Alphabet Inc (GOOG, GOOGL) isn’t much for tradition. Its Google X Labs notoriously toyed with developing commercial hoverboards, and seriously considered the feasibility of a Wonka-esque space elevator. GOOG stock, however, may actually be impacted by its newest harebrained idea.
YouTube (a division of Alphabet’s keystone portfolio company Google), plans to offer a streaming TV package called “Unplugged” in 2017 for less than $35 a month, according to an exclusive Bloomberg report.
This, given the prevalence of “cord-cutting” in recent years, could be a meaningful new revenue stream for Alphabet — and work wonders for GOOG stock.
Where GOOG Stock Could Get a Boost
Alright, so let’s get to the math behind this thing, to show what kind of impact this could have on the GOOG stock price. As recently as the second quarter of 2015, the cable TV industry was seeing a loss of nearly 500,000 subscribers on a year-over-year basis.
Conservatively, let’s assume that rate remains stable. I happen to think cord-cutting will pick up as the years go by and an increasing percentage of the population becomes comfortable with new technology, but that’s just me.
Now, let’s assume YouTube’s “Unplugged” package gets about 50% of these cord-cutters to convert to its service. Aggressive? Perhaps, but given my conserve approach to the previous variable, I don’t feel bad about it, okay?
Basically, GOOG stock owners will reap the benefit of 250,000 cord-cutters per year. That’s 250,000 x $35, or $8.75 million. Multiply that by 12 to annualize it, and you get $105 million in additional revenue per year from this new venture.
Alas, we haven’t taken into consideration the prospect of advertising revenue, which obviously further sweetens the pot for GOOG stock owners. Let’s assume YouTube Unplugged can monetize subscribers at the same rate that traditional cable can. Taking Time Warner Cable Inc (TWC) as an example, we see that it made $1.03 billion from advertising on a total subscriber base of 10.8 million people, which works out to above $95 a head.
That’s $95 x 250,000 subscribers, or about $24 million annually. Adding that to the $105 million figure, GOOG stock owners see an additional $130 million annually in revenues simply fall into their lap.
Even More Ammo for GOOG Bulls
Now, for a company expected to grow revenue by $12.1 billion this year, that’s only about a 1% annual improvement, so it’s not exactly a game-changer in the short-term. Longer-term, it’s not crazy to assume that economics become more favorable.
As I said earlier, cord-cutting is likely to accelerate, not remain stagnant. Those 500,000 cord-cutters per year could accelerate to 1 million per year within the next five years or so. YouTube’s share of those defectors could rise over time as well: eMarketer projects YouTube will have 185 million unique viewers by 2018, or 67% of all internet users. That gives an awfully large population to market its Unplugged product to.
Plus, one can easily imagine YouTube delivering greater advertising revenue per user than current cable providers, given the increasingly targeted nature of online ads in contrast to cable TV ads.
And probably the biggest point to be made is that all the math above only factors in U.S. subscribers. There’s a whole world out there, you know.
I also expect YouTube Unplugged to enjoy greater profit margins than typical cable cos. YouTube won’t have to splurge on capital expenditures, maintenance or even sales and customer care costs to the extent that cable TV providers do. Just take a few more servers live and put a promo on the YouTube (or even better, Google) homepage.
The greatest costs will be programming costs, and to be clear, GOOG hasn’t gotten Comcast Corporation‘s (CMCSA) NBC Universal, Viacom, Inc. (VIA), CBS Corporation (CBS), or Twenty-First Century Fox Inc (FOX) to ink deals yet. That ultimately has been the failure of Apple Inc.‘s (AAPL) Apple TV as well, so they need to get the ball rolling on that.
But I have no doubt that YouTube has the willpower to get it done. When YouTube Unplugged does go live next year, it’ll be the beginning of an exciting (but long-term) new catalyst for GOOG stock.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
