It’s time for Alphabet to spin off YouTube

Compared with the attention heaped on Bob Iger’s return to the helm of Disney and the stepping back of Reed Hastings at Netflix, news on February 16th that Susan Wojcicki would resign from YouTube after nine years as ceo caused barely a rustle in the media pages. That is a sign of two things. First, how little attention Wall Street analysts and entertainment-industry scribblers pay to the business of YouTube, even though it has become a hub—as well as a byword—for global video. Second, how overshadowed it is by the teetering ramparts of its parent company, Alphabet. Sundar Pichai, the tech giant’s beleaguered boss, is fighting wars on so many fronts, from Microsoft’s ChatGPT-inspired encroachment on Google search to trustbusters and the Supreme Court, that the goings-on at YouTube must seem like a sideshow.
That does a disservice to Ms Wojcicki. Her decision to hand over to her lieutenant, Neal Mohan, may not have come at the pinnacle of YouTube’s success. A combination of an advertising slowdown and competition from TikTok, an addictive short-video app, has helped lead to its second consecutive quarter of year-on-year decline in ad revenues. Yet on her watch, YouTube has become so integral to the entertainment landscape that to many it is DIY handbook, cookbook, childminder, jukebox, yoga instructor, news channel and time sink, all rolled into one. It has 2.6bn monthly active users and a simple but effective revenue-sharing model that millions of creators rely on to keep pouring stuff out. Its response to TikTok, YouTube Shorts, averages 50bn views a day.
Data published this week by Benedict Evans, a tech commentator, underscored just how far the platform has gone beyond social-media video to more mainstream content. In America, YouTube’s share of TV viewing has recently eclipsed Netflix. Last year, according to Mr Evans’s estimates, it paid its creators almost as much as Netflix paid for its big-budget productions. Star YouTubers like MrBeast command similar audiences to a top Netflix hit.
It is an advertising juggernaut to boot. Though its $29bn of ad sales last year were roughly a tenth of Alphabet’s revenues, Richard Broughton of Ampere Analysis, a research firm, points out that they are equivalent to a “sizeable chunk” of the global $140bn broadcast-TV advertising market. Moreover, YouTube gives Spotify a run for its money in music and podcasts, sells cablelike bundles of channels on YouTube TV, and, like Amazon and Apple, takes a cut on subscriptions to other media companies’ streaming services. And it has even just shelled out a reported $14bn for the rights to stream live American football on Sundays. In short, putting China’s great firewall to one side, it is hoping to become the stage door for all the world’s small-screen video, from user-generated clips and streaming to sport.
Ms Wojcicki is as close to Mountain View aristocracy as you can get without being surnamed Brin or Page; Sergey and Larry first set up the search engine that would be Google in her garage. She no doubt helped bring Google’s professionalism to bear on YouTube. After the freewheeling chaos of YouTube’s early days—it had been founded only a year before Google bought it in 2006—she became the adult, and ad-executive, in the room. As she departs it is worth asking whether YouTube, now past adolescence, benefits from its attachment to the mother ship as much as it used to. Tim Mulligan of MIDiA, another research firm, thinks Alphabet may in fact be hindering YouTube more than helping it. Is it time for a spin-off?
For YouTube, there are many arguments in favour. One is focus. Such is the upheaval in the entertainment industry, from TikTok and the streaming wars to cord-cutting in pay-TV, that laserlike concentration is essential. Alphabet has too much else on its plate to give YouTube full attention. Then there is the business model. Without the hand of an advertising behemoth on its shoulder, it would have greater freedom to experiment with subscription revenues. A third argument has to do with regulators. A case heard on February 21st at the Supreme Court on whether YouTube violated anti-terror laws by using algorithms that recommended extremist videos was met with scepticism by justices. And Facebook has suffered plenty of political heat over content. But being part of a bigger firm than Meta, Facebook’s parent, makes YouTube a juicier target, especially for trustbusters. Its ability to expand services like YouTube TV globally may be hindered by regulatory concerns about Alphabet’s size.
Alphabet could reap benefits, too. Mr Pichai’s panicky response to ChatGPT, an artificial-intelligence (AI) partnership between Microsoft and a startup called OpenAI, has raised doubts about his leadership. A spin-off of YouTube would send a strong signal that he is doubling down on such “generative” AI. It would also enable Alphabet to get ahead of the Department of Justice (doj), which in January sued Google over its alleged monopoly of digital-advertising technologies. Alphabet denies it is a monopoly. But if courts decide differently, a voluntary break-up, even loosely related to ad-tech, would be preferable to a doj-imposed half-Nelson.
YouTube’s valuation as an independent public company could be eye-popping. Its ad sales are close to Netflix’s revenues of $32bn, not counting its 80m music and premium subscribers or TV revenues. Laura Martin of Needham, an investment bank, reckons that it could be worth at least $300bn, more than half as much again as Disney and double Netflix’s market capitalisation.
Control freaks
If it all sounds too simple, that’s because it probably is. Messrs Page and Brin control more than half of Alphabet’s voting rights, and would not like to be the first titans of tech to start selling off the family silver. Yet with TikTok, which is Chinese-owned, in no apparent rush to go public, investors would probably relish getting their hands on the shares of an American equivalent—especially one taking on the world’s TV giants. The freshly minted plutocrats of the creator economy might, too.
Read more from Schumpeter, our columnist on global business: AI-wielding tech firms are giving a new shape to modern warfare (Feb 16th) What would Joseph Schumpeter have made of Apple? (Feb 9th) China’s BYD is overtaking Tesla as the carmaker extraordinaire (Feb 2nd)
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