Movie rentals are a logical extension of Google’s YouTube business, as it pushes the video site more toward professional content that it can profit from. But an estimate surfacing this morning that YouTube’s supposedly-in-development movie rental business could generate about $1 billion in a few years is too aggressive.
In a report this morning — reiterating his “BUY” rating on Google — ThinkEquity analyst William Morrison writes:
“If Google is able to offer access to newer movie titles to its approximately 400M users globally, we believe that it could become a billion dollar business for the company within a few years.”
On the surface it’s not hard to follow the logic of these numbers. After all, at $3.99 per rental — the same price charged at iTunes — that’s less than one movie rented per user, per year.
However, it’s a little surprising Morrison is sticking his neck out so early on in the game. While the massive reach of YouTube makes it tempting to forecast large revenue numbers for commerce initiatives, it’s unclear if users will think of the site as a place to buy videos in such a meaningful way.
The first problem with the estimate is reach: YouTube’s isn’t really 400 million for pay-per-view rentals. It will likely take longer to secure international rights; look how long it’s taken Hulu, whose owners even own the networks its shows run on. This makes the immediate audience closer to 120 million — YouTube’s U.S. reach, per comScore.
In the U.S., YouTube will already have plenty of competition. Among paid streamers: Apple’s iTunes, Microsoft, Sony, Amazon, Blockbuster, and Netflix, plus ad-supported movies from Hulu (and even YouTube). And then the big guns: Digital cable VOD services and DVD rentals from Netflix, Redbox, and Blockbuster.
Let’s also not forget that the overwhelming majority of movie viewers currently prefer to watch their movie rentals on their TVs — infrastructure that YouTube doesn’t yet have set up.
Then, there’s pricing. Dollar-a-day DVD kiosk rental service Redbox is gaining steam as a rental alternative for consumers, and many believe it will represent 30% of the movie rental market by 2010. That’s serious competition for Internet services, which rent movies at $3.99 per clip. (And don’t expect major price drops from streamers: SNL Kagan estimates that profit margins among Internet rental services would fall to between $0.08 and $0.19 per movie if the price was dropped to $1.)
Is it possible that movie rentals will someday generate $1 billion in sales for YouTube? Sure, maybe. But it’ll be a huge feat if it happens within a few years. (And by the time you subtract its content costs, and factor in how big Google’s business will be as a whole by then, it’s still a very small amount of money for the company.)