Quick Thoughts: YouTube TV is More Than a Me-Too OTT Service

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–     GOOGL is entering the increasingly crowded, but still nascent OTT PayTV market with YouTube TV – a bundle of 40 channels for $35 a month.

–     On the surface, YouTube TV’s offering is undistinguished vs. rival services from DISH, SONY and T, which have similar content deals at similar price points.

–     GOOGL can leverage its world best datacenters and CDN for significant performance advantages – more stable streaming, much lower lag, unlimited storage, etc. –  where rivals have struggled

–     There is also substantial synergy with other GOOGL assets (Search, Assistant, Android, Home, YouTube, etc.), and the service ads significant value to GOOGL’s digital ad platform

Traditional cable, satellite, and telecom pay TV providers are seeing an acceleration in subscriber declines as public companies that report sub numbers reporting YoY losses widening from -1.3% in 3Q16 to -1.7% in 4Q16. With average pay TV bills exceeding $103/month according to SNL Kagan, OTT alternatives priced under $40 per month are attractive options for consumers to get the channels they want to watch. GOOGL is entering this increasingly crowded OTT pay TV space with the $35/month YouTubeTV, going up against services with similar content bundles from Dish, Sony, and AT&T/DirecTV, with Hulu set to enter soon and AAPL looming on the sidelines. Although a late entrant, GOOGL is coming into a relatively nascent market with strong competitive advantages, which include arguably the top content delivery network in the world, the lowest cost cloud storage infrastructure, complementary products and services (Chromecast, Home, Assistant, AndroidTV, YouTube, All Play Music, and, of course, Search), and the market leading digital advertising platform.

YouTube TV was long expected, as rumors of deals with broadcast network owners like Disney, Fox, Comcast’s NBCU, and CBS, circulating since early 2016. The YouTube TV offering consists of 40 channels from 4 large media companies (DIS, CBS, FOXA, and CMCSA), including highly coveted sports networks like ESPN, Fox Sports, and NBC Sports. Channels from pureplay pay TV network owners like Viacom, Time Warner, and Scripps are notably absent. Given these networks appear on other OTT services, their absence suggests that GOOGL does not see them as “must have” content for its target customers, although it would be no surprise to see them added at a later date (undoubtedly at a lower price than has been asked thus far).

A recent survey by eMarketer indicated that some 56% of cord cutters chose to cancel their traditional Pay TV services on the basis of price. Of Internet users surveyed, 86% of respondents either somewhat or strongly agree that pay TV services are too expensive. Studies by the FCC and SNL Kagan corroborate this as cable prices grew at a 6.1% CAGR from 1995-2013 versus 2.4% CPI growth over the same period. Still, despite prices substantially lower than the typical $100+ per month cable bill, adoption of OTT services has been modest – just 1.5M US households receive linear TV via the internet compared with 50M US Netflix subscribers. We believe poor service quality has been a key obstacle – the existing competitors have been plagued by buggy user experiences and inconsistent streaming performance. Live streaming TV channels frequently lag their cable counterparts by 1-3 minutes, which is unacceptable in the age of social media, where tweets can give away results ahead of lagging streams. We believe that YouTubeTV, levering GOOGL’s superior cloud infrastructure and industry best content delivery network, will be able to dramatically improve upon its infrastructure challenged rivals’ performance. (See http://ssrllc.com/publication/37440/) Indeed, GOOGL already delivers more than 1 billion hours of live and pre-recorded video daily – with a reputation for top notch streaming performance.

YouTubeTV is also raising the bar for cloud DVR functionality, offering unlimited storage and allowing programs to be held for 9 months. The competition, all of whom limit DVR storage by capacity caps and/or dramatically shorter holding periods, will undoubtedly end up matching YouTubeTV’s policy, but from a substantial disadvantage – GOOGL is the lowest cost datacenter operator in the world.

GOOGL can also generate synergies with several of its other corporate assets. Inarguably, GOOGL is the top search company and can apply that technology (including its artificial intelligence capabilities) toward facilitating program discovery on YouTubeTV, in particular, offering recommendations based on learned preferences. It can also tie the service to Android equipped devices and popular Chromecast streaming devices to easily control everything from a smartphone. With Assistant, a subscriber might schedule a DVR recording with a voice request to a Google Home or to a Pixel smartphone. Classic YouTube will be bundled with the PayTV channels with a common interface and discovery tools, and unlimited music streaming is a throw-in. We expect all of this to work with characteristic GOOGL performance and ease of use.

GOOGL is also the leader in digital advertising with sophisticated tools and extensive user data to effectively match ad messages to specific users. Adding the PayTV content to the mix enhances the value of GOOGL’s platform to advertisers, with cross promotion opportunities that could add value to network partners as well. In the scheme of the existing business, YouTubeTV is likely to be a small business opportunity for the company, particularly in terms of profit potential, but we believe that its value in consolidating video viewership to a single consistent platform and learning from the interactions will be considerable.

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