One Of Google’s Most Powerful Advantages In The AI Revolution

Summary:

• Amid all the focus around how AI will transform Google Search, investors are missing the AI-driven opportunities of the powerful YouTube platform.
• In contrary to streamers like Netflix suffering from the writers’ strike amid the threat of generative AI, YouTube stands to be a big beneficiary.
• However, the use of generative AI could also invite new problems for Google.

Amid all the focus around how AI will transform Google (NASDAQ:GOOG) (NASDAQ:GOOGL) Search, investors are missing the AI-driven opportunities of the powerful YouTube platform. In contrary to streamers like Netflix (NFLX) suffering from the writers’ strike amid the threat of generative AI, YouTube stands to be a big beneficiary as its creators are independent. Both creators and advertisers could produce content and ads more easily and creatively in the era of generative AI, conducive to more advertising revenue. However, the use of generative AI also invites new problems for Google in some unexpected manners.

Investors are well-aware now of the US strike by the Writers Guild of America [WGA] affecting media giants like Netflix and Disney (DIS). A key issue facing the writers is the use of generative AI to produce scripts, imagery, video, visual and audio effects, all with a few simple prompts, threatening a lot of jobs in the entertainment industry. While writers and studios debate over the use of AI going forward, YouTube stands to be a big beneficiary.

The writers’ strike will benefit social media apps like YouTube and TikTok with user-generated content, given that their content is mostly created by independent creators compensated through the YouTube Partner Program. Moreover, YouTube is not bound to any contracted term negotiations with any associations the way the large studios are, offering a more appealing business model for investors.

According to data from Nielsen, YouTube continues to be the streaming platform with the most viewership time in the US, with 8.5% share in May 2023. This is not surprising given that it is free and ad-supported.

Now, Google could leverage its prowess in the field of AI by empowering its YouTube creators with generative AI software applications, the type which WGA are trying to restrict use of at the large production studios. As generative AI becomes progressively versatile, it will increasingly empower independent YouTube creators to produce high-quality entertainment that one would usually expect from big studios investing millions into production facilities. Hence, YouTube content could become increasingly competitive with the content produced by streamers and production studios. In fact, user-generated content is becoming an increasingly popular choice of video-entertainment through Connected TVs. On the last earnings call, CEO Sundar Pichai and Chief Business Officer Philipp Schindler proclaimed:

Sundar Pichai

The living room remained our fastest-growing screen in 2022 in terms of watch time, and we are seeing growth and momentum internationally.

…

Philipp Schindler

connected TV. As Sundar said we are seeing momentum globally. Viewers love watching YouTube creators and their favorite content on the large screen. Advertisers are leaning in.

Zooming out more broadly for a second. Across YouTube, we’re helping brands benefit from our expansive reach and drive the profitability they are looking for. In one of our largest marketing mix modeling studies to date, YouTube ROI is 40% higher than linear TV and 34% higher than all other online video, according to a customer analysis from January 2020 to March 2022 of Nielsen Compass ROI benchmarks across 16 countries and 19 billion of total media spend measured. This proves YouTube’s ability to drive effectiveness at scale.

With YouTube creators becoming increasingly empowered by versatile generative AI tools, it will only amplify the rising trend of audiences consuming more user-generated content on TVs, conducive to more YouTube advertising revenue, benefitting Google investors.

Generative AI should also enable creators to produce content much more easily and efficiently, accelerating the pace at which new content is published on YouTube. As long as this is high-quality, entertaining content, it should continue to attract viewers to the platform, in turn bringing more and more advertisers.

Furthermore, Google has also been striving to augment YouTube as a social commerce platform, taking on e-commerce platforms like Amazon (AMZN). The goal is to encourage more and more people to search, learn about, and shop for products on YouTube. As people increasingly come to the platform with the intent to shop, it could improve conversion rates for its advertisements, conducive to more advertising revenue.

