Alphabet Inc. - Dawn of Red

Alphabet announced the October 28 launch of YouTube Red, an ad-free subscription offering that will feature some exclusive content from YouTube's biggest stars, including PewDiePie and Lilly Singh. YouTube Red will also provide subscribers with a new music service and YouTube's standard content offering, both ad-free. Our initial take is that YouTube Red may be limited in appeal to superfans of YouTube personalities; but at $9.99 per month, YouTube Red provides attractive monetization dynamics and should not cannibalize YouTube's overall revenue, in our view. Our three key takeaways include the following:

A focused offering with attractive monetization dynamics. With YouTube's viewership growth at +60% YoY in 2Q15, we continue to believe YouTube's ad-supported model maintains a long growth runway. However, YouTube Red likely provides better monetization of YouTube's most active fans and should not cannibalize YouTube's overall revenue. Assuming an average CPM of $10 across YouTube ad-supported viewing, we estimate YouTube Red is accretive to revenue per user by ~$7/month. However, we believe given a set of assumptions around addressable users and penetration, the incremental annual revenue opportunity is likely <$250mn.

Borrowing from MTV? A major theme of the YouTube Red launch was YouTube's growing commitment to original content. Differentiated from other SVOD scripted originals, we believe YouTube is increasingly committed to providing a larger platform for its biggest stars such as PewDiePie (38.0mn subs), Jenna Marbles (15.3mn subs), and The Fine Bros. (12.8mn subs). In our view, YouTube is increasingly positioning itself as a web-based version of 1980s/90s MTV, particularly following the hiring Susanne Daniels, former head of MTV programming. YouTube Red provides attractive economics to top content creators, as subscription revenue is split based on viewership share. 99% of content creators, including major media companies, are participating in the new service.

Not competing directly with major SVOD players. Focused on expanding the platform for YouTube's existing pool of talent, we think YouTube Red is initially pursuing a differentiated strategy relative to other SVOD services, which emphasize big-budget scripted originals and licensing Hollywood content. We believe YouTube Red's subscribers should view the service as enhancing their YouTube viewership experience as opposed to offering an alternative to content like House of Cards or Transparent.

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Alphabet Inc. - Dawn of Red

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