Pacific Crest: “Google's extraordinary data and ability to deliver video across platforms position it to disrupt traditional pay TV and capture TV ad dollars."
YouTube, for all its grand scale in video, hasn’t really done much to disrupt the traditional TV market.
But the time is ripe for YouTube to strike, according to Pacific Crest analyst Andy Hargreaves, who laid out a possible battle plan in a note distributed on Friday.
“Google's extraordinary data and ability to deliver video across platforms position it to disrupt traditional pay TV and capture TV ad dollars, in our view,” Hargreaves wrote.
YouTube hasn’t yet “meaningfully” encroached on the $200 billion global TV ad budget, he said. The main problem is that YouTube still doesn’t have a big enough volume of high-quality, long-form video: the type you would get on TV, or on Netflix.
That’s a hard issue for YouTube to fix with its current business model, but Hargreaves reckons YouTube’s secret weapon could be the launch of its own streaming TV service (“vMVPD”), which would directly compete with cable and satellite TV.
The battle for streaming TV
For months, it's been rumored that YouTube is working on a streaming TV service called "Unplugged."
YouTube is reportedly looking to charge under $35 dollars a month for the service, which you could watch on your TV, phone, laptop, and so on. In December, CBS CEO Les Moonves appeared to accidentally both confirm that YouTube is building its own TV package, and also that CBS had already signed a deal for it.
If Unplugged comes to fruition, it will be entering a crowded market.
Dish’s Sling TV, AT&T’s DirecTV Now, and Sony’s Vue are already fighting over cord-cutters, and Hulu will enter the picture in the next few months. Even Amazon is rumored to be working on its own TV package.
There's stiff competition from both established TV distributors and tech companies. But that doesn’t mean YouTube should sit this one out, according to Hargreaves.
"Given the nature of distribution online, with virtually no geographical barriers and low consumer switching costs, and the magnitude of the advertising opportunity, we believe Google should be aggressive in both the resources it applies to the service and the retail pricing,” he wrote.
YouTube should play to win.
Just make it work
One thing that could give YouTube an early edge is if it nails the technical aspects of Unplugged.
The idea of a live streaming TV service is new, and the reference point, for most people, on how TV is supposed to function is cable or satellite. These services, while subject to the occasional glitch once in a blue moon, largely function as advertised. When you want to watch something, it’s there.
The same cannot be said for the early streaming TV services.
Since its launched in late November, AT&T’s DirecTV Now service has been repeatedly smacked with technical issues, from strange error messages to huge blackouts. And both Sling TV and Vue have had their share of tech snafus as well.
YouTube has a ton of knowledge already, not just in delivering online video, but also in “live” online video. If Unplugged actually works 99% of the time on Day One, YouTube will have a huge opportunity to snag market share.
On Friday, AT&T announced that it had gotten 200,000 additional paying video subscribers in the quarter ending December 31, “entirely driven” by DirecTV Now. By the end of 2016, DirecTV Now had only been in business for about a month. 200,00 paying subscribers in a month is impressive, and it means there’s a demand for the product. But so far, DirecTV Now has delivered a frustrating experience for many those early adopters, who have taken to forums and Twitter to rant against the service.
This is an opening for YouTube.
One of the benefits of a streaming TV service is how easy it is to cancel — think Netflix. So if DirecTV Now continues to be struggle with technical problems, YouTube can swoop in.
Even if YouTube succeeds in getting a leg up on its competition, that doesn’t mean the streaming TV market will be an instant goldmine.
The margins on the early streaming TV services appear to be razor-thin, and Hargreaves suggests that, initially, YouTube’s margins should actually be negative, given the “magnitude of the opportunity and the volume of competition.”
The crux of that opportunity lies in a fundamental shift in how TV ads work. As it stands now, TV networks sell most of the ad inventory for their shows. And in the early days of a YouTube streaming TV service, that's likely to continue to be the case, with YouTube itself selling only a few minutes of ads per hour on its own service..
But that will change, according to Hargreaves.
“Google's vastly superior data should allow it to monetize its ad inventory at superior rates to networks,” he wrote. “Over time, this disparity should allow Google to capture a greater share of total ad inventory on its service. Played out over several years, we believe the natural evolution of a successful Google vMVPD service [Unplugged] would be for the roles of content supply and ad selling (both currently done by TV networks) to split, with Google managing the ad selling and networks relegated to content suppliers.”
In a nutshell, YouTube will be better at selling ads than the networks, and eventually be in charge of selling all of them.
And that’s the real endgame and potential for profit: getting control of all the ad dollars.