YouTube was the real hero of Google’s Q1 earnings, and it should set off alarm bells at Netflix

YouTube CEO Neal Mohan has emphasized subscription products in his leadership of Google’s video service.

Google’s advances in the AI market drew widespread cheers following its first quarter earnings report on Thursday, but the company’s results also showed that it’s making strides in another competitive sector: video streaming.

Google’s subscriptions grew 18% in the first three months of the year driven by YouTube, while YouTube’s ads business grew 21%. And company executives ticked off a string of other metrics and milestones intended to show the progress being made in streaming.

YouTube subscriber bases are hitting critical mass with TV, its cable-plus television streaming service, now at 8 million users, and Music and Premium boasting over 100 million (including trial users). This will help the video giant generate $3.12 billion in revenue from YouTube subscriptions this year (versus $2.87 billion in 2023), predicts EMarketer.

“More and more people are watching YouTube from the living room,” said Chris Ballard, managing director at Check Capital Management.

Driving much of that growth was demand to watch NFL games via the company’s ultra-pricy Sunday Ticket offering, as well as its cable alternative YouTube TV and the ad-free Premium version of YouTube. YouTube TV subscribers get over 100 TV channels and access to cable staples like on-demand offerings. And starting at $13.99 per month, YouTube Premium subscribers unlock the ad-free version of YouTube, including its Spotify-alternative YouTube Music.

These subscription offerings are a nice addition to Google’s ad-supported business, helping to diversify Google’s revenue stream while also bolstering its position as one of the top players in the streaming market.

And while many of the other big streaming companies like Netflix and Disney are trying to build ad-based businesses, YouTube is working in “reverse,” said Emarketer senior analyst Ross Benes. “Streaming services are finding that getting paid by both consumers and advertisers will make them less beholden to the whims of either,” he told Fortune in an emailed statement.

Netflix has made nice inroads so far with its new ad tier. The company said last week that the ad business increased 65% quarter-over-quarter in Q1, helping boost the company’s overall revenue to $9.37, above analyst estimates. In the long run, a Netflix executive said during the company’s earnings call, it hopes that the advertising and subscription businesses will be roughly equivalent in size, though they noted that Netflix currently has more available inventory than it has been able to monetize through ad sales.

The increasing competition for streaming ad dollars is causing Wall Street to sweat. After Roku alluded to this challenge in its earnings report, the company’s stock dropped more than 10% on Friday — despite strong quarterly results.

For Google and YouTube, of course, advertising is the foundation of the business, powered by a deep reservoir of specialized technology. YouTube’s advertising business grew 21% in the first quarter of this year, showing that the video giant’s central moneymaker isn’t going anywhere as it continues to return on marketers’ investments. And Emarketer’s Benes believes that YouTube increasing its TV user base will enable it to attract advertising dollars from TV-centric marketers.

“Viewers are watching YouTube because they expect to access everything in one place, across screens and formats — their favorite creators, live sports, breaking news, educational content, movies, music and more,” said Google chief business officer Philipp Schindler during the earnings call.

YouTube’s subscription revenue in the first quarter actually declined slightly compared to the fourth quarter of 2023. Alphabet chief financial officer Ruth Porat said this was because YouTube only had one week of Sunday Ticket revenue—the end of the NFL season—in the first quarter of 2024 versus 14 weeks in the fourth quarter of 2024.

At $449 per NFL season, Sunday Ticket is YouTube’s highest priced subscription product (though it’s often available cheaper with special promotions), and at least one Wall Street analyst on Thursday’s earnings call was eager for YouTube to launch more sports partnership subscription products. While the company shared no plans to do so on the call, with $108 billion in cash on its balance sheet, it certainly has the means to score more touchdowns if it decides to double down on sports.

Thursday’s earnings announcement also arrived close to the one-year anniversary of YouTube TV’s price increase from $64.99 per month to $72.99 per month. Now that consumers have acclimated to this price, YouTube will eventually become the largest TV and cable provider globally, says Emarketer’s Benes. And ultimately, he believes, this will tip the scale in favor of YouTube in striking and renewing partnership deals with TV networks.

Could streaming subscription revenue ever top advertising revenue, and become the main-event at YouTube?

Unlikely, says Check Capital Management’s Ballard.

“In our view, YouTube’s ad business is destined to be much larger than the subscription business,” Ballard said, via email. “People have shown a demonstrated preference for free ad-supported services over paid subscriptions. Look no further than total YouTube users versus Netflix users. It’s not even close. YouTube has 2.7 billion global users and Netflix has 270 million.”

This story was originally featured on Fortune.com