Hey Google, Please Set YouTube Free

(Bloomberg Opinion) -- Shares in Google-parent Alphabet Inc. have lagged competitors so far this year. There is worry its faltering progress in artificial intelligence means the outlook’s not so hot for its core business of selling ads alongside search results. But one part of its empire, minimally detailed on the company’s filings like some side hustle, shows no sign of being knocked from its throne.

YouTube, the video-sharing site that has turned into an entertainment juggernaut, generated an estimated $45.1 billion in revenue last year and is watched more often on US TVs than Netflix. It is on course to be the biggest “cable” provider in the country by 2026.

With the company’s top brass fixated on solving its lackluster start in the AI wars and revitalizing its cloud business, the best thing for YouTube’s future is to be spun out into a separate concern that can cement its place, as analysts MoffettNathanson describe it, as “The World’s Leading Media Company.”

Needham analyst Laura Martin says “YouTube Inc.” could command a market value as high as $423 billion. Using pure-play streaming competitors as a benchmark, she calculates that, locked within Google, YouTube is undervalued by about 30%. YouTube’s valuation would sit comfortably above the likes of entertainment peers like Netflix Inc. and Walt Disney Co. In the world of social media, it would be worth more than TikTok,(1) Snapchat and Reddit combined. 

Most important, YouTube’s value would be determined by its competitiveness in markets it currently dominates rather than in the context of Google’s struggling position in AI against the likes of Microsoft Corp. and Amazon.com Inc. “A lot of investors are worried that generative AI will displace Google Search, so they would be very interested in owning YouTube standalone,” Martin said. “It wouldn’t have the risk of AI undermining the search business.”

YouTube’s position is strong and the outlook is good. In 2023, advertising revenue on the platform brought in $35.1 billion, up 8% from the year before. That represented just less than 10% of Alphabet’s entire revenue. Factoring in the money YouTube makes from various subscription plans, estimates MoffettNathanson, the platform’s revenue in 2023 was $45.1 billion and is set to grow to approximately $68.5 billion in the next two years.

Investors would welcome more insight into YouTube’s performance as it shifts from its legacy model — solely reliant on advertising — to more of a revenue mix, with subscriptions playing a bigger role. Only limited knowledge of YouTube’s underlying metrics is available, compared with other platforms, save for selective disclosures by Google executives. A standalone YouTube would be compelled to offer more data on daily active users, ad conversions and subscriber churn. (Relative to the rest of Google’s business, YouTube is just one small part, so the company is obliged only to break down its accounting into “material” chunks.)

External estimates and consumer surveys suggest such disclosures would only add to YouTube’s attractiveness for potential investors. We know, for starters, that young people have a muscle-memory-like instinct to engage with the service. According to Pew, 71% of US teens are on it daily (16% describe their use as almost constant) compared with its nearest competitor, TikTok, with 58%. Appeal among adults is even stronger, with 83% of adults saying they use it, far more than any other online platform. YouTube’s popularity holds across gender, race and income lines.

While YouTube made its name as a free service — much to the initial consternation of rights holders — the fastest growing part of its business is now persuading people to pay for more advanced features or added content. Currently, it offers YouTube Music, which competes with Spotify, and YouTube Premium, which removes advertising. Together, they brought in $6.5 billion in revenue in 2023, up 48% year-over-year, MoffettNathanson estimates. While other streaming platforms fight to fend off churn versus other similar services, with people ducking in and out of subscription plans based on the release schedules of popular shows, YouTube’s role as a seemingly limitless vault for all kinds of video — from concert clips to instructions on how to clean an oven — offers a more constant value for money. Better still, production costs for most of YouTube’s content are shouldered by creators, not YouTube.

And then there’s YouTube TV, its cable-like live TV bundle package, which the company used to undercut traditional cable companies before jacking up its prices to more than $70 a month — enough to pull in $6 billion in sales in 2023, MoffettNathanson estimates. YouTube TV is on course to have more paid subscribers than today’s largest cable TV provider, Comcast, by 2026. While other streaming platforms have to rely on acquiring their own expensive streaming sports rights, YouTube has been able to craftily piggyback the broadcasters that already have the most popular events in their lineup (while simultaneously also buying its own, such as the NFL’s Sunday Ticket).

All of this progress is happening under the stewardship of YouTube’s famous CEO … who? Who is it? If you know without looking it up, I’m impressed. I’ll give you half a point if you think it’s Susan Wojcicki, who had been in the job nine years before stepping down in February. She was succeeded by Neal Mohan, a Google insider who could likely walk down any street in Silicon Valley or Hollywood and not be recognized despite now having one of the most powerful jobs on earth.

This low profile may have served the larger Google monolith well since it bought YouTube in 2006 for a mere $1.65 billion — surely one of the smartest tech deals in history. As a subsidiary, YouTube has avoided much (though not all) of the scrutiny leveled at its peers in the social media space. When tech CEOs are hauled to Congress to answer to the consequences of social media, YouTube is often absent despite its clear role in steering people into deep and dark conspiratorial rabbit holes.

With everything else on Google’s plate, the advantages of keeping YouTube in-house are now outweighed by the opportunities and value growth offered by spinning it off. Ushering YouTube’s future as a more traditional-looking media conglomerate-of-sorts requires a sharper focus away from the frenzied activity elsewhere at Alphabet. At 19 years old, YouTube is ready to fly the nest.

More From Bloomberg Opinion:

• AI Is the Tie That Binds Frenemies Apple and Google: Dave Lee
• Google’s Bad Gemini Rollout Did the World a Favor: Clive Crook
• US TikTok Addiction Isn’t Just China’s Fault: Karishma Vaswani

(1) Based on TikTok's most recent internal valuation following a private share sale, according to data from Pitchbook.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Dave Lee is Bloomberg Opinion's US technology columnist. He was previously a correspondent for the Financial Times and BBC News.

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