Why Disney’s Epic Games investment challenges YouTube

YouTube’s chief executive, Neil Mohan's, latest open letter was full of confidence. A little over a week since YouTube recorded a 16% jump in advertising revenue to $9.2 billion for Q4 2023, he outlined four big bets to advance the business this year. These ranged from introducing AI tools to bolster content creation and ensure creators are recognised as “next-generation studios”, to sharpening its focus on smart TVs, subscriptions, and making the platform safer.

It was the latest in a string of announcements that portrayed YouTube on the front foot. At a time when Twitch is slashing costs in pursuit of profitability, Google’s subscription businesses spanning YouTube Premium, YouTube Music, YouTube TV and Google One Cloud storage amassed $15 billion of revenue last year. With its Prime Time channels business narrowing the gap between social video and TV streaming, and Mr Beast reportedly signing a TV show deal with Amazon Prime Video, there seemed to be no end to YouTube’s growing sphere of influence.

And then came the announcement that Disney was investing $1.5 billion in Epic Games. While it may seem leftfield to suggest such a deal should concern a social video company like YouTube, the seriousness with which Disney is considering gaming universes suggests the entertainment consumption behaviours of Gen Z are now at the front and centre of its strategic thinking. Disney’s immersive fandom world will cater directly to those behaviours by allowing players to play, watch, shop and engage with their content. Knit this together with Epic Games Fortnite Creator Portal, and you have an experience primed for the lean-through generation.

The virtual worlds threat

This should worry YouTube for two reasons. Firstly, gaming universes are being positioned as places where users can also watch content. This began with the Travis Scott virtual concert in Fortnite in April 2020, and will be evolved by Disney through its promise to allow users to watch in its virtual world. Moreover, Roblox has not only been allowing users to upload videos into their own virtual worlds but has started testing video advertising.

Secondly, gaming worlds are quickly becoming a key part of the creator economy – especially among younger audiences. Roblox’s daily active users grew by 22% to 68.4 million year on year for 2023. Its fastest growing age group was 17-24-year-olds, and 38% of its top performer community-created experiences were built in the year to December. With Roblox also paying out $701 million in creator development fees between October 2022 and September 2023, creating content in gaming worlds has potential to take time spent away from creating content on social video platforms.

YouTube’s gaming pivot

So, how does YouTube react?  The good news for YouTube is that gaming videos play a big role in platform viewing through livestreaming and uploaded videos. When asked what type of content consumers watched on YouTube in Q4 2023, video game viewing was in double digit figures. This, however, was dwarfed by music, which was close to half consumer usage. This makes sense considering the emphasis YouTube puts on music content, especially around its YouTube Music subscription service. However, the picture changes when it comes to age. For younger viewers, especially those between 16 and 27 years old, gaming video consumption outweighs music, with the reverse happening for 45-year-olds and upwards. This suggests either YouTube must bank on viewers turning to music content as they get older, or they should put a greater emphasis on gaming content to cater to this younger audience.

So, what should that gaming strategy look like? There is an argument to suggest that YouTube should evolve its subscription business to include access to live service gaming alongside access to music. A less risky bet would be to become an aggregator of live service gaming platforms – such as Xbox Live and Amazon’s Luna – through its Prime Time channels business. This is something rival aggregators are already doing. Either would help support the money it makes through viewers donating to video game creators.

Yet, will this be enough to see off the threat from gaming worlds? The question comes down to ‘what does YouTube want to be in the future?’ Does it want to be video’s everything app and concentrate on that entertainment medium alone? Or does it want to become a central point for content creation? If it is the later, then YouTube may need to consider taking a Disney-style approach to gaming worlds by making an investment in, or partnering with, Roblox. That is big bet Mohan should be considering for his next open letter.