The streaming war is heating up. Netflix’s dominant position in the market is being challenged on all fronts. Rivals like Disney+, Amazon Prime and Apple TV are circling the company, smelling blood in the water. But this week raised the question if one of the biggest threats against Netflix isn’t coming from somewhere else.

When Alphabet’s Google unveiled its quarterly results this week, one figure in particular stood out. The report revealed that YouTube has an ad revenue of more than $7bn. That’s almost as much as the $7.3bn in revenue Netflix reported over the same period. Also, Google didn’t include YouTube’s subscription revenue in the report, suggesting the figures could be higher still.

Moreover, Google said 120 million people watched YouTube on their TVs last month. While still a long way off from Netflix’s 209 million subscribers, it’s still a testament to the reach of YouTube.

This begs the question: is YouTube coming for Netflix’s lunch? Are user-generated cat videos and QAnon conspiracies really going to topple the house that founder Reed Hastings built?

There’s cause to contemplate the idea. According to GlobalData’s new Internet TV scorecard, Alphabet as a whole is just behind Netflix as a world market leader in this industry.

Despite this, market analysts and industry experts are sceptical about YouTube’s prospect of going toe-to-toe with Netflix.

“Netflix and Youtube might look similar, but they occupy very different areas in the market, with pros and cons to both models,” Simon Andrews, CIO at Edge Investments, tells Verdict. “At heart, YouTube is a platform where the same content creators and consumers meet, whilst Netflix uses advanced algorithms to understand viewer behaviour and refine editorial decisions to drive engagement.”

True, but what if YouTube were to pivot to start making its own content a la Netflix and only make it available for subscribers?

“In theory YouTube could build up a big catalogue of original content and try to compete head-to-head with Netflix,” Martin Garner, COO at CCS Insight, tells Verdict.

To some extent, the San Bruno-headquartered streaming site has already tried to do exactly that with YouTube Red, now rechristened YouTube Premium. The subscription service was first unveiled at the tail end of 2014.

By paying a small premium, users could access premium content created by influencers like PewDiePie, avoid ads and see scripted content like Karate Kid-spinoff Cobra Kai. However, the scripted content never really took off.

Then, in May 2020 and after months of speculation, YouTube officially announced it would scale down on its scripted content. Cobra Kai is now available on Netflix via a deal between the two.

“In terms of trying to break into the Internet TV market, it’s not really been as successful,” Charlotte Newton, analyst at GlobalData, tells Verdict.

Even though the number of YouTube users may have reached 120 million, Newton puts the number of paying subscribers at close to 30 million or so.

“It’s sort of more or less a drop in the ocean,” she says.

Garner believes that in order for YouTube to bridge the gap, Google would have to raise its annual content investment to between $10bn and $20bn.

“This compares to capital expenditure for the whole of Alphabet of $22bn in the last 12 months, so we think such a high commitment to content is unrealistic, and not a direction that YouTube wants to take,” he says.

Instead, Garner believes YouTube will continue to focus on upping its ad revenue, not its subscription content.

“Driven by ad revenue, YouTube is investing heavily in expanding its services to compete across multiple areas and to increase its advertising real-estate,” he says. “Among other things it wants to become a major shopping destination. YouTube has now become a rather untidy sprawl of different services and the company needs to be careful that it does not either lose its identity or put people off by carrying so much advertising that users find it painful to get to the content they want.”

If that sounds familiar, it’s because TikTok is already doing something similar in China. As Verdict has reported in the past, the short-video platform is rapidly making its mark in the Chinese ecommerce sector.

Given Google made sure to tout that its TikTok rival YouTube Shorts grew from having 6.5 billion daily views in March to 15 billion daily views in June, it seems likely this is where YouTube’s focus lays.

The one category where Netflix scored at the lower end in GlobalData’s scorecard was in shorter videos, but analysts don’t think this is the market segment the Lost Gatos-headquartered company will focus more on.

“We’re trying to be Starbucks,” Hastings famously said during the 2017 Code Conference when comparing himself to competitors like Amazon and YouTube who tried to catch every market segment.

“Our customers watch lots of other video. They watch video on YouTube and we’re not trying to replace that,” he said. “We’re not trying to meet all needs.”

Instead, he wanted to be more like HBO and focus on emotional content and to offer a premium subscription service.

“They’re sort of trying to follow where their audiences are going whilst sticking to what they know,” Newton says, adding that this would also include Netflix’s recently announced foray into video games.

Moreover, while Netflix may be threatened by YouTube’s ad revenue, it won’t have to deal with the extremist content posted on the social media platform. This problem has come to the forefront over the last year, with fake news and conspiracy theories having been linked to everything from the January 6 riot on Capitol Hill and the spread of misinformation about Covid-19 vaccines.

“The trouble is it’s mostly user generated content and people are going to go for creating things that are going to create buzz,” Newton says. “Things that create buzz tend to be things that maybe will be slightly controversial, will get attention for both positive and negative reasons. And that is something that YouTube is going to have to grapple with more and more.”