Can Yahoo Give YouTube a Run for Its Money?

Source: Thinkstock

Source: Thinkstock

Yahoo (NASDAQ:YHOO) is reportedly fast approaching a summer launch for its YouTube video rival. Google’s (NASDAQ:GOOG) (NASDAQ:GOOGL) YouTube has essentially created and dominated the online video advertising market. However, Alibaba’s IPO will soon make Yahoo a very rich company, leaving open potential acquisitions like AOL (NYSE:AOL), which could make Yahoo very competitive in the long-term.

What’s the news?

According to AdAge, Yahoo is ramping up talks with video producers and plans to premiere a rival to Google’s video service later this summer. Yahoo is hoping that its attractive offers can persuade many of YouTube’s top video creators to make the switch.

Specifically, Yahoo will implement a more generous revenue sharing deal. YouTube currently takes 45 percent of advertising revenue, or offers an option for fixed advertising rates. Reportedly, however, developers will have channel pages to publish videos, and will be able to share the video with both Yahoo sites (i.e. Tumblr) and non-Yahoo sites, including YouTube.

Why go after this market?

Clearly, Yahoo’s strategy is to replicate YouTube, using what has worked while giving better incentives. The reasons are rather obvious, as Yahoo has no share of the $70 billion U.S. TV market, which is a large piece of the $200 billion U.S. advertising industry.

Also, Yahoo needs to replace what it’s losing with the Alibaba IPO. The company’s 24 percent stake could be worth as much as $48 billion, $31 billion after taxes, but it will lose its equity interest. Specifically, Yahoo generated nearly $600 million last year from the equity interest, or about half of its net income. Therefore, Yahoo likely sees a video streaming service similar to YouTube as a way to counter this loss.

Granted, Yahoo has a long way to go before catching Google in this market. Last year, YouTube’s revenue grew 51 percent to $5.6 billion, or 9.3 percent of Google’s total annual sales. Clearly, YouTube is still growing and shows no signs of slowing down. If Yahoo is to compete with Google, it needs a successful video business.

Acquisitions are key to success

Yahoo is developing its platform in-house, but that doesn’t mean there aren’t areas where it will need help. For example, the acquisition of Tumblr looks wise with regard to video streaming, as the site is home to diversified content. Also, the company is rumored to be near closing a deal to acquire video streaming startup RayV, which develops software to improve high-definition video. Also, there are the continuous rumors of Yahoo’s desire to buy AOL, which would could be a game-changer.

AOL owns AOLon, the company’s video streaming business, and one that has driven much of the company’s growth in the last year. While AOLon consists of YouTube-like videos, much of its content includes news and featured partners like ESPN, Martha Stewart, The New York Times, The Wall Street Journal, and TIME. Plus, earlier this month, AOL announced 16 original shows to AOLon, featuring big name talent like James Franco and athlete Bode Miller.

In regard to Yahoo’s primary goals, the company has shown a key focus on news and original content, as seen with the Katie Couric deal, both of which can be boosted by acquiring AOL. Also, let’s not forget the Google connection, as both Yahoo and AOL CEOs Marissa Mayer and Tim Armstrong, respectively, were both at Google prior to their current roles. In fact, Armstrong and AOL are very familiar with what works on YouTube, as its third-party application platform, which grew 55 percent year-over-year in AOL’s last quarter, led YouTube in matching advertisements with videos, which is something Yahoo might find very appealing.

Final thoughts

Currently, there are a lot of doubters regarding Yahoo’s entrance into video, but when you consider recent acquisitions, the cash position that Alibaba creates, and the speculation for new acquisitions, Yahoo has an opportunity to grow through this service. Granted, Mayer must get this right, but looking back at her tenure as CEO of Yahoo, there isn’t much that she’s done wrong, thus adding to the assumption that Yahoo will give YouTube a run for its money.

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