The skirmish between Roku (NASDAQ:ROKU) and Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) YouTube TV has escalated quickly into a full-blown battle. Roku emailed users of the live-TV streaming app on Friday morning, letting them know that Alphabet's Google has chosen to let the YouTube TV contract with the popular smart-TV operating system expire.
We're not talking about Roku cutting ties with YouTube itself, as that situation would send shockwaves through the streaming universe. YouTube TV is a live streaming service that duplicates the linear cable and satellite-TV experience by offering access to more than 85 different live channels for $65 a month. Breaking up is still going to be a big blow to both companies.
It's more than just negotiating in public now
Earlier this week, Roku warned YouTube TV users on its hub that this could happen. Dragging the situation out into the public may have backfired for both parties.
"We cannot accept Google's unfair and anticompetitive requirements that would allow for the manipulation of your search results, impact the usage of your data and ultimately cost you more," Roku explains in Friday's Dear John letter to its affected users.
Roku is no longer accepting new subscribers to YouTube TV. Existing users can continue to use the older version of the app unless Google forces its hand for a full removal of the channel. YouTubeTV is no longer available for download, so Roku is asking existing users not to delete the application.
Neither party will win as long as the standoff continues. Roku is huge. It grew its audience by 39% last year, beginning 2021 with 51.2 million active accounts. With a lot of that growth coming from cord-cutters -- folks kissing their cable and satellite services goodbye -- live-TV streaming platforms have emerged as a way to duplicate the experience with live sports and network programming along with cloud-based storage to catch what they miss in real time.
YouTube TV is a leader in this small but rapidly growing field. It topped 3 million premium subscribers by late last year. It did not provide an updated subscriber count in this week's quarterly report, earnings call, and financials filing, but the market is clearly expanding. Smaller sports-centric fuboTV (NYSE:FUBO) has seen its subscriber base and revenue grow by 73% and 83%, respectively, last year.
YouTube TV is a lot smaller than YouTube itself. YouTube reaches 2 billion active users worldwide, so YouTube TV's base is less than 0.2% of YouTube's massive audience. But there's a lot of money to be made in streaming live TV to programming-hungry consumers. FuboTV, for example, is generating $8.47 a month per subscriber in ad revenue -- and that's on top of what its subscribers are paying for the high-priced service.
Alphabet could squander momentum in this battle. Roku's audience is growing, and 38% of all new smart TVs sold in the country come with Roku's operating system as the default factory-installed gateway to that experience. There are only a half-dozen viable live-TV streaming services out there, and new Roku users or existing Roku accounts adding new devices will have to consider the alternatives to YouTube TV if the two sides don't play nice.
Roku will also suffer. It has long positioned itself as an app-agnostic platform, but last year it was months late in adding HBO Max and Peacock to its system. Now it's showing YouTube TV the door. The publicity that Roku is generating by negotiating in public in this war may sway consumers to turn to rival streaming hubs. Smart TV manufacturers may have to reconsider going with Roku as the operating system of choice.
None of this has to end badly, of course. The scorpion doesn't have to sting the frog and drown both. For now, there are tech giants and media stocks watching this situation closely for a chance to benefit from the discord. Opportunity knocks. Opportunity rocks.