Can YouTube TV Get You to Cut the Cord for $35 a Month?

For years, YouTube has served up almost every imaginable kind of video.

The site’s top trending attractions on a recent afternoon included clips of a gymnasium roof collapsing in the Czech Republic, a colossal alligator lumbering across a footpath in Florida, some North Korean refugees digging into American barbecue for the first time, and a guy demonstrating how to wash a car with a baby. (Step one: Hand the baby the hose.) Now, a dozen years after its creation and about a decade after its absorption into Google Inc., YouTube is on the verge of adding yet one more genre—a category of programming that has long eluded it. YouTube is finally getting regular TV.

On Feb. 28, YouTube Inc. announced a new service that will deliver an assortment of major television channels to paying customers via the internet. For $35 a month, starting sometime this spring, subscribers to YouTube TV will be able to watch the top four broadcast networks—ABC, NBC, Fox, and CBS—and 35 or so of their affiliated cable channels, including ESPN, Disney Channel, MSNBC, National Geographic, and Fox News. Among other enticements, YouTube TV will give subscribers a DVR tool for recording shows and unlimited storage space in the cloud. The only catch is that shows are automatically deleted after nine months.

YouTube CEO Sees Giant Opportunity for Just $35 a Month

Subscribers will be able to watch YouTube TV on smartphones, tablets, laptop computers—pretty much however they want. The mobile apps are designed to easily “cast” from smartphones to larger screens, perhaps even—for we olds—actual TV sets. Throughout the app, native YouTube content will be layered in alongside the network shows. The goal, executives say, is not so much to lure older viewers away from their cable subscriptions, but rather to coax youngsters into paying for a package of linear TV channels for the first time. “This is TV reimagined for the YouTube generation,” says Christian Oestlien, director of product management at YouTube.

YouTube TV arrives at an uneasy time in the television industry. For several years the percentage of households in the U.S. that pay for a cable or satellite subscription has been inching downward. This, in turn, has increased pressure on the major networks, which rely heavily on the lucrative per-subscriber licensing fees they collect from cable and satellite operators.

The networks have begun licensing their programming to a new crop of services—such as Dish Network’s Sling TV, AT&T’s DirecTV Now, and Sony’s PlayStation Vue—that distribute some subset of the TV universe (typically 20 to 120 channels) over the web at a lower cost for consumers than a traditional cable package. Later this year, Hulu LLC, a joint venture backed by several major media conglomerates, is expected to introduce a competing product.

Christian Oestlien
Photographer: Carlos Chavarría for Bloomberg Businessweek

These TV-lite packages offer many of the same enticements (they’re low-cost and mobile-friendly) now being touted by YouTube, yet none has gotten off to a particularly strong start. Sling TV, which launched in February 2015, recently topped 1 million subscribers, less than 1 percent of the 120 million U.S. households that currently have some form of TV. PlayStation Vue, which entered the market shortly after Sling, has attracted upward of 100,000 customers. In January, AT&T revealed that DirecTV Now drew about 200,000 customers during its first month of operation.

No one is making much money, if any, says Dan Rayburn, an analyst at Frost & Sullivan Inc. The services, he says, are priced too low (usually $20 to $65 per month) to cover the costs of licensing premium programming from the networks. “I don’t buy it as a successful business model,” he says. “None of these services would be able to survive without the backing of their parent companies.”

Even so, TV-curious tech companies keep trying. In recent years, Apple, Microsoft, and have considered taking a crack at the market. “In the next six months, we’re going to see a major bake-off,” says Brett Sappington, senior director of research at Parks Associates Inc.

YouTube TV will come into the world with a branding advantage over its competitors. Some observers believe that people weaned on YouTube from the crib will instinctively follow wherever it leads them. “With younger viewers, we feel like you should fish where the fish are, and YouTube has a young audience,” says John Skipper, president of ESPN Inc. and co-chairman of Disney Media Networks. “We also like their mobile emphasis and that they understand how to use data to find out people’s predilections and to make their experience better.”

“We’ve been talking about this concept of bringing together the best of TV and the best of YouTube for a long time,” says Neal Mohan, YouTube’s chief product officer. “We want to be the whole universe of video content.”