Last year, Google partnered with Shopify (SHOP) to more easily allow YouTube creators to partner with Shopify merchants for product endorsement deals. Generative AI could further enhance the collaboration process, enriching creators’ marketing capabilities and content creativity, as well as allowing brands to play a bigger role in determining how their products are presented thanks to simple, prompt-driven interfaces of these generative AI software tools. This could attract more brands to market through YouTube creators, and potentially attract more consumers to the platform thanks to richer shopping experiences enabled by generative AI. If YouTube is indeed successful in attracting more shoppers, it would augment the value proposition of its advertising solutions, conducive to more advertising revenue and satisfying shareholders.

Impact of generative AI on YouTube advertisers

Google is constantly striving to enhance its advertising solutions and possibilities through YouTube to maximize advertising revenue. The ‘YouTube Select’ ad solution launched in 2020 allows advertisers to select specific content packages alongside which they want their ads to appear, enabling them to reach a more relevant audience and maximize conversion rates.

Aside from empowering creators, YouTube can also offer generative AI tools to enable advertisers to produce ads more easily and creatively. The underlying AI models can also leverage what it knows about YouTube audiences (e.g. watch histories, Google search histories, etc.) to help advertisers create ads with better conversion potency. If successful, this could encourage advertisers to spend more ad dollars and resources on YouTube, conducive to higher advertising revenue, advantaging Google shareholders.

But here’s an unexpected twist to consider. As generative AI tools become increasingly easy to use to produce YouTube videos, there is indeed the possibility of advertisers exploring the production of their own streaming content instead of trying to look for relevant content produced by creators. Marketers could strive to produce content that both entertains people and persuades them to buy their products/ services in a more seamless manner, as opposed to intrusive ads in-between creators’ content. This would yield them even greater control over how their products/ services are presented.

In fact, advertisers are already making ‘Shorts’ ads that strive to blend in with the other entertaining YouTube Shorts through similar short-form video formats and styles. Now with generative AI, companies could attempt to produce even longer pieces of content with commercial intent.

This should further bolster Google’s ability to earn advertisement/ marketing revenue, not through traditional in-stream ad placements, but by enabling these marketers to include product/ website links and other commerce solutions in their commercially-driven entertainment videos.

Furthermore, this could potentially enable Google to monetize its YouTube Premium subscribers in additional manners on top of subscription fees. Google can’t show ads to YouTube Premium subscribers, as that is the point of the ad-free experience. However, if these subscribers decide to consume content produced by companies that strive to blend entertainment with marketing their products/ services, it could potentially still allow Google to earn commission fees/ product-impression revenue from these subscribers, improving YouTube’s revenue potential.

It remains to be seen how advertisers end up employing generative AI, but Google investors can expect some transformational shifts as new possibilities arise.

Risks relating to generative AI

Legal issues: The generative AI models and software used to produce content will be trained on millions of old pieces of content, for which writers and producers will rightfully demand compensation. Hence, YouTube will need to overcome various legal obstacles to be able to offer powerful generative AI tools to their creators, and could also incur costly licensing fees/ compensation systems for artists’ and producers’ work used in training models, depending on how laws and industry standards end up formulating around the use of this revolutionary technology.

Competition: While the use of generative AI promises to enrich content creation possibilities and foster advertisement strategies on YouTube, investors should expect rivals like TikTok to also up their game to stay competitive. Hence, as generative AI tools become widely accessible across platforms, it may subdue the boost to YouTube’s advertising revenue relative to competitors.

Is Google stock a buy?

Now, let’s tie all this into the broader investment narrative for Google. While YouTube’s growth prospects through generative AI are alluring, YouTube advertising only made up 10% of total revenue in Q1 2023, moderating its impact on Google’s overall financial performance. The largest revenue driver remains the ‘Google Search & other’ segment, contributing 58% to company-wide revenue. The future of Google Search revenue remains uncertain as generative AI chatbots like Bard and ChatGPT are programmed to provide the most relevant and useful responses to users’ queries, undermining the ability to show ads of highest-bidding advertisers. Therefore, Nexus Research maintains a ‘hold’ rating on Google.

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Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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