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We just found out that Alphabet (NASDAQ:GOOG)(NASDAQ:GOOGL) is pushing up the price of YouTube TV. It’s coming soon:
Effective April 18, 2023, the monthly price will be revised from the previous $64.99 to $72.99, according to an email sent to subscribers on Thursday.
And from Twitter:
An update for our members. As the cost of content has increased and we continue to invest in our quality of service, we will adjust our monthly cost from $64.99/month to $72.99/month after 3 years to offer you the best possible TV service.
That is an increase of around 12%. It wouldn’t surprise me one bit if that really was an increase to handle the NFL Sunday ticket. Details are still a bit hazy, but they do suggest it could be an add-on to the YouTube TV Base Plan, or some sort of standalone offering through their PrimeTime channels.
The bill with five million subscribers paying $72.99 a month is about $365 million, or about $4.4 billion a year. Given GOOGL’s total revenue of $283 billion, YouTube TV will account for approximately 1.55% of GOOGL’s total.
Overall, this means that the price hike mostly covers the cost of new content and inflation, with little room for any real “extra” profit. In short, this doesn’t move the needle much at all.
Here are 5 things that are more important
Competition in the advertising market: GOOGL’s advertising business, which accounts for the majority of its sales, is facing increased competition from companies such as Amazon (AMZN) and Facebook (FB). Google must continue to innovate and deliver value to advertisers to maintain its market position and revenue growth.
Regulatory scrutiny: GOOGL faces regulatory scrutiny in several areas, including antitrust, privacy, and content moderation. The outcome of ongoing investigations and potential new regulations could have a significant impact on Google’s business and stock price.
Cloud Computing Growth: GOOGL’s cloud computing business is growing rapidly and could become an increasingly important part of its revenue. However, the company faces stiff competition from established players like Amazon and Microsoft (MSFT) and needs to continue investing in its infrastructure and services to remain competitive.
Innovation and New Product Development: GOOGL’s success is built on innovation, and the company must continue to develop new products and services to drive revenue growth. Focal points could be artificial intelligence, autonomous vehicles and health technology.
Macroeconomic Trends: GOOGL, like all companies, is influenced by macroeconomic trends such as interest rates, inflation and economic growth. Changes in these factors could impact Google’s revenue growth and profitability.
Switch to what really matters
With that out of the way, it’s much more important to consider what actually drives GOOGL forward. I’ll keep it simple You have three legs to the stool.
Google Services segment Google Cloud segment Other Bets segment
The Google Services segment is the most important, as it generates the majority of Alphabet’s revenue and profits. Within this segment, it is particularly important to track advertising revenue as it is the company’s main source of income.
The Google Cloud segment has significant potential for growth and diversification of Alphabet’s revenue streams, while the Other Betting segment currently represents a small portion of GOOGL’s overall business and may require larger investments to achieve profitability.
Let’s zero some more. GOOGL, Facebook and Amazon are all major players in the online advertising industry, but they have different business models and approaches to advertising. Here are some key similarities:
All three companies generate significant advertising revenue, with advertising accounting for a large portion of their total revenue. They all use data and targeting to serve ads to users based on their behavior and interests. They all offer self-service advertising platforms that allow advertisers to create and manage advertising campaigns.
GOOGL and META are particularly reliant on advertising. But AMZN continues to gain ground. Anyway, here are the differences.
GOOGL’s advertising business is primarily based on search engine advertising through its search engine and Google Ads platform, while META’s business is based on social media advertising through its flagship platform and other company social media apps (Instagram, WhatsApp, etc.). and AMZN based The business is based on e-commerce advertising through its marketplace and advertising services. GOOGL and META offer display advertising on their platforms, while AMZN mainly focuses on product listings and sponsored search results on its e-commerce platform. GOOGL and META use their vast data resources to deliver targeted ads to users, while Amazon uses its data on users’ purchasing behavior and interests to serve ads on its platform and on off-platform websites. bring things together
As we look ahead to 2023 and 2024, most investors are concerned about GOOGL for recessionary impact on ad revenue. But I would also argue that funds could be shifted either away from GOOGL or into GOOGL depending on the factors I am outlining. Here are four ways recessions can impact advertising.
