PARQOR is the handbook every media and technology executive needs to navigate the seismic shifts underway in the media business. Through in-depth analysis from a network of senior media and tech leaders, Andrew Rosen cuts through what's happening, highlights what it means and suggests where you should go next.
In Q4 2022, PARQOR will be focusing on four trends: this essay touches on all four.
Yesterday, YouTube finally released PrimeTime Channels, its own version of Amazon’s Prime Video Channels and The Roku Channel’s Premium subscription offerings. Meaning, users will now be able to “sign up, browse and watch [their] favorite TV shows, movies and sports” within YouTube. It will be in the U.S., only.
I thought there were two notable sentences in YouTube’s blog post.
“Once you sign up, content from your Primetime Channels will be reflected into the YouTube experience you know and love.”
This is an elegant way of saying the YouTube algorithm is the new Electronic Programming Guide (EPG) for announced legacy partners like Paramount Global and AMC Networks. That’s significant in two ways. First, it means that YouTube’s algorithm will have more say over which content is consumed from a streaming app than the app itself. That is implied from the images on the blog post highlighting individual shows disaggregated from the app either via the user interface or via YouTube’s search results.
Second, it means that the cost of access to reach YouTube users (and 135MM Connected TV device users in the U.S.) is disaggregation: the shows are the value proposition, and the content libraries have been disaggregated from the apps. Meaning, consumers searching for the shows on YouTube will find the show, and in order to watch the shows they’ll need to sign up for a subscription to a custom version of the app within YouTube. There’s a lot less friction for consumers. But given YouTube’s scale and engagement globally, it also is the beginning of a rationale for killing the streaming app as a business model.
“Whether it’s subscribing to Nerdist to analyze clues after watching a Yellowjackets episode on SHOWTIME® or finding makeup tutorials from Trixie Mattel to recreate your favorite looks from the Paramount+'s Original series RuPaul’s Drag Race All Stars, you can now immerse yourself with all the content YouTube has to offer.”
Key Takeaway
YouTube Primetime Channels offer scale, but not much else, for legacy media streaming services as advertising headwinds grow and cord-cutting accelerates.
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This is a fantastic example of what I’ve described as the “The Netflix Paradox”, “'The Office' Paradox” or “The YouTube Paradox”: the “walled garden” model is unusually vulnerable to the power of third-party platforms like YouTube to find more audiences with the same content (I wrote about it back in August). So YouTube can find more audiences for streaming content than the streaming apps may be able to find themselves, and it can also find audiences for creator content related to streaming content. YouTube now is a one-stop shop for both.
But this also reads differently in light of something YouTube CEO Susan Wojcicki revealed to YouTuber Hank Green in a 2020 interview: “in terms of viewership of YouTube users, there’s creators, music companies and traditional media, and creators are about half of it.” This is another way of saying that creator content is going to be anywhere between 2x (if traditional media is 25% of consumption) and 5x (if it’s 10%) more likely to be consumed than legacy media content on YouTube.
So, this math alone says creator content related to and/or inspired by legacy media content is more likely to be consumed on YouTube than the legacy media content itself. That means certainly win-win logic here for creators and legacy media streamers, where YouTube’s algorithm can recommend paywalled show content alongside free creator content, and vice versa.
But there is also a zero-sum, win-lose logic at play here, too: creators are more likely to be consumed by YouTube users, and suggested by YouTube’s algorithm than legacy media content behind streaming paywalls. as Erin Teague - the head of sports, movies, and shows at YouTube and the leader of the Primetime Channels project - told The Verge, the algorithm won’t rank shows “first in search results or promote them more aggressively in recommendations.”
This reflects the dynamic within an anecdote shared by “The Office” writer and actor B.J. Novak on the Recode Media podcast, after host Peter Kafka asked him whether the show felt “less popular” since it left Netflix. Novak answered: “I thought it would feel less popular, but the weird thing is, when I ask teenagers who say ‘We love “The Office!”’—I say, ‘Do you watch it on Peacock?’ And more often I hear, ‘No, we watch it on YouTube.’ People will watch highlight reels of it and consider that the show.”
The difficult challenge this presents for both YouTube and streaming services participating in PrimeTime Channels is whether consumers offered to pay for the show will opt for the show when presented with alternate versions of the content. That seems TBD.
On this point, Peacock is notably not one of the launch partners for PrimeTime Channels, nor are Disney+, Netflix or Apple TV+.
