Insights

YouTube TV’s 5 Million Viewers Hold a Lot of Value for Google’s Future

YouTube TV — the streaming service’s cable TV alternative — has 5 million subscribers and trial subscribers streaming live programming. Not only does that make it the largest virtual Multichannel Video Programming Distributor (MVPD), beating Disney‘s (NYSE: DIS) Hulu + Live TV, but it’s now the fifth-largest distributor in the nation. That’s some serious industry heft, and it could prove extremely valuable to its parent company, Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL).

5 Million subscribers hold a lot of weight

The cable industry is shrinking, and network owners are certainly feeling the pinch. As a result, we’ve seen significant industry consolidation over the last few years.

Disney, notably, bought Fox, except for a few networks that it either had to divest or weren’t included in the deal. Viacom and CBS remerged to form Paramount Global. And WarnerMedia and Discovery recently completed their merger to form Warner Bros. Discovery.

The merged media companies hold more power in carriage fee negotiations with distributors. But the bigger distributors have the ability to push back. With a growing number of viewers, now reaching 5 million, YouTube TV is able to provide meaningful value in an industry where most competitors are shrinking.

While that may mean better carriage rate agreements for YouTube TV, the parent company may be able to use those negotiations as a platform for expanding into the valuable premium TV and connected TV advertising markets. And that’s where Google can really benefit.

Getting those TV ad dollars

YouTube TV gives the company approximately two minutes of every hour of viewing to fill with commercials. To do so, it relies on Google’s ad technology, which can dynamically insert advertisements into TV streams. It’s the same technology other publishers that partner with Google use to fill ad inventory for their linear networks, streaming services, and digital properties.

Google has been trying to win TV ad dollars for a long time now. The industry still brings in over $65 billion in annual U.S. ad spend, and that’s expected to continue for a long time.

While Google had a brief relationship with Disney, serving ads across its properties, that contract now belongs to The Trade Desk. YouTube was renegotiating its carriage agreement with Disney in December but was unable to lock up the advertising deal as part of its contract. That said, Disney is one of the most powerful names in the cable bundle with valuable properties, including ESPN.

Google was also unable to secure a deal with Netflix, which will launch an ad-supported tier in early 2023. The streaming leader chose Microsoft for its ad-tech and sales partner, which could turn it into a much bigger rival for connected-TV advertising in the near future. As such, it behooves Google to leverage its strong position with YouTube TV and tie up some long-term contracts.

Google’s fortunes with other media companies may be better. Notably, Warner Bros. Discovery and Paramount Global operate ad-supported streaming services as well as other digital properties with lots of advertising opportunities. Google is a very suitable service for those jobs.

The opportunity for Google is massive. While it’s a dominant force in overall digital advertising, digital video ad serving remains an area where it faces meaningful competition (outside of YouTube). With a growing number of big potential contracts in digital video advertising, Google would do well leveraging the growing size of YouTube TV to win advertising contracts.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Adam Levy has positions in Alphabet (C shares), Microsoft, Netflix, and Walt Disney. The Motley Fool has positions in and recommends Alphabet (A shares), Alphabet (C shares), Microsoft, Netflix, The Trade Desk, and Walt Disney. The Motley Fool recommends Warner Bros. Discovery, Inc. and recommends the following options: long January 2024 $145 calls on Walt Disney and short January 2024 $155 calls on Walt Disney. The Motley Fool has a disclosure policy.

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