The cord-cutting movement marches on. Cable giant Comcast (NASDAQ:CMCSA) lost another 273,000 pay-TV customers last quarter, while AT&T (NYSE:T) shed another 627,000 cable TV subscribers during the three-month stretch ending in September. Both are extensions -- and microcosms -- of forces working against the entire cable television industry.
However, there's a noteworthy name bucking this attrition trend. Digital cable service YouTube TV now serves more than 3 million watchers, up from the 2 million its parent Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) confirmed were on board early this year before the COVID-19 pandemic took hold. Research outfit MoffettNathanson estimated YouTube TV had 2.5 million paying customers as of the end of June, up from an estimate of 2.3 million as of the end of the first quarter.
How is Alphabet's young cable alternative sidestepping the cord-cutting movement, particularly after July's price increase that made the service nearly as expensive as conventional cable? Perhaps some of the broad assumptions about cable's cost are wrong. Mostly though, Google's got a digital TV edge not many people fully appreciate.
Bucking the trend
For the unfamiliar, YouTube TV is Google's answer to out-of-control cable bills. The internet-delivered alternative to linear cable from the likes of Comcast's Xfinity or Charter Communications' (NASDAQ:CHTR) Spectrum offers the same mix of channels one would expect from cable stalwarts. You just need a streaming receiver that powers the YouTube TV app.
Except, the assumption is that it should be struggling just like all the rest of these virtual/digital video distributors are. AT&T's comparable over-the-top cable television service lost 37,000 subscribers last quarter, while Sling TV from DISH Network (NASDAQ:DISH) lost another 56,000 of its 2.3 million customers during its second quarter of this year.
And as was noted, more conventional cable media platforms like Comcast's Xfinity and AT&T's cable services lost customers last quarter too, lengthening the industry's losing streak. For instance, AT&T shed another 627,000 subscribers during the three-month stretch ending in September,
What makes YouTube's feat all the more impressive is how July's $5 price increase to a monthly cost of $64.99 didn't appear to be a problem for newcomers even though that figure encroaches on conventional cable's pricing. Those prices drove another 590,000 cable cancellations for AT&T's cable customers last quarter and picked off another 273,000 of Comcast's TV customers during the same period.
Data is the difference
YouTube is a well-recognized platform, but the average investor may not realize just how busy YouTube is. The site attracts more than 2 billion users per month who collectively watch an average of about 1 billion hours' worth of video every day. These viewers generated $5 billion worth of ad revenue for Alphabet last quarter alone. YouTube also boasts more than 30 million paying subscribers, most of whom are paying for access to YouTube Music and ad-free video outside of YouTube TV.
At the same time, Alphabet's search engine, Google, handles a total number of web searches measuring in the trillions every year thanks to its sheer size. Global Stats' statcounter indicates Google is the go-to search engine for around 93% of the world's internet users, and its Android operating system powers roughly 73% of the world's mobile devices. For perspective, around 5 billion people regularly search the web, and there are about 2.5 billion actively used Android devices in the world.
Each one of these Google searches and each instance when an Android app is used gives Alphabet another small piece of potentially useful information about that individual. This data is then hashed into a profile that ultimately allows Google to delivery highly targeted ads to these individuals. As much as multi-faceted cable giants like Comcast or AT&T may know about you, they're not going to know as much about you as Google does.
Of course, it doesn't hurt that every YouTube user is only a couple of easy clicks away from being converted into a YouTube TV customer.
Simply put, Alphabet is collecting new cable customers in an environment where cord-cutting is the norm because it's already got access to a huge base of users. Most probably won't become YouTube TV customers, but most of them don't have to become paying subscribers for Google to be a disruptor in the business.
And there's the rub for Alphabet shareholders, as well as for investors of other cable names.
With a price of $65 per month, Alphabet's 3 million virtual cable customers are still only adding about $2.3 billion worth of revenue to the top line per year. That's a small fraction of the $171 billion in sales it's driven for the past four quarters. It could double its current cable headcount and still not really move the company's broader revenue needle. And yet siphoning off cable customers from names like AT&T as well as Charter Communications -- which derives about 45% of its revenue just from cable TV -- could still prove quite problematic for those companies.