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Alphabet (NASDAQ:GOOG) is showing a rapid growth in its subscription business and has recently crossed 50 million subscriber milestone on its YouTube Premium and Music platform. Within the music streaming business, Google is close to Apple (AAPL) and Amazon (AMZN) and is showing the fastest growth rate according to MIDiA research report. At the current growth rate, it should be possible for Google to reach 200 million subscribers on its YouTube subscription platform by 2025.
Subscription business is the new battleground for tech companies. All the tech players are looking to increase their subscription revenue as it gives them a recurring base of revenue and also improves the ecosystem of services. Amazon is in the lead with its Prime membership and has reported over $30 billion in subscription revenue in the trailing twelve months. Apple is also looking to gain more members for Apple One, TV+, music streaming, and other services. Google has an advantage in this segment due to its YouTube platform and the strong market share within smart speaker and smart home devices business. Rapid growth in subscription revenue can improve the valuation multiple of Google and boost the bullish sentiment towards the stock.
Subscription business is the new battlefield among tech majors. All tech giants want to increase their subscription revenue and build a strong ecosystem of products and services. Amazon is currently in the lead due to its Prime membership which is backed by the massive logistics network and rapid investment in streaming video. Apple is also increasing investment in TV+ and has promoted Apple One as a combo option to get all subscriptions. Google was quite late to this business and has only recently invested significant resources to improve the subscription services.
However, the management's efforts are showing good results. The company has already reported over 50 million subscribers on YouTube Premium and Music. It is close to Amazon and Apple in terms of market share in the music streaming business. According to the report by MIDiA Research, the growth rate of YouTube Music is a lot higher than Apple and Amazon. It is possible that Google overtakes these two companies within the next two years. This would be a big win for Google as the company was lagging a lot.
MIDiA Research
Figure 1: YouTube is in third place among big tech players within music streaming segment.
Amazon has created the perfect flywheel effect through its subscription business. It has used Prime membership revenue to boost investment in logistics and is now heavily investing in streaming video content. At the current growth rate, Amazon could hit $100 billion in revenue in the subscription business by 2025 which shows the potential of subscription segment.
Amazon Filings
Figure 2: Amazon has shown strong growth in subscription business at a high revenue base.
Google has launched Pixel Pass which provides customers all the services of Google along with an option to update their Pixel device every two years. This is a seamless merger of hardware and software in one subscription plan. We could see more focus on this option as Google tries to improve the market share in the smartphone industry and also launches new services within the subscription segment.
Even at 50 million subscribers, YouTube Premium could start making an impact on Google's top line. At the higher end, if we count every subscriber as paid and using the YouTube Premium option of $11.99 per month, it would be equal to $7 billion annual revenue. Other services like Google One and Nest Aware could further increase this revenue base. The growth rate for subscription services is quite high and we could easily see this number cross 200 million by 2025.
The biggest advantage for a strong subscription business is the tailwind it provides for other services and products. Google has a wide range of smart home devices and is trying to increase Pixel sales. More subscribers using Google services would help Pixel Pass subscription which combines Pixel device with other subscription plans.
Amazon has also used its Prime membership to drive sales of Echo products. Prime members using Amazon Music on Echo devices can get very attractive rates. This ends up creating more loyalty within Prime membership and also increases sales of Amazon Music and Echo devices. Google could replicate a similar strategy by combining its hardware and services within one single subscription plan with very attractive rates.
Alphabet stock is trading at a lower PE multiple compared to Apple which derives 80% of its revenue base from products like iPhones, iPads, Mac and others. While Apple has made huge investments to ramp up its subscription business for its own services, Google has reported better growth and membership numbers in recent quarters. It should be noted that Apple, Netflix (NFLX), Disney (DIS) and other streaming giants need to invest tens of billions of dollars every year to build an attractive subscription platform. However, Google would be spending a fraction of that amount on YouTube content development.
Google also has a number of levers to pull more users to the subscription option on YouTube. It has already restricted download options for non-subscribers. We could even see a limit to the video quality allowed for non-subscribers on YouTube. Google could easily restrict the highest quality videos for YouTube Premium users. If Google is able to reach 200 million subscribers by 2025 on YouTube and other services with an average revenue per user of $150, it would add $30 billion of annual subscription revenue for the company. Hence, the subscription business could be a major driver for Google's top-line and bottom-line growth.
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Figure 3: Comparison of Alphabet and Netflix's growth and PE metrics.
Alphabet is trading at a lower PE multiple compared to Netflix which is market leader in subscriptions. However, Google's subscription growth is a lot higher than Netflix and Google has a longer growth runway. Google's ecosystem will also benefit massively from a strong subscriber base compared to Netflix which should give this business a higher valuation multiple on a standalone basis.
Investors should closely follow the subscription growth trajectory of Google to gauge the long-term growth potential of the stock and the ability of the company to build a strong moat in new services and products.
Google has cornered close to 8% market share within the music streaming industry and is placed behind Apple Music and Amazon Music. The growth rate of YouTube Music is the highest which could lead the company to dethrone both Amazon and Apple in the music streaming ranking in the near term. Google's management has already announced that they have over 50 million subscribers on YouTube Premium and YouTube Music platform. It is likely that Google will push more users to become paid subscribers by limiting the options for free users on YouTube.
It should be noted that the company spends a fraction of amount on content development on YouTube compared to Netflix, Disney, Apple, and Amazon. This should free a lot of resources for Google to divert to other growth segments. Google's Pixel Pass subscription option is another initiative by the company to tie up its hardware and services together. This will increase hardware sales and will be a massive boost to the overall ecosystem. The Alphabet stock is also trading at a modest PE multiple compared to Apple, Netflix and other major tech stocks which increase the long-term returns for investors at the current price point.
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Alphabet Can Race Ahead Of Other Tech Giants - Seeking Alpha
