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YouTube Wants to Be Your New Pay-TV Provider

By Adam Levy – Jul 14, 2016 at 6:39PM

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A new skinny bundle of TV channels is Alphabet's latest moonshot.

YouTube's current TV app. Image source: YouTube

The largest streaming video website in the world is looking to get a little bigger.

The Information reports that YouTube, a subsidiary of Google, the Alphabet (GOOG -0.95%) (GOOGL -0.96%) company, is expected to launch its streaming live television service early next year. YouTube fully expects CBS's (PARA -4.27%) broadcast network and Disney's (DIS -3.52%) ABC and ESPN to be part of its bundle, and it's reportedly in talks with other major network operators as well such as Viacom (NASDAQ: VIA).

YouTube will join a growing number of online offerings providing streaming television. DISH Network started the trend last year with the launch of Sling TV, and others have jumped on board the trend. Hulu is also expected to launch a similar service next year. With the increasingly crowded market, YouTube will need to figure out how to differentiate itself from the competition, and sell a subscription package to its users, who are used to getting video for free.

So, will Alphabet's latest moonshot succeed?

A lot working in its favor

YouTube has a lot of advantages over even some of the most established competitors.

Hulu, for example, has just 12 million paid subscribers in the U.S. and Japan. eMarketer estimates that it reaches a whopping 67 million Americans every month between its paid and free users. Still, that pales in comparison with the 176 million who visit

YouTube's huge existing audience presents it with an opportunity to market a service to a group of consumers who are already familiar with its products.

However, that benefit hasn't helped it sell subscriptions to its premium ad-free product, YouTube Red. Along with removing ads, YouTube Red provides access to premium original content and Google's premium music-streaming service. The Information reports that adoption is weak, and that's further indicated by the extension of the service's trial period from 30 days to four months.

But what could separate YouTube from the competition is its huge library of user-generated content, that it's capable of accessing for relatively little compared with broadcast networks. YouTube reportedly plans to package that content into niche networks that could replace niche cable networks such as HGTV or Style.

That could enable YouTube to save on content costs while providing a different set of programming for its subscribers. If YouTube can pass those savings on to its subscribers, it could have a price or value advantage over others. YouTube is expected to price the service under $35, which is in line with most existing services.

A lot working against it

Aside from the fact that YouTube hasn't had much success selling a subscription service in the past, it has a couple of factors working against it.

Primary among these factors is that network operators are all pushing to get their channels into these skinny streaming bundles. After losing 7 million ESPN subscribers over the past two years, Disney has shifted its focus to working with traditional pay-TV operators and tech companies to get its most expensive cable network into more packages. CBS CEO Les Moonves is also very open about getting its broadcast network into more digital platforms.

Other network operators, such as Viacom, are also pushing to get their networks into streaming packages. After seeing affiliate fees fall 1% in the first six months of the year, Viacom is pushing to get its networks in more digital services. With every cable network vying for spots in various skinny bundles, new services run the risk of either coming away empty-handed or being forced to take on more than they want. That could prevent YouTube from providing additional value through its user-generated content.

Moreover, many networks are exploring going direct-to-consumer. CBS already has its All Access app, which provides access to CBS's live broadcast and its entire archives, going all the way back to I Love Lucy. ESPN is exploring providing more niche programming direct-to-consumer. Additionally, Disney's recent investment in MLB Advanced Media's BAM Tech gives it access to one of the best streaming video platforms, opening the door for even more a la carte options from the media powerhouse. Viacom, likewise, launched Noggin -- an tailored subscription for Nickelodeon programming -- early last year.

The growing number of custom options could further reduce the demand for skinny bundles.

Is it worth it?

It's still early days for streaming television services, such as the one YouTube intends to launch. With more and more Americans cutting the cord every year, there's a growing market for more digital-friendly video services. As a leader in online video streaming, YouTube would be foolish not to try its hand at a subscription service.

Still, there's more working against it than for it. Not only does it have to compete with incumbent pay-TV services, but there's also a growing number of new digital services popping up. YouTube may end up spending a lot of money on upfront contracts with networks and marketing, and having little to show for it.

But, hey, moonshots are what Alphabet is all about.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Adam Levy has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Walt Disney. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Stocks Mentioned

Alphabet Stock Quote
$99.48 (-0.96%) $0.96
Alphabet Stock Quote
$99.87 (-0.95%) $0.96
Walt Disney Stock Quote
Walt Disney
$95.93 (-3.52%) $-3.50
Paramount Global Stock Quote
Paramount Global
$19.51 (-4.27%) $0.87

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