YouTube Gets Into The Subscription Game

YouTube’s announcement that content owners on its platform have until October 22nd to agree to the terms and conditions of its forthcoming ad free subscription service is a herald of significant forthcoming change for the world’s largest video sharing site. Under the new terms all video on YouTube must now be available to subscribers- content owners can’t choose to have their videos remain exclusively available to non-paying customers. In return for agreeing to participate in the ad-free premium subscriber service YouTube has announced that it will pay content owners 55% of total net revenues earned from subscription fees based upon the amount of time the content is viewed by paying subscribers.

Youtube’s defence of this policy is to play the viewer advocate position whereby content owners are asked to imagine the negative reactions experienced by fans if after having signed up for an ad-free service they then cannot find their favorite content. YouTube claims that content partners representing over 95% of “YouTube watchtime “ have asked for and signed up for this service. And that it will represent a supplementary source of advertising revenue for content owners.

YouTube is Following The Money

Officially YouTube does not make a profit despite revenues increasing by 25% from $3billion in 2013 to $4 billion in 2014. Google maintains that the company breaks even on costs versus revenue which is largely down to its ad-supported free to view business model. Whilst this hasn’t necessarily been a problem due its place in the Google ad ecosystem, the rise of insurgent competitors with very different business models has forced YouTube’s hand.

YouTube’s unique selling point is not the ubiquitous presence of the platform as a video viewing and sharing platform. This although highly significant is effectively a utilitarian platform offering and utilities can be, and frequently are disrupted. YouTube’s USP comes from the fact that a quarter of its audience visit the site to view native creator channels- YouTube Stars of the likes of PewDiePie and Zoella. This is also the fastest growing channel segment on YouTube accounting for 26% of views and with the most popular such as PewDiePie growing at double the rate of their nearest non-creator media equivalents.

These Native Creators have a strong sense of their own autonomy and they are increasingly learning how to maximize their revenue earning potential-witness Beauty Blogger Michelle Phan’s recent $100 million funding round for her beauty start up Ipsy. These creators now that ad-funded free to view channels offer the lowest core source of revenue for their content. And disruptive start ups like Vessel which offer exclusive premium windowing of their content allow them to the opportunity to earn considerably more through the subscription model.

Subscription Will Become The New Standard

Although only 7% of YouTube Channel subscribers express an interest in paying subscription fees for access to premium content (MIDIA Research Consumer Data) this is a predictable and reoccurring form of revenue which allows creators to invest in growing their businesses as global brands in an increasingly competitive landscape. Additionally depending upon the price point, subscription revenues can match or even out perform ad-revenues for the channel owners based upon the multiples earned per subscriber over an ad-supported viewer.

The key challenge for YouTube is both how to avoid alienating content partners with its draconian opt in policy, and at the same time how to persuade YouTube users that to start paying for a subtle modification to their what until now has been a free viewing experience.