Paramount, AMC Networks & YouTube
It is no accident that Paramount is mentioned 16 times in the press release (mentions of either Paramount+, Paramount Streaming or Showtime) — Paramount Global’s Q3 earnings were this morning, and the story for investors is growing out streaming subscribers. The press release hasn’t helped: As of the time of this writing, Wall Street investors have punished the stock with a more than 10% decline.
Paramount earnings didn’t tell a great story for investors: TV advertising revenues were down by 3% year-over-year. Management attributed it, in part, to both a decline in impressions and “softness in the scatter market” domestically, and “unfavorable foreign exchange rates” internationally. Affiliate and subscription revenues were down by 5% year-over-year “driven by a decline in MVPD subscribers, partially offset by rate increases from MVPDs and vMVPDs, growth in reverse compensation, and its deal with Hulu + Live TV (which it doesn’t mention by name) from April 2021.
Paramount's Operating Income relies almost entirely on on its linear business (it is losing money on streaming). So, with cord-cutting trends accelerating — both Comcast’s and Charter’s TV customer bases have seen accelerated churn year-over-year, with Comcast seeing a loss of more than 10% of its subscribers — almost 100% of Paramount's operating income is at risk.
Like Paramount, AMC Networks is facing similar market dynamics, though we won’t know how these market dynamics of cord-cutting and weakening advertiser demand are impacting AMC until Friday’s earnings call. Like Paramount, AMC Networks has played up to investors that streaming subscription revenues had made up for lost affiliate revenues.
This points to a logical question: how exactly does partnering with YouTube help not only this story, but also the finances of this story?
Who has the credit card info?
There is an obvious answer: YouTube has aggregated 135MM users on Connected TV devices in the U.S., so as they cut the cord one of the most obvious bets for continuing to reach them will be via YouTube on Connected TVs.
But, the story of churn for apps like AMC+ (N/A) and Paramount+ (5.9%) has been high churn. There is no evidence to believe that YouTube’s algorithm replacing an app will reduce churn yet. Meaning, YouTube’s algorithm is positioned to do something: increase subscriptions by marketing the content better and drive better engagement around shows. But that does not mean more subscriptions will not result in lower churn because YouTube’s recommendation algorithm was not designed to solve the problem of churn.
The Verge highlighted why growth in the Primetime Channels interface will be ”tricky”, too:
You can’t sign up for a new service through the app yet, for instance; you’ll need to scan a QR code or type in a URL. And if you’re already subscribed to one of the Primetime Channels services, you can’t just log in through YouTube. You’ll need to cancel and sign up again. If you’ve signed up for services through YouTube TV, those will transfer, and Teague says you can use your YouTube login to log into other apps through the TV Everywhere system. But it’s all still too complicated.
There is also the question of who owns the credit card information: the apps are now channels within YouTube’s interfaces and Google Pay already processes the transactions on YouTube for movie and TV show rentals and purchases, so Google appears to own the credit card information.
So, the upside from YouTube Primetime Channels is additional scale and marginal revenues for Paramount or AMC Networks. The downside is friction to sign up, no ownership of credit card information and potentially higher churn. That means a model like Disney offering “early access to select Star Wars and Marvel merchandise” exclusively to Disney+ subscribers is something that will be near impossible for Paramount or AMC Networks to replicate with their IP, if they opted to do so.
It's not cleaner, it's messier
This all points to a difficult question: what exactly is the business model for legacy media streamers with Primetime Channels? Because Paramount and AMC Networks need to grow operating income to both compensate for cord-cutting losses (affiliate and advertising) and to pay down debt (Paramount has $15B outstanding and $2.35B due over the next five years). Access to 135MM helps. But how?
I thought Erin Teague’s answer to this question in The Verge piece was notable:
“Building a streaming service that just works, all the time, that can stream live content, on-demand content, that can recommend content in ways that are delightful for users — it turns out that’s a really hard technical challenge.” Teague and YouTube are betting that more and more companies will happily cede that challenge to YouTube and focus on making shows and movies people want to pay for. “
Effectively, her sales pitch is that Paramount and AMC Networks should replace lost operating income from cord-cutting with an arms dealer model. In light of Paramount’s earnings, that does and doesn’t makes sense: it does in the sense that YouTube offers an alternative to Paramount eating into operating income and cash flow to fund its streaming business. But licensing was 50% of what Paramount earned from Affiliate and Subscription in Q3 2022 (and that also excludes advertising). An arms dealer model isn’t a one-to-one replacement for lost revenues, and especially with debt obligations looming.
So, it makes sense nominally why 30 companies are betting on YouTube PrimeTime Channels: 135MM CTV users is nothing to sniff at. But, this is far from the groundbreaking opportunity these businesses need as advertising headwinds grow and cord-cutting accelerates.