Thursday, January 18, 2018

YouTube: I've Seen This Movie Before






About: Alphabet Inc. (GOOG), GOOGL, Includes: FB

Summary

Alphabet will further tighten the criteria required of content producers to be able to advertise on YouTube.
I believe the move is inevitable in the face of sector-wide concerns over the quality of content distributed on the web.
I believe players like Alphabet and Facebook are ultimately much better positioned (read: deep pockets) to fight the threats.
This idea was discussed in more depth with members of my private investing community, Storm-Resistant Growth .
YouTube's early 2017 ad fiasco is the gift that keeps on giving.
Parent company Alphabet (GOOG, GOOGL) announced today its next move to curb malicious activity on its online video platform, and will further tighten the criteria required of content producers to be able to advertise on YouTube. The move follows the previous policy that demanded a minimum of 10,000 lifetime views from contributors to qualify for YouTube's partner program. The threshold now has been changed to 1,000 channel subscribers and 4,000 hours of content viewership over the previous 12 months.

(Credit: TechPrevue)

When too much openness is a bad thing

Some may see Alphabet's initiative as restrictive of video creation, particularly as those who lack the necessary scale to earn ad dollars on the platform would have less of an incentive to produce content. Ad impressions could not only dip (although YouTube argues that "the creators who will remain part of partner program represent more than 95% of YouTube's reach for advertisers") but also be more concentrated in the hands of fewer accounts, who would likely be the main beneficiaries of the ad policy update at first glance.
But although the business case for YouTube's policy changes could be up for discussion, particularly in regard to short-term implications, I believe the move also is inevitable in the face of sector-wide concerns over the quality of content distributed on the web. The cherished openness of online media platforms has certainly been a key feature of the Internet revolution. But it seems like more robust gatekeeping might be necessary to ensure that these same platforms can continue to attract viewers and advertisers and support the business in the long term.

An online media trend

The YouTube case, in fact, reminds me a bit of another online media giant and its efforts to fight inappropriate content: Facebook (NASDAQ:FB).
As I have reported recently, the Menlo Park-based company is getting ready to spend lavishly in 2018 on system controls to prevent the dissemination of "fake news" and other forms of malicious content throughout its platform, resulting in a 45-60% YOY increase in expenses this year. The initiative, while detrimental to financial results, is the poison pill that the company has chosen to swallow to protect the appeal of its platforms and the success of the business model.
It seems like more control and stricter guidelines around content creation and distribution will become more prevalent in the online media world.

Implications to financials and the stock

I don't believe the policy changes announced today by YouTube's management team will have much of an impact on Alphabet's financial performance, neither should it cause pressure on share price - as today's intraday trading activity seems to corroborate. But in broader terms, the fight against improper content that has been taking place over the past few quarters at the Mountain View headquarters is likely to contribute with at least margin pressures as we roll into 2018.
Not only is Alphabet still grappling with continued advertiser skepticism as it tries to win them over, but the infrastructure of human content reviewers (projected to rise to 10,000 people in 2018) and artificial intelligence needed to combat the malicious content threat will probably consume quite a bit of the company's resources. With YouTube having been valued by one analyst at nearly 10% of Alphabet's market cap last year, the financial health of the online video business is certainly a matter of great importance.
But as I have argued in the past, I believe players like Alphabet and Facebook are ultimately much better positioned (read: deep pockets) than other internet players to address the threats without jeopardizing much in terms of P&L performance and shareholder value. In the end, I believe advertisers will favor platforms that are well-supported by superior quality control systems that help them find better content to promote their brands and products. The benefit to the media platform companies, I believe, should come in the form of more ad space demand and higher ad prices.
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Disclosure: I am/we are long GOOG, FB.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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