“These two different types of media have evolved along separate, parallel paths,” says Susan Wojcicki, chief executive officer of YouTube. “They’ve been inching closer and closer together. This is the final convergence.”

YouTube TV is organized around three zones—a home tab for finding things to watch, a live tab for scrolling through channels, and a library tab that organizes a user’s recorded shows. Mohan says the ability to record limitless amounts of TV was one of the features that most excited early testers.

The app’s home page brims with recommendations: what to watch now on live TV, what’s trending on YouTube, what upcoming shows you might want to record. Product manager Oestlien says the process of providing compelling recommendations is based on everything the company has learned over the past decade while guiding billions of people through the galaxies of material on YouTube. What you ­previously chose to watch or reject largely determines what will be ­recommended to you. The result is a sly machine that is forever learning what kinds of things you enjoy watching and spoon-feeding you more of it. “We really want to re-create the experience that you have on YouTube, where you begin with one show and then move seamlessly through a ton of great content,” Oestlien says.

Neal Mohan
Photographer: Carlos Chavarría for Bloomberg Businessweek

Viewers can also search for specific shows or genres. A query for cooking shows, for example, might turn up recommendations for Hell’s Kitchen, the TV staple from Fox, alongside Epic Meal Time, a web-only show produced by Studio71 GmbH. “Search-based navigation is Google’s sweet spot,” says Mohan. “We should be able to do that better than anybody else.”

Everything on the app is highly personalized. Within a single YouTube TV subscription, a family can set up as many as six individual accounts. Each family member gets a profile, customized recommendations, and a personal library—all of it untouched by the irritating preferences of others. “That way your own YouTube TV experience doesn’t have to get polluted with what your spouse or kid is watching,” says Mohan.

Internet TV has often been less reliable than cable or satellite. Maddening disruptions tend to take place during the biggest programming events, when surges in viewership can reduce everything from World Cup soccer matches to Game of Thrones season finales into spinning buffer wheels of outrage and recrimination. YouTube executives say they can do better. “Something that tends to be taken for granted, but is actually a pretty herculean effort, is the years of video-serving infrastructure that we’ve built up,” Mohan says. “Every minute, on average, more than 400 hours of content are being uploaded on YouTube and ready to serve. There’s an enormous amount of learning that went into that, which we can apply to this new YouTube TV experience to make it reliable and flawless.”

There are plenty of gaps in the lineup. Subscribers won’t be able to watch anything from Viacom (Comedy Central, MTV), Discovery Communications, AMC Networks, A+E Networks (History, A&E), or Turner Broadcasting (CNN, TBS, TNT), to name a few. Replicating the entire cable-TV bundle would have been too costly, says Wojcicki. Instead, her team targeted a selection of channels that would deliver the essential elements—particularly live sports. Through the deals with Fox, CBS, NBC, and ABC (whose parent company, Disney, owns ESPN), YouTube TV subscribers will be able to watch pro and college football, basketball, soccer, baseball, hockey, tennis, and golf. “We’ve designed the service to be great for sports lovers,” she says.

The selection will likely grow and evolve. Additional tiers of programming—catering to fans of comedy, say, or European soccer—could eventually be added and subscribed to for an extra monthly fee. “The mix in a couple years will be the result of lots of learning, lots of testing,” says Robert Kyncl, YouTube’s chief business officer.

Once upon a time, the notion that TV programmers would give their blessing to YouTube to distribute any of their precious goods would have been preposterous. When the video-sharing site made its debut in 2005, users frequently posted clips that were taken without permission or payment from big media companies. Much teeth-gnashing ensued. In 2007, Viacom Inc. sued YouTube for copyright infringement, seeking $1 billion in damages. (YouTube denied it did anything wrong.)

By the time that suit was settled seven years later for an undisclosed sum, relations between YouTube and the TV industry were thawing. YouTube engineers were rolling out stronger filters for keeping unauthorized material off the site, and over time, a vibrant culture of indigenous YouTube “creators” took hold. Moonstruck teenagers ate it up. YouTube started inking deals with networks to re-air programming highlights, cutting whoever made the shows in on the resulting ad revenue. “We’ve proven that we are a friend,” says Kyncl.

Robert Kyncl
Photographer: Carlos Chavarría for Bloomberg Businessweek

And a wildly rich friend at that. The largest TV networks stand to benefit from YouTube TV and its rival services in part because, to gain entry to the market, the deep-pocketed newcomers are likely coughing up significantly more per subscriber than established distributors.

