Fine-Tuning the YouTube Picture
In class we discussed network effects, the idea where a product or service becomes more valuable as an increasing number of people use the product or service. You can see the effects of this idea within markets and more prominently, social media outlets such as Facebook or YouTube. In particular, network effects have had a lasting impact on YouTube and its success as both the media platform and as a Alphabet owned company in the market.
YouTube was founded in 2005 and quickly emerged as a pioneer for video content. Currently, it generates billions of dollars ($12 Billion in 2016) and has 5 billion daily video views. The foundation of the success of YouTube lies within its strong network effects. A larger number of viewers will result in content creators to favor YouTube as a platform for media distribution. More content corresponds to a greater likelihood of more users using the platform. This process will continually occur and thus results in a very strong network effect and YouTube becoming increasingly more valuable. In addition, since the start of YouTube, more premium content owners have joined YouTube as well. This includes channels that own rights to music or TV programs such as Jimmy Fallon’s The Tonight Show. The addition of these content producers have had significant contribution to the increase in the viewership and usage of YouTube as a media platform.
Alongside the loop between viewership and content production, ad revenue is also strengthened by the network effect. With the increase in users/ viewers, ads have become more valuable on YouTube. Not only does ad space cost more due to the increase in users that use the service (more traffic), but also since there are more people viewing videos on YouTube, there are simply more ads being played since YouTube uses preroll and bumper ads which play in the beginning each video as opposed to display and overlay ads that are not dependent on the number of videos played but rather the traffic that uses YouTube as a media platform. Due to the network effects, ad revenue is expected to grow from $12 billion in 2016 to $24 billion in 2021.
Lastly, the article discusses the promise of YouTube Red, a subscription model for premium content on YouTube and the potential network effects it may have. YouTube Red allows for access to original series and programs as well as a variety of additional features such as no ads. While it hasn’t had much success, it is expected to grow over time. The premium content that is accessible through YouTube red could increase the value of YouTube Red which in return could translate into a greater number of subscribers to the service. Larger audiences would then possibly attract more content creators to join and expand the premium content library. This would once again increase the number of subscribers. This network effect would benefit Alphabet as it would generate a source of revenue aside from ads from YouTube. The effects of this process would be similar to how Netflix became so popular.
YouTube is a highly successful service in the present day an age. This article highlights how network effects have contributed to the success of YouTube and consequentially, how powerful the effects can be. These effects are not only limited to YouTube but also can be found on Facebook, Bitcoin, and numerous other services.
Source: http://news.morningstar.com/articlenet/article.aspx?id=836710