Report: YouTube TV needs a big ad revenue boost to become profitable

They’re still a drop in the bucket compared to the still-dominating traditional satellite and cable TV players, but so-called “skinny bundle” TV services like YouTube TV are gaining in popularity. Despite its growth in terms of sheer subscriber numbers, however, The Information reports today that Google is still trying to figure out how to make money on the service.

First up today is an unofficial update on current subscriber numbers. CNBC reported in January that YouTube TV managed to acquire more than a quarter million subscribers in less than a year since launch, but today’s report shows Google inching close to that important 1 million milestone. The site’s sources say that YouTube TV has added about half a million since then — roughly 800,000 subscribers.

The report also has some unfortunate details on the economics of the service. At its current $40 per month price point, Google is paying more for just programming per subscriber than it’s taking in — $9 more at $49 a month. Those high prices are due to existing deals and legacy cost structures which keep the price of these cable channels high, the report says.

Unfortunately for Google, the situation is reportedly only going to get tougher in the coming months, the report adds. Apparently Google has signed annual cost increases as high as 7% in some cases, which means the pressure to figure out how to turn a profit will only increase over the coming months.

And how will it do that exactly? In usual Google tradition, advertising is the answer. To hopefully make up for the ever-growing disparity in programming costs (not to mention other costs associated with running the service, like marketing), The Information’s sources say that the current plan is to turn a profit by growing its advertising business on the service:

YouTube appears to be banking on ad revenue to turn a profit from its skinny bundle, according to people familiar with its plans. YouTube expects to eventually generate around $15 to $16 a subscriber in ad revenue, said a person familiar with its thinking. That would cover its losses on programming and other costs.

Interestingly, an “industry executive” speaking to The Information said that skinny bundles could make as much as $8 per subscriber in advertising — or roughly half the amount Google hopes to make. Obviously, Google hopes to leverage some existing strengths, like offering hyper-targeted advertising and cross advertising with the top 5% most popular YouTube channels to get that price tag up.

9to5Google’s Take

First of all, it’s crazy to see how fast YouTube TV has grown in just the last 6 months. Gaining half a million paying subscribers in 6 months is huge, but of course still nothing compared to the over 90 million people who pay for traditional cable or satellite TV. Hopefully we’ll see that number grow.

Seeing these numbers exposed is also interesting in light of the recent price increase from $35 to $40. But while it may be tempting to think that price increase was due to YouTube TV being not profitable yet, it’s worth noting that Google has also added more networks — and inherently has higher costs.

Disruption costs money, and while it’s definitely going to be an uphill battle for a while as the big cable and satellite players do everything they can to maintain control, it seems Google, Hulu, DirecTV Now, Sony, and Sling have made good progress — combined they have about 6 million paying subs.