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Will YouTube Begin Printing Profits in 2016?

By Andrew Tonner – Dec 21, 2015 at 5:21AM

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These two new initiatives could help Alphabet's YouTube finally tap into its massive profit potential in the year to come.

Source: YouTube Red.

Looking at the streaming video and music markets, one could fairly argue each has shifted from freewheeling expansion to consolidation among a few select incumbents, a paradigm shift that will fundamentally alter the balance of power in this multibillion-dollar market.

Apple (AAPL 1.56%) finally grew serious about on-demand by launching the long-overdue Apple Music in June. On-demand early mover Spotify continues to surge toward 100 million users. Pandora (P) has finally moved to reverse years of product mismanagement by purchasing Rdio's on-demand assets. 

However, for a number of reasons, Alphabet's (GOOG 2.65%) (GOOGL 2.81%) YouTube might be the most intriguing name in the digital content space at present, a fact clearly borne out by two of the company's recent moves.

2016: The year of YouTube?
YouTube has always been a juggernaut in the media and tech industries. The site consistently ranks as the third most frequently visited website in the world, behind Alphabet's Google homepage and social media power Facebook's homepage. And in terms of total songs played, Alphabet's YouTube is the world's most popular music service.

However, even amid sales in excess of $4 billion in 2014 and over 1 billion total users, Alphabet has largely managed YouTube to break even in recent years. However, that will likely end next year thanks to a long-anticipated shift in business models at the online entertainment maestro.

First, Alphabet's expansion of its YouTube subscription music service will be one of its most important storylines in the coming year, not to be confused with its other paid music service -- Google Play Music. Last month, YouTube launched a dedicated YouTube Music app that allows users to stream and discover songs and music videos. Like Spotify, the service has a free, ad-supported version as well as a paid ad-free subscription tier. Predicting the service's success remains anyone's guess, as Alphabet has yet to release Initial subscriber numbers. However, given the immense popularity of the platform, the multiple new pathways to Alphabets subscription music plans should help increase YouTube's average revenue per user (ARPU) and push the platform toward profitability in the coming year.

Beyond music, Alphabet is reportedly working behind the scenes to secure the streaming rights to TV shows and movies in an effort to augment its fledgling music service. According to reports, YouTube executives have held discussions with production companies and major Hollywood studios to develop video content licensing deals that would more directly pit YouTube against the likes of Netflix and's Prime streaming service. Although the exact subscription structure and timeline isn't immediately clear, the new content would also likely be parceled into YouTube's Red subscription service, which could help further transform the website into a profit center for Alphabet.

Source: YouTube.

YouTube looms large
To be sure, YouTube has all the makings of a competitive titan in the streaming music and video spaces. However, the platform will also need to navigate a few key obstacles in order to become a financial force in both streaming music and video.

For starters, YouTube is largely associated with free or, more correctly, ad-supported content. Although certainly not a given, it will be interesting to see whether Alphabet's media platform can convince consumers to gravitate toward paid subscriptions. Timing could also prove an impediment. Though hoards of users access YouTube's free service, its competition, Pandora and Spotify in streaming music, and Netflix and Amazon in streaming video, have been acquiring subscribers for years now. Although it also enjoys a huge installed base, many suspect Apple Music faces an uphill battle in on-demand music simply because it's unfortunately late to Spotify and Pandora's party.

Overall, given its sheer size and the unique, but much beloved, user-generated content it controls, YouTube's competitive threat shouldn't be underestimated by investors in Pandora, Amazon, or Netflix. I'm cautiously optimistic that Alphabet's emerging media powerhouse has the size and ability to create compelling subscription offerings in both music and video.

While we're clearly in the early innings of this storyline, there's plenty of reason to believe 2016 could be the year YouTube finally taps into its outsized profit potential.

Andrew Tonner owns shares of Apple. The Motley Fool owns shares of and recommends Alphabet (A and C shares),, Apple, Facebook, Netflix, and Pandora Media. 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.

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