when combined, recently exceeded 80 million subscribers and have huge growth potential.
Looking to the future
Some other initiatives coming down the pike with high future growth potential are the company making it easier for content creators and brands to sell products and services on YouTube and also, the creation of generative artificial intelligence (AI)-powered tools for content creators.
The company has yet to describe what its AI tools will be able to do. Still, one can imagine that its future generative AI tools will incorporate many of the features of existing third-party AI video generators, like helping content creators with idea generation, using different backgrounds, adding or deleting items in a video, avatar creation, and making videos in other languages -- imagine the possibilities.
Suppose you are an Alphabet shareholder; you have little reason to be concerned about YouTube's future. On the contrary, it remains the most attractive online video property, with plenty of avenues for future outsized growth.
