There are limited reasons to watch cable television now a days, and they only continue to shrink. With CBS (NYSE:CBS) recently paying hundreds of Millions for 2014 Thursday Night Football, it is clear the sports is one of those key remaining attractions. With Netflix (NASDAQ:NFLX) already saying no to live sports, the question remains: who will bring live sports to a mass online audience?
I believe that YouTube (NASDAQ:GOOG) has recently taken several key steps in securing online sport content deals, and is in a key position to expand and monetize its potential audience.
YouTube is already a major part of Google, generating $1.96B in 2013 net ad revenue (up 65.5% from 2012) and it brought in $5.6B in gross revenue. YouTube controls 20.5% of the US video ad market, and is only set to grow in the coming year with help from mobile.
YouTube has aggresivley chased content over the last several years, and may have created the infrastructure to expand it to historic levels. YouTube has already inked a deal with the NBA D-League to air more than 90% of games, and is predicted to bid for MLS soccer rights in 2014. This could be a major step, as John Ourand predicts that 2014 will be the year where YouTube proves that it can handle a subscription service, beginning with the MLS deal.
YouTube is not only setting itself up to be one of the major online sports broadcasters, but also has a huge advantage behind them. YouTube already has thousands of hours of archival footage from nearly every major sport and player, potentially allowing users not only to watch live games, but also previous games and highlights.
YouTube currently offers live concerts and events through YouTube Live, but it has only taken one step onto the court.
What does this mean for investors?
Because YouTube is potentially supplying their own content, they would keep all ad revenue besides the initial costs (instead of a 55-45 revenue split with current content providers).
As seen above, the US Broadcasting rights for ESPN went for $8M a year for 41 MLS games (around 1/18th of the games in a season), or $195,000 a game. With roughly 220,000 viewers a game, it costs ESPN roughly .87 cents/user/game.
For our purposes, we will assume $21 CPM (Cost Pert Thousand Impressions), an average rate for YouTube video ads. The estimated $21 CPM comes out to roughly 2 cents a video view. While YouTube may be able to work off this model for D-League basketball, it may become more difficult for higher cost programs such as MLS soccer.
Subscriptions for MLS soccer are as high as $53 for the season - this is where YouTube will need to implement their subscription service.
At 2 cents an impression, YouTube would need to show 400 million videos to users, a very unlikely amount. However, with just 10 impressions over a 90 minute game, YouTube would make (based on 41 games and 220,000 viewers a game) $4.5M off of video advertisements. This means to break even, YouTube would need to charge users just .39 cents a game.
If YouTube charges users just .99 cents to watch any game (and at any time), they could make $13.5M a season, or 68% operating margins. With additional advertising options, and higher value targeted advertisements, YouTube can make a lofty profit from such a deal.
While soccer is not one of the main sports in America, YouTube would put itself in a position to enter the American family's living room. If YouTube were to have bid on the recent CBS Thursday Night Football Deal, it could have changed the landscape of sport programming in a single shot.
However for the time being, YouTube does not have the capability to support an 8 game, $250M-$300M deal. With about 8M viewers a game, YouTube would make just $13M off of 10 impressions a game. This means they would have to charge viewers a whopping $31 - $37 for 8 games to break even.
While there are multiple types of advertisements YouTube can use, including a variety of costs and impressions, the potential is there. YouTube has advantages over conventional mediums, including additional programs, special licensing possibilities, and targeted advertising.
It is impossible to predict how many users would watch free sports programming, and how many impressions that would generate. It is also impossible to know whether YouTube is a viable contender to control the sports industry. For the time being, it might be beneficial for YouTube to partner with the likes of CBS, ESPN (NYSE:DIS), or NBC (NASDAQ:CMCSA) to offer an online medium for sports broadcasting. Without paying for the costs of programs, YouTube can still generate money off of a revenue split.
The ball is sitting on YouTube's lap - they just have to take the shot.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.