Summary
2016 could be a catalyst year for YouTube with the trend of cord-cutting/shaving.
Viewership migration to digital is supportive of its user growth; 1b+ MAUs a goldmine for advertisers.
Remain bullish on GOOG.
Google's (NASDAQ:GOOG) 2016 will likely to be characterized as the year of YouTube. Although the core search business will likely to remain the cash cow for GOOG, video advertising and subscription service will be the key drivers for GOOG as YouTube leverages its 1b+ viewer base. I see several drivers supportive of my view.
First, the macro picture certainly favors YouTube. The trend of cord-cutting and cord-shaving is irreversible as viewership and engagement migrate to digital channels. This secular tailwind favors video distribution platform that have a broad spectrum of content capable of attracting various audiences. In addition, the growing penetration of smartTVs globally with YouTube as a pre-installed channel app is also driving YouTube penetration higher, allowing GOOG to steal more ad dollars away from TV. While the trend of ad dollars shifting from traditional media to digital media is well-documented by the analyst community, it is worth noting that magazine and newspapers have suffered the most within traditional media as content shifts online. However, TV is holding its ground with 1-2% ad dollar growth/year given its large viewership and the growth from emerging markets where TV penetration is still low when compared with developed nations. That said, TV remains the largest untapped market within traditional media and this area represents the most attractive growth area for internet companies as they aggressively focus on online video distribution by creating large-scale, brand-based ad campaigns and leveraging existing user bases to attract advertisers, in my view.
Secondly, the trend towards digital content distribution has accelerated in recent year with the rise of Hulu, Amazon's Prime Video, Dish's Sling TV and Sony's PlayStation Vue in addition to Netflix (NASDAQ:NFLX). The growing variety of OTT services will continue to drive the cord-shaving/cutting trend, driving TV subs onto digital platforms. With YouTube recently introducing its own premium service and is actively looking for streaming rights to make its library competitive to that of NFLX, I think YouTube has sufficient resources to differentiate from the other OTT platforms with original content or YouTube expert channels such as the ones from Michelle Phan in cosmetics or Felix Kjellberg in video games. Although I acknowledge that the existing OTT market is already well-defined with NFLX being the clear leader in terms of revenue, Hulu getting content from Viacom (NASDAQ:VIA) and Time Warner (NYSE:TWX) and AMZN gradually scaling up its own content offering, it's difficult for YouTube to immediately make an impact. However, I believe that investing in original content and leveraging the asset that YouTube has (ie. YouTube Gaming) could differentiate the platform from its peers and attract paying subscribers.
Over time, I would not be surprised to see digital distribution disrupt movie theaters in that big budget films will likely release through both online and offline channels. It's worth reminding investors that the success of The Interview, which generated $15m in the first four days for viewing. Google Play, YouTube and Microsoft highlighted that digital distribution of movies is just as effective as offline distribution. With a billion active viewers each month, YouTube could become the next movie distribution platform.
In conclusion, GOOG remains my top pick among the large cap internet players as we head into 2016. Besides the near-term catalyst from video, GOOG's ecosystem is still in its early stage of growth. The resurgence of GOOG wallet, robotics, fiber, home automation and in-vehicle telematics offer attractive call options for the medium term.
By WestEnd511
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