Can “Unplugged” Drive Revenues For YouTube?

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GOOG: Alphabet logo
GOOG
Alphabet

After launching  YouTube Red last year, its first paid subscription service, Alphabet Inc.’s subsidiary Google (NASDAQ:GOOG) is now reportedly working on a paid subscription service called “Unplugged” that would offer customers a bundle of cable TV channels streamed over the Internet. The project is likely to be launched next year and YouTube is looking to sell a package of channels at a subscription charge of less than $35 a month. Reports suggest that the company is currently in negotiations with media networks to firm up the packages. Consumers are moving away from traditional Pay-TV, due to high costs and immobile viewing. Younger audiences in particular seek the ability to subscribe to skinny bundles of channels that can be viewed from any internet enabled device. As the OTT (Over the Top Television) market witnesses significant growth in the future, YouTube’s latest project has the potential to become a key revenue driver of growth in the future. Competition in this market segment is intensifying, with players such as Dish’s Sling TV, Hulu and Amazon actively exploring live streaming.  YouTube’s ability to provide popular content will likely be important for its success in this venture.

Popular Content Would Be Key Success Factor

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The NPD group estimates that by 2018 nearly 231 million installed devices will be connected to the internet and have the ability to deliver apps to the TV.  This represents an 82% growth compared to the 2014 figure. According to Statistia, revenues from the online video market (including subscription based streaming) are expected to increase from nearly $10 billion in 2016 to around $14 billion in 2020. Millennials (consumers in the age group of 18-34)  increasingly prefer consuming content via the internet to traditional Pay-TV. This gives them the flexibility to watch content on any device and at a much lower cost. While the potential of this market is strong, YouTube’s success will depend on its ability to provide popular channels at an affordable price to consumers. Dish’s Sling TV currently offers a bundle at $20 per month and recently launched multi-device streaming. Viacom is providing its networks through a suite of apps called “Viacom Plex Play” on a mobile device. The video on demand service Hulu is likely to provide a live tv subscription soon and Amazon is also interested in offering this service. With intense competition in this market, YouTube’s immense popularity should work in its advantage; however programming quality will be the key factor to drive revenues. Netflix is currently the most popular video on demand service in the U.S. and its high quality original programming is the primary driver for subscriber growth.

YouTube accounts for more than 12% of Google’s valuation, as per our estimate, and we expect a steady increase in its revenues per page view and number of users during our forecast period. If its subscription based services can drive higher revenue growth for the segment, there can be a 5-7% upside in our price estimate.

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An internet TV viewing bundle for $35 is definitely more attractive for consumers currently paying nearly $100 for their Pay-Tv subscriptions. High quality videos and better technology will work in YouTube’s favor.   However, its ability to negotiate with television networks to provide the most popular content to consumers will be key to the success of “Unplugged”.

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