In a few months, YouTube will be celebrating its 12th anniversary. The most popular video service on the planet changed a lot in the meantime, but at its core, it always remained true to one idea – delivering free video content to its users and making money from advertising. Well, that business model recently started diversifying after the Alphabet-owned video platform introduced YouTube Music Key which it consequently expanded and rebranded as YouTube Red. The concept of this subscription is rather simple – for $9.99 per month, you eliminate all advertising on YouTube and also get access to some exclusive content. Is that enticing enough? Possibly, but $9.99 a month is also around what you pay for Netflix. Now, YouTube Red is currently financing some rather high-profile projects in addition to providing its current stars with funding to produce high-quality content but can videos from PewDiePie and Shane Dawson really compete with the likes of House of Cards, Narcos, Stranger Things, Daredevil, Arrested Development, and Orange Is The New Black? Yeah, probably not. Then there are thousands of other popular movies and series Netflix is hosting in addition to producing award-winning series and quite literally changing the landscape of visual media, all for $9.99 per month for an HD subscription.
Well, it seems that YouTube is finally starting to realize that. Sure, the service is still just gaining traction and has yet to roll out in most territories worldwide, but the Alphabet-owned company wouldn't be where it is today if it wasn't capable of increasing its competitiveness. At the moment, YouTube Red is only available in the United States, Mexico, Australia, and New Zealand. That's not a lot of markets for a product that launched over a year ago, but YouTube's strategy is now finally coming to light. It seems that before conducting any major expansions, YouTube Red will do its best to offer customers better value for their money.
More specifically, latest reports from The Wall Street Journal and Variety suggest that YouTube is planning to transform into an actual TV service. Sources with an intimate knowledge of the matter are claiming that the company already has a content agreement with CBS and is working on a similar deal with Disney and 21st Century Fox.
If that actually ends up happening, this is the perfect opportunity for Google to perform a corporate spin-off and let YouTube operate on its own. Now, what is a spin-off and why would it make sense for YouTube? As its name suggests, it's an act of splitting the company from its parent by giving its stock to the parent's shareholders. While spinning off a subsidiary is still one of the rarest corporate activities there is, for one reason or another – investors love it. Spin-offs usually lead to increased sales and growth which consequently results in rising stock value, not to mention the fact that capital markets aren't prone to valuing a diversified group more than the sum of its parts. This so-called "conglomerate discount" is another reason why Alphabet's shareholders would most likely benefit from spinning off YouTube.
In addition to that, YouTube already has most of the necessary personnel to act on its own. Back in early 2014, Google appointed Susan Wojcicki, a renowned American technology executive as the CEO of YouTube. Having been involved with Google since the late 90s, Wojcicki's appointment was originally seen as more of a promotion than a strategic appointment, but these days, she's talking about YouTube as a successor to traditional television and clearly has a lot of ambitious plans for the company. Speaking at a Fortune event held earlier this month, Wojcicki described the fact that people under 35 are moving away from conventional TV services as a tremendous opportunity for YouTube.
Couple that with the aforementioned content deals with CBS and other major content creators and you have a perfect platform for a spinoff. If YouTube becomes a major player in the online TV market, Alphabet could get in trouble with antitrust watchdogs seeing how it would be able to control YouTube Red content, delivery of the thereof via Google Fiber, and advertising on the platform via Google AdWords. Traditional cable service providers certainly wouldn't sit idly and watch that happen as they'd probably jump at the first opportunity to complain to regulators about the unfair advantage YouTube would have as a subsidiary of one of the largest tech giants on the planet.
So, if Google, i.e. Alphabet would separate YouTube from its core business, that would preemptively solve a lot of these potential issues given how the company would then have enough freedom to partner with other advertising and distribution networks. Calculated use of these options would probably be enough to avoid too much scrutiny from regulators and the industry itself. In other words, YouTube is showing visible signs of wanting to transform YouTube Red into a comprehensive, general purpose TV subscription service but before it can do that, it has to consider that move in the context of already controlling a significant part of the media distribution and online monetization landscape in the US. Spinning off YouTube into a separate entity isn't the only solution to potential issues that could arise if YouTube Red starts competing with the likes of Hulu and Netflix, but it certainly seems like the most convenient one.