Even in an era of bundle bloat for virtual MVPDs like DirecTV Now and Sling TV, the recent news that YouTube TV had agreed to a carriage deal for Discovery’s major networks was a surprise, taking its total network count to 80. Even more so was the fact that YouTube TV was increasing its monthly fee to $49.99.
$10 more for Discovery’s networks?
Analysts are praising the deal for Discovery. Most of their major networks are included, with eight initially being available and OWN being added later in the year. The deal has increased Discovery’s VMVPD coverage to 71% of homes with a subscription, up from the low 58% they had following their departure from DirecTV Now (only Viacom had worse coverage of the major network groups).
But when it comes to YouTube, the reaction is more confusion than celebration.
Considering the recent growth that YouTube TV has experienced, with total subscriptions estimated to have increased by 400,000 in Q4 2018 and reportedly over a million subscribers, it appeared that YouTube had hit a sweet spot with consumers. It was lower priced than most competitors (including the other fast-growing service, Hulu with Live TV) and offered a higher than average number of channels.
YouTube TV was also estimated to be incurring heavy losses in spite of increasing the monthly fee by $5 in March 2018. The Information estimated last summer that the cost to YouTube per month for its network bundle was $49; given the subscription was priced at $40, this meant that YouTube was losing at least $9 a month per subscriber, as this doesn’t include the costs of running the service. With the estimated 400,000 new subscribers at the end of 2018, that amounts to $3.6 million extra per month. Chump change perhaps for parent Alphabet, but a growing loss nonetheless.
The cost of adding the Discovery networks to YouTube TV (estimated from SNL Kagan’s carriage fees and assuming a 6% increase a year) amounts to around $1.90 immediately, rising to $2.01 once the OWN channel is included. With the monthly subscriber increase of $10, this means around $8 will be available after for YouTube. But this isn’t profit. Instead, this will staunch the losses the service is making, to a more palatable $1 per subscriber per month.
There may be value to subscribers with these new networks. However, YouTube couldn’t raise their prices for the second year in a row by a substantial amount without giving their consumers something. (It’s also easier to do it this way than to let consumers know they’re not paying the true cost for the service, and they have to spend $8 more per month without getting anything in return).
The timing of the announcement is also interesting. It happened one month before the upfronts, so Discovery can tell advertisers they are reaching over a million more (mostly young) consumers who don’t have traditional Pay TV. The impact of the price hike on YouTube subscribers will also be noted after the upfronts happen.
Should the number of subscribers fall, as could well be likely with this move, it will be after advertisers see YouTube’s upfront pitches with the most up-to-date numbers for the year to date. It could be as well that YouTube chases more of the addressable advertising pie this year, and, as they are one of only three VMVPD providers to offer individual user profiles, going out there with the maximum number of addressable individuals can only aid their cause.
It’s important to note that addressable advertising by household carries a much higher CPM ($40) than standard advertising ($10), and that addressable by individual has a premium on top (at least $50 per CPM). YouTube’s biggest rival currently for addressable is Hulu, as they also have user profiles and a higher subscription count, so the timing for the price hike is fortunate.
YouTube TV enters the upfronts with a wide range of networks, its highest subscriber count ever, and the capability for individual addressable ads. It will likely keep two of those three in the months following, but with the service price now above both the mean and median for VMVPDs, it is tough to see their rapid growth continue unencumbered.