YouTube is proving consumers love TV; they just hate cable companies. The Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) subsidiary's virtual pay-TV service, YouTube TV, has over 1 million subscribers, according to a Bloomberg report.
That still trails rivals including AT&T's (NYSE: T) DIRECTV Now, Hulu's Live TV service, and DISH Network's (NASDAQ: DISH) Sling TV. But YouTube TV is growing quickly, and it has an opportunity to keep growing in 2019.
Image source: YouTube.
Finally, a successful YouTube subscription product
YouTube has been trying to expand beyond its core ad-supported video platform for years.
It launched YouTube Music Key over four years ago, and if you've never heard of it, that's because it's been relaunched twice and still hasn't caught on. It's now called YouTube Premium (and was called YouTube Red before that), but management appears to be giving up on selling ad-free premium content. It's making its new original productions available for free to everyone by 2020.
But YouTube TV has managed to grow to 1 million subscribers despite its limited geographic reach. It was in just 100 markets at this time last year. In January, the company expanded the service to reach 98% of the U.S. population. That alone should support further growth in 2019.
A successful subscription service is key to diversifying YouTube's revenue away from video ads. While digital video ad spending is still growing extremely well, YouTube has faced numerous challenges with regard to brand safety as a result of some of the content on its platform. As a result, the premium advertisements that are shifting from TV to digital may find other ad inventory (from a growing number of ad-supported video-on-demand platforms) more appealing.
YouTube TV is still just a small part of Alphabet's massive business. It's even a small part of YouTube. One million customers paying $40 per month is just $480 million per year. For reference, Alphabet generated nearly $137 billion in 2018, and YouTube is estimated to account for around $15 billion of that. Not to mention YouTube TV's profit margins are much lower. But owning a sizable pay-TV provider could give YouTube's parent company an extra leg up in winning over the television advertising market.
How YouTube TV compares to the competition
YouTube TV is still notably behind the competition. Hulu Live is closing in on 2 million subscribers, according to the Bloomberg report. That's in line with an earlier estimate that Hulu's service surpassed DIRECTV Now at the end of last year. AT&T ended the year with 1.6 million DIRECTV Now subscribers.
DISH's Sling TV leads everyone with 2.4 million Sling TV subscribers. But DISH is feeling pressure from other streaming services. It started offering a promotional rate for as little as $15 per month for three months for new subscribers. DISH notably saw its Sling TV subscriber additions fall to just 205,000 in 2018 after adding 711,000 subscribers in 2017.
But DISH should be wary of promotional pricing. When AT&T took customers off its promotional pricing for DIRECTV Now, it saw a massive drop in subscribers. It lost 267,000 DIRECTV Now customers in the fourth quarter as it removed various promotions. AT&T previously ran into hiccups once it stopped offering free premium streaming devices to new sign-ups.
In comparison, YouTube TV is reportedly adding hundreds of thousands of customers every quarter. It seems only a matter of time before YouTube catches up with the legacy TV providers.
How YouTube TV could accelerate in 2019
As mentioned above, YouTube may see an acceleration in subscriber additions in 2019 as a result of its geographic expansion. But there's another opportunity for YouTube as it starts to move away from its YouTube Premium offering. YouTube may opt to include some of the premium features of YouTube Premium -- ad-free and offline viewing -- in a YouTube TV subscription.
Hulu incorporates its basic on-demand service into its Hulu Live TV service. The integration is great, as Hulu's on-demand service reduces the amount of traditional DVR space Hulu needs to offer subscribers since they can just watch most shows the next day on demand.
YouTube has a similar opportunity by integrating some of the YouTube Premium features into a YouTube TV subscription. It already includes YouTube originals in the subscription, but considering the popularity of YouTube's ad-supported platform, ad-free YouTube viewing could compel some consumers to sign up for YouTube TV over its competitors.
It might also enable the company to raise the price of YouTube TV as it looks to make the service more profitable. Hulu raised the price of Hulu Live at the start of the year and AT&T raised the price of DIRECTV Now last summer.
Investors should look for YouTube to continue improving and expanding on YouTube TV as it works to take market share from the legacy TV providers and grow a subscription service. That could come at a cost in the short term, but the long-term benefits would be worth it.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Alphabet (C shares). The Motley Fool owns shares of and recommends Alphabet (A shares) and Alphabet (C shares). The Motley Fool has a disclosure policy.