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The Financial Times recently reported that Google (NASDAQ:GOOG) is in talks with Hollywood studios to launch a pay-per-view movie service on YouTube. The goal is to release newer movies via YouTube on the same day as the DVD release. YouTube users will pay $5 for each movie.

YouTube has struggled to generate meaningful profits throughout its five-year history due to the high bandwidth and storage costs associated with online videos. The rumored pay-per-view service represents an attempt to drive revenues and profits by offering premium content in addition to YouTube’s standard user-generated fare.

YouTube constitutes about 3% of our $643 stock price estimate for Google. Below we present two possible business cases for a YouTube’s pay-per-view service and discuss how they might impact the stock.

Pessimistic case

We expect YouTube’s global user base to grow rapidly in coming years, from 450 million in 2010 to more than 700 million by the end of our forecast period. You can drag the trend-line in the chart below to create your own YouTube audience forecast and see how it impacts Google’s estimated share value.

If 1% of YouTube viewers were to use the new pay-per-view service, YouTube would build an audience of about seven million pay-per-view customers by the end of our forecast period. This is a small audience compared to that of video rental powerhouse Netflix (NASDAQ:NFLX), which we estimate will have 39 million subscribers by 2016.

If these seven million users watch an average of one $5 movie a month, YouTube would realize incremental revenues of more than $400 million in the last year of our forecast period. The implies that YouTube’s revenue per 1,000 page views would rise to about $10.25 by the end of our forecast period, compared to our current forecast of about $9.50.

Based on our expected long-term EBITDA margins of 20% and taking other expenses into account, we estimate that this scenario would add $500 million to Google’s market value, yielding an upside of less than 1% for our Google price estimate. In the next interactive chart, drag the trend-line to create your own revenue per page view forecast for YouTube and see how it impacts the company’s stock.

Optimistic case

But what if 5% of YouTube’s audience were to use the pay-per-view service by the end of our forecast period? In that case YouTube would build a pay-per-view audience of about 35 million, which is quite close to our Netflix forecast. This admittedly aggressive scenario would boost YouTube’s revenue per 1,000 page views by $2, producing incremental revenue of nearly $2 billion a year by the end of our forecast period. Google’s market value would rise by $2.5 billion, adding more than 1% to our estimated stock price.

Disclosure: No positions

Source: YouTube’s Pay-Per-View Service Won’t Move Google’s Stock