Summary

WSJ reported that YouTube may be seeking new license deals.

Negative implications for the cable and media companies – neutral on NFLX.

Remain bullish on GOOG.

Wall Street Journal reported that YouTube from Google (NASDAQ:GOOG) (NASDAQ:GOOGL) is looking to add streaming rights to TV shows to enhance its content offering and compete against Netflix (NASDAQ:NFLX), Amazon (NASDAQ:AMZN) and Hulu. The report disclosed that YouTube executives have met with studios and other production companies to negotiate licenses for new content that will be added to YouTube Red, the $9.99/month subscription service that offers both movie and music streaming. It’s unclear on what content is under discussion but if this turns out to be accurate then this will be a negative to cable companies given the increased number of OTT choices available. In the long term, this could be a negative to NFLX which is facing a maturing domestic market (see –Netflix: Not As Bad As It Seems) and increased competition from OTT rivals. I have highlighted that YouTube will be an important asset for GOOG (see – Google 2015 Outlook: The Year Of YouTube? And Google: Tuning To Channel YouTube), and I remain bullish on GOOG.

In order to get subs to pay for YouTube’s content, several strategies are available at YouTube’s disposal. First, YouTube can move into original content to differentiate itself from peers. I note that it’s working with Felix Kjellberg, aka « PewDieDie, » next year and the content will be exclusively available for Red subscribers. For those who do not know PewDieDie, he is a video game rock-star that makes millions playing and commenting on video games on YouTube. The second strategy is to license movies and TV shows similar to what its peers are doing.

Given that the OTT market is already well-defined with NFLX building up its content library, Hulu getting content from Viacom (NASDAQ:VIA) and Time Warner (NYSE:TWX) and AMZN gradually boosting its content, it’s difficult for YouTube to immediately make an impact. However, investing in original content and leveraging the asset that YouTube has (ie. YouTube Gaming) could differentiate the platform from its peers and attract paying subscribers.

Ultimately, YouTube’s gain will be someone’s loss. First, traditional cable companies will likely to see ARPU pressure given the plethora of OTT services in the US. Second the TV ad dollar is the last remaining frontier for the online video platforms and YouTube could gain a significant portion of the ad dollar as it leverages GOOG’s ad platform.

Conclusion, I remain bullish on GOOG and slowly getting cautious on NFLX due to increased competition.