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Will YouTube Be Your Cable TV Provider? Not in the Near Future

By Andrew Tonner - May 11, 2016 at 9:41PM

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Will the cable industry ever play ball with the likes of Apple and Alphabet?

The cable industry is in the midst of a generational shift, and Alphabet's (GOOG -0.27%) (GOOGL -0.21%) YouTube is the latest name trying to cash in on this moneymaking opportunity. YouTube is reportedly in the midst of developing its own Internet-based cable TV service, an area in which it has long expressed interest.  

However, investors in the search giant would do well to moderate their expectations. Google's attempts to bring cable to YouTube appear far less likely to succeed given several recent developments within the cable industry.

Inside YouTube Unplugged
According to Bloomberg, YouTube is working toward launching its own over-the-top (OTT) cable service. The company is said to be planning a launch as early as next year, though it remains unclear exactly how that might come to pass.

Operating under the name YouTube Unplugged, Alphabet has reportedly pitched the service to executives from Comcast (CMCSA 2.68%) (NASDAQ: CMCSK), Viacom, Twenty-First Century Fox (FOXA) (FOX), and CBS Corp. However, the Bloomberg article says no major media company has agreed to license its content to YouTube Unplugged.

The lack of traction among necessary content partners presents a critical problem for a service reportedly looking to launch next year. It also might signal a more fundamental obstacle facing tech companies such as Alphabet and Apple (AAPL 1.62%) in their attempts to create their respective OTT services. Apple also has reportedly hit roadblocks in getting content.

Regardless, YouTube appears to have already invested in the technical infrastructure necessary to support a "skinny bundle" service.

Source: Apple.

Outside looking in
The impasses at Alphabet and Apple raise questions about whether the cable industry will allow tech companies to create competing OTT products at all.

As I discussed last week, Twenty-First Century Fox and the Walt Disney Company recently decided to create a new OTT service that will bring content from the two major producers to Hulu, the service they jointly own with silent partner Comcast.

In the face of declining cable subscriptions, cable companies and networks have increasingly turned to so-called skinny bundles -- lower-cost cable packages, usually with 20 to 40 channels -- to retain customers. Skinny bundles yield less revenue per subscriber -- typically between $20 and $40 monthly, versus $99 on average for traditional cable bundles.  

However, thanks to the ubiquity of the Internet and smartphone and tablet app ecosystems, the cable companies and networks such as Comcast, Twenty-First Century Fox, and Walt Disney can create and readily distribute their own skinny bundle services. In doing so, the networks and cable companies should be able to capture a greater percentage of the subscription revenue than if they simply licensed their content to third-party distributors such as Alphabet or Apple. 

Apple and Alphabet could argue that their technological and product experience makes them better suited to create an easily navigable and attractive OTT cable product. However, for names like Comcast, Twenty-First Century Fox, and Disney, their ownership of Hulu largely invalidates this claim. Apple and Alphabet might also say they can offer cable companies and networks immediate scale, but cable companies already have huge installed bases as well.

With the coming changes to the set-top-box space likely to dismantle another key source of cable industry revenue, the cable companies and networks probably are in no mood to enable tech companies such as Alphabet and Apple to compete with them. So while Alphabet appears intent on breaking into the cable market, the lack of cooperation from the cable industry could signal that the shift from cable to Internet-based TV services might not flow through to tech companies after all.

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Stocks Mentioned

Alphabet Inc. Stock Quote
Alphabet Inc.
$2,174.75 (-0.21%) $-4.51
Alphabet Inc. Stock Quote
Alphabet Inc.
$2,181.62 (-0.27%) $-5.83
Apple Inc. Stock Quote
Apple Inc.
$138.93 (1.62%) $2.21
Comcast Corporation Stock Quote
Comcast Corporation
$40.29 (2.68%) $1.05
Twenty-First Century Fox, Inc. Stock Quote
Twenty-First Century Fox, Inc.
Twenty-First Century Fox, Inc. Stock Quote
Twenty-First Century Fox, Inc.

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