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Is YouTube’s New Pay-TV Service Dead On Arrival?

YouTube announced their new pay-TV service, YouTube TV yesterday. Retailing for $35/month, the latest entry into the skinny bundle service has no actual start date yet, though it does seems to have the four major broadcast networks signed up (sort of) along with all their various and sundry cable affiliates.

While Silicon Valley acolytes see this as another nail in TV’s coffin, we suspect it’s actually (to quote our erstwhile president) the reverse.

Here’s why:

The notion that there’s a market for skinny bundles is based on a false premise. Companies like YouTube look at Millennials without cable packages and figure there are about 10 million households without pay-TV.

The problem with that assumption is that we’re pretty sure most of those Gen Zers and Millennials are actually watching pay-TV. Only they’re watching it with OPP—Other People’s Passwords or Own Parents Passwords. Yes, they don’t have set-top-boxes and they’re watching on an app, but they’re authenticating that app with Mom and Dad’s Comcast credentials.

So there’s that.

There’s also the fact that the demand for skinny bundles is pretty low. The product suffers from the fact that people who investigate quickly start to feel as if they are paying 30% less dollars for 70% less content, and that factoring in that “double play” (TV + Broadband) deal their MVPD is offering, the savings can be even less.

So there’s that too.

And while we’re on the topic of double- and triple-play packages, there’s the very real fact that the MVPDs have a monopoly or duopoly over broadband and have no qualms about using that to their advantage. So that broadband alone might cost $125/month, while broadband plus their basic cable service (which has more channels than any skinny bundle) is just $100/month. For the first nine months, anyway …

So there’s that as well.

There’s also the affiliate thing. Quick background: by law, the broadcast networks are only allowed to own 32% of the TV stations that show their programming. The stations they own, all in major markets like New York, Chicago and Los Angeles, are called “O&Os”—owned and operated—and they are part of the YouTube deal. That’s about eight to ten metro areas in the U.S.  Everywhere else you’ve got affiliates—independently owned TV stations that agree to show programming from one of the Big 4 broadcast networks. These stations also have a decent amount of local-only programming they run during non-prime time hours.

Now getting deals with the affiliates is no easy task—Sony’s Playstation Vue still hasn’t managed to strike any deals. There’s an oft-repeated industry legend that says when Apple wanted to start up a pay-TV service, the networks famously told them to go out and strike deals with the affiliates, and when they’d gotten them on board, to come back and they’d talk. Which was widely seen as the TV industry equivalent of “go out and slay the dragon and rescue the princess from the castle. And when you’ve done that, we’ll see about letting you marry her.”

YouTube CEO Susan Wojcicki was pretty blasé about getting the affiliates on board, but we’re a lot less optimistic. The phrase “herding cats” comes to mind and we’re feeling more than a bit skeptical that YouTube, which has never had to deal with local TV broadcasters before (aside from some takedown orders for pirated content) is going to bring them on board.

So there’s also that.

There’s also math. If the potential market is 10 million, and you’ve got Sling and DirectTV Now and Sony Playstation Vue and YouTube and the soon-to-be-launched Hulu pay-TV service all competing for those viewers … that’s not a whole lot of viewers. To put it into perspective, Comcast alone has 22.3 million subscribers.

So what does the future look like then?

Comcast, they of the 22.3 million subscribers, seems to have their finger on the pulse. (A statement no one would have suspected five years ago, but kudos to them for coming back.)

Comcast recently struck deals with Netflix and YouTube to put both services on their X1 set-top-box. They also released a Roku app. Right there, you have the three key trends:

  1. MVPDs will partner with the major streaming services and incorporate them into their set-top-box interfaces. Netflix, Amazon and Hulu will become online versions of HBO—consumers will sign up via their MVPD and their shows will show up in the program guide. This is already happening—Hulu has a deal with Altice, the aforementioned Netflix/Comcast deal is already in place and more are on the way. It’s a win for all parties involved, so we expect these to happen pretty quickly.
  2. MVPDs are going to double down on their TV Everywhere (TVE) apps, both on devices like Roku and on tablets and smartphones. Now that Nielsen’s Total Audience Measurement system is (more or less) in place, those views will be counted towards ratings and networks will do away with the restrictions they’d placed on TVE. Comcast’s Roku app replicates their X1 set-top-box and provides all the same content. So no rolling trucks or waiting for the cable guy to show up–sign-up can be as easy as downloading an app.
  3. Short form and niche content will be available via MVPDs as well. As the MVPDs move from a grid-based guide to a recommendation-based one (see our piece on how revolutionary this change will be) their interfaces will be able to surface programming from their libraries based on a viewer’s interests. With machine learning recommendation and playlist systems from companies like Iris.TV in place, the MVPDs can start offering what amounts to a linear stream of short-form programming as a counterpart to long-form.

What’s important here is that all these options give the MVPDs the tools to shut down cord-cutting. Since all viewers need broadband, the MVPDs can easily pair broadband with just Netflix, or with a couple of streaming services and short form to lure back someone who is thinking of cutting the cord. Maybe even throw in basic cable as well, to bring in “cord nevers” who have broadband but get their TV elsewhere. All while continuing to try and upsell the customer for the remainder of the relationship.

Should 5G or start-ups like Starry ever manage to break the MVPD’s death grip on broadband, the future of TV will look a lot different, but for now, this appears to be where everything is headed—a direction that doesn’t leave much room for YouTube TV. Especially when they are competing with services like Sling, DirecTV Now and Hulu, which are part of larger organizations that are also in the pay-TV arena, and thus have the ability to offer their customers something extra.