Reduced advertising budgets: Advertisers can reduce their advertising budgets or postpone advertising campaigns during a recession to save money and maintain profitability. This can lead to lost revenue for advertising platforms and media companies.
Shift to performance-based advertising: Advertisers may be transitioning to performance-based advertising models such as pay-per-click or affiliate marketing, which offer a more measurable return on investment compared to traditional advertising models such as branded advertising.
Changes in advertising mix: Advertisers can shift their advertising mix to focus on lower-cost channels like digital advertising and reduce spend on traditional advertising channels like TV and print.
Lower advertising prices: During a recession, advertising prices can fall as media companies and advertising platforms compete for a smaller pool of advertising dollars. This can benefit advertisers who can negotiate better prices or get more value for their ad spend.
Barring a recession, GOOGL could be undervalued right now. Given GOOGL’s reliance on advertising, there’s almost certainly a “recession discount” in place right now. See #1 directly above, which makes it clear that companies will spend less in a recession.
let’s move on If there is a recession, GOOGL could potentially benefit as it’s more of a direct marketing tool, where pay-per-click is about performance, not broad strokes or branding. This is good for GOOGL, not least for market share. Additionally, GOOGL could gobble up more cash and pull many pounds of flesh out of TV and print. In other words, it could speed up GOOGL.
I would also like to point out that META and AMZN could be affected in a similar way or there could be differences. At this point, until we know there’s going to be a recession and how severe it is, it’s a waiting game. What I don’t really see is META or AMZN stealing much from GOOGL, if anything.
For a quick look, let’s review the revenue changes over three years:
Data from YCharts
But we need to zoom out to see the sales growth better:
Data from YCharts
Unfortunately, we can’t go back much further to see what happens when everything really explodes. We have 2020 in the mix, but these online giants have done well. You wouldn’t think anything happened at all.
How about the net income?
Data from YCharts
And what about profit margins?
Data from YCharts
GOOGL and META are much closer together here. And as many know, AMZN is investing billions directly into the business. Still, I like GOOGL’s profit margin, especially when we take the bigger and longer view of revenue growth and net income.
So while we don’t have a good future for GOOGL assuming there’s a terrible recession, there’s a lot to like about the company. Strategically, and broadly speaking, fundamentals at a high level, GOOGL has been stable along the way.
Wrap up
First, I don’t see the YouTube TV price increase as anything special or unique. The subscription business is growing and the stability it offers is great. But it’s a small part of the business. The implications are trivial for now.
Second, GOOGL’s closest competitors compete a lot more for advertising than anything else. A quick analysis shows that GOOGL and META are of course closer competitors. Importantly, GOOGL, META and AMZN could be adversely affected by a recession. However, it has to be argued that because they are “bigger fish” (or even sharks) they could gobble up the competition directly or via market share gains. It could be a case of short-term pain for long-term gain. I don’t see META or AMZN destroying GOOGL’s ad business, despite the competitive overlap.
Third, GOOGL has been strong and stable for a long time. Earnings, earnings and profits are powerful for years. Initiatives like YouTube TV and the associated price increases are important, albeit small. However, it really is the advertising machine that we will be watching closely now and in the future. In other words, nothing has really changed.
All that said, there are always threats. There is no doubt about it. For example, ChatGPT and artificial intelligence could pose a serious threat. Or we could say that GOOGL is finally going to really “turn on” the AI and introduce it in a way that completely changes the game. We will see. For now, we’re using GOOGL’s history, the current established competition, and the near future to guide our investments. I consider GOOGL a Buy at $100 or below and a Strong Buy below $90. We will keep watching.