“We are really open to being in business with anybody as long as they pay us fairly and appropriately for our content,” says Leslie Moonves, chairman and CEO of CBS Corp. “The YouTube people were terrific to deal with. They have a very young constituency, which is something we’re always trying to reach. They are very attuned with what we do and what our needs are.” Moonves declined to say how much YouTube is paying CBS but called it “a very fair deal for both parties.”

There is growing hope among media companies that the new web-TV bundles—backed by well-funded, millennial-mesmerizing brands such as YouTube—could reverse any slide in the overall number of pay-TV customers in the U.S. Peter Rice, head of 21st Century Fox Inc.’s networks group, estimates that the services will attract 2 million to 3 million subscribers by the end of this year. That’s similar, he says, to the growth of satellite TV in the mid 1990s. “It’s a very rapid pickup,” he says. “I’m really excited about where it’s going and what it’ll mean for our business.”

Likewise, native YouTube programmers say they’re salivating over the dawn of YouTube TV, which will put their shows on equal footing with the big TV brands. “The idea that our series and movies could be on a slate of programming with all this other quality content from major TV networks is really appealing to us,” says Burnie Burns, who co-founded Rooster Teeth Productions LLC, a webcentric company in Austin.

The new service won’t be YouTube’s first effort to collect monthly charges from customers. In 2015 the company launched YouTube Red, which for $9.99 a month lets subscribers watch videos and listen to music on YouTube without seeing any ads, while also getting exclusive access to original YouTube movies and series. But most of the content on YouTube has always been available to everyone for free. Getting large numbers of its target audience to pay for network TV will likely be a challenge. Historically, persuading millennials to pony up for online programming has been a bit like asking a roundtable of toddlers to discuss the finer points of moral philosophy.

Even so, the company’s executives say they plan to market the service primarily on the web, targeting existing YouTube users. There are reasons to believe, they argue, that youngsters’ resistance to paid content may be weakening. Kyncl points to the growing number of young people paying for streaming services such as Netflix. “We believe the time is right,” Kyncl says.

YouTube CEO Wojcicki says the company isn’t worried about short-term profits. “The approach we’ve taken with all new products is looking at: Are we solving a real problem? Is this something we care about? And if we are successful, will it make a difference?” she says. “Ad-supported TV is one of the largest industries in the world. We see all these ways the experience could be better: search, recommendations, cloud storage. For Google, as an advertising-supported information company, it’s a good investment.”

For years, advertisers have paid less for placement on YouTube than on traditional TV, despite relentless efforts by the company to close the gap. That’s because, in part, of lingering concerns among some big brand managers over the unpredictable, and sometimes rank, quality of YouTube’s videos. The uneasiness isn’t entirely unwarranted. Recently, Felix Kjellberg, an immensely popular Swedish YouTube performer who goes by the handle PewDiePie, posted a series of clips with anti-Semitic content. In the ensuing controversy, Google scrambled to stop serving ads from its premium advertising service to his channel and canceled his original YouTube series. (Kjellberg didn’t respond to a recent request for comment by Bloomberg News. In a video addressing the controversy, he apologized for using language that some found offensive.)

All of this can make traditional TV programming look appealingly safe by comparison. One of the potential benefits of the new service for Google is that it will position a large amount of high-end, advertiser-friendly TV programing alongside YouTube videos—which could eventually diminish the underlying rationale for the wide variance in ad pricing between the two genres. For now, though, Google will have little sway over the advertising seen on YouTube TV. The bulk of the ads will be controlled by the TV networks and will be largely indistinguishable from what viewers are accustomed to seeing on satellite and cable. YouTube executives believe that someday they’ll be able to exert more control. “If you look at TV advertising today, it is not personalized at all,” Wojcicki says. “Everybody in the Bay Area gets the same TV ad. So I think there will be interesting opportunities over time to make the experience better for advertisers—more measurable, more relevant.”

And perhaps more likely to reach that most elusive of creatures: the rangy, ad-averse American teenager. “We’re bringing a lot of simplification to the TV process,” says Wojcicki. “For a new generation of viewers, this is going to make much more sense.”

—With Lucas Shaw

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