There was an interesting article in Seeking Alpha that evaluated Netflix’s stock as overpriced. The argument began by “establishing” that distribution is more valuable than content from a value chain perspective. The author then framed Netflix as a distribution company within that context, and used YouTube as a comparable platform. Finally, the article went on to discuss the differences between Netflix and YouTube and skewer the current valuation.
Forget for a moment whether or not you agree with the comparison between YouTube and Netflix, and focus on the exercise of considering YouTube’s role in the future ecosystem. Right now, it is clearly a distribution company. But it is also a technology company, a CMS, a media company, and a massive search engine. And it’s global. So how does this sudden Goliath think about the future? Here are the areas of vulnerability:
Search & Smart TV Convergence: While it’s clearly the largest and most recognizable video platform and search engine, YouTube is vulnerable to any of the current and coming systems that aggregate search across screens. Search across all video reduces YouTube’s position, because the consumer viewing experience is not as good as Netflix or Hulu, for example. So given a choice of channel, consumers may not select YouTube. Just as Spotify and Pandora themselves are not genres of music, yet are able to enhance the listening and discovery experience, YouTube must figure out how to be less of a repository and more of an experience.
Branding: YouTube as a brand is a bit of a garage sale – you can seemingly find one of everything there. But consumers know that there are niche brands that deliver a certain kind of content, and YouTube itself has struggled to capture that level of branding, despite trying subscription and preferred partner approaches. So channels like Machinima, Comedy Central, and Awesomeness have more ability to maneuver with their brands than YouTube does, which is an insulator. From a branding perspective, it is vulnerable to niche channels that provide unique content.
Relationships: YouTube is expensive, both for advertisers and for content creators. Content creators get excellent, innovative support from YouTube in terms of infrastructure, but they give up a significant share of revenue. Yahoo is betting that creators will ultimately choose to leave for platforms that share a higher portion of revenue.
Ad agencies have some issues with YouTube’s analytics and its closed systems, which frequently block video overlay, annotation, or integration products. YouTube needs to innovate in technology from a brand and agency perspective. Finally, the MCNs (like Maker.TV) and Vevo may begin to move some exclusive content off-platform if they think they can do it. YouTube will need to find a way to keep those groups happy to continue the symbiotic relationship.
Programmatic Buying: As cross-screen programmatic buying increases, these automated systems won’t care where they find an audience. As noted, YouTube does have amazing infrastructure, and it’s extremely efficient and capable from a technology point of view. But it is expensive and restrictive in its data sharing. If programmatic is about price and efficiency, money may automatically start to move as more video channels emerge. On the other hand, it’s worth noting that all of the jockeying for high quality content and “YouTube stars” is an indication that programmatic has a ceiling.
It’s possible that this sounds like an indictment of YouTube. It’s not. This is still an amazing, leading platform with unmatched scale and awareness, as well as strong revenue and profit. But things change very quickly in digital video, and there are harbingers of things to come in areas where YouTube has not been able to capitalize. The growth of video in general means that new ideas and start-ups or pivots will never end, and YouTube will need to innovate to maintain its position.