Google‘s YouTube, looking to squeeze new coin from the millions of free videos on the service, aims to launch a subscription-based service later in 2015 that will strip out all ads. But there are many reasons to be skeptical that the initiative will yield much juice.
YouTube CEO Susan Wojcicki first tossed out the idea last year. This spring, YouTube informed content partners that they must get on board — otherwise, their channels will be made private and won’t be eligible for ad-revenue sharing. YouTube is currently looking to launch the subscription-video service in late Q3 or early Q4 but may end up pushing back the launch to early 2016, according to sources.
In her VidCon keynote Thursday, Wojcicki barely touched on the video-subscription plans. Instead, she focused on enhancements to YouTube’s mobile apps, which include support for full-screen vertical video, and touted production tools at YouTube Spaces for shooting 360-degree and 3D video. In a separate interview with the Wall Street Journal, she insisted the video-subscription service was making progress despite some holdouts.
“There are some partners outstanding,” Wojcicki acknowledged, “and we’re still in the process of working through that with them.” She added that YouTube has secured agreements with content partners representing more than 90% of watch time.
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But locking in that final group of content partners is only one issue YouTube will have to wrestle with. The untested model faces a myriad of challenges:
- YouTube viewers come to YouTube for free video. People have been trained for 10 years that YouTube is a vast video jukebox that’s free to use. Will they suddenly be motivated to shell out a monthly fee to watch that without the ads? YouTube has a poor track record of making consumers part with their money: a pay-channel initiative failed to take off two years ago, and its streaming movie-rental service hasn’t registered much action apart from Sony’s “The Interview.”
- No content in the pay service will be available exclusively. To make people pay up, you need to give them something they can’t get for free. But while some speculated that YouTube’s SVOD would be akin to Netflix, with a bucket of premium video behind a paywall, the service actually is more like Spotify Premium: same lineup of stuff, just without the ads. That model has worked for Spotify and others, but it’s not clear it will work as effectively for video (especially given that many YouTube ads can be skipped after a few seconds). By contrast, startup Vessel is hoping to win subs for its $3-monthly service with 72-hour exclusive access to partner videos. While the jury’s still out on Vessel, its value proposition at least encompasses access to content you can’t get anywhere else.
- YouTube’s SVOD fiat has annoyed content providers. YouTube will take a 45% cut of subscription revenue (as it does on advertising), with the rest divvied up to partners based on aggregate subscriber viewing time. Don’t like it? Tough luck. YouTube’s take-it-or-leave-it attitude has rankled partners, and that may push them to broaden distribution on other platforms like Facebook. “Many content providers are frustrated by the introduction of new business terms from YouTube, which essentially say you can’t monetize your content on our site anymore if you don’t agree to our new subscription terms,” said a senior exec at one large MCN. “Feels like a strong-arm tactic.” YouTube positions the SVOD service as providing creators a revenue stream that will supplement what they earn from advertising — but nobody knows if that will result in a sizable chunk of change.
- The SVOD service is not spurring TV networks to add premium content to YouTube. YouTube originally approached networks to see if they’d be interested in providing full-length episodes of TV shows — the thinking being that an ad-free environment would be a big draw. But the nets are not biting, according to sources, corroborating a Bloomberg report this week. That’s because YouTube is offering the same rev-share terms as on the ad-supported side, and networks can better monetize their shows on their own outlets or established SVOD platforms like Netflix or Hulu (whereas YouTube’s subscription service is unproven). In fact, the YouTube video-subscription service may have the effect of prompting TV networks and media companies to share less content — which today is nearly entirely promotional, in the form of short clips — because they may have contracts with other distributors specifying exclusivity in the SVOD space.
- Pricing may be too high to lure most customers. YouTube hasn’t settled on a specific price point for the SVOD service, according to sources. But consider this: YouTube Music Key, the music-streaming service Google launched late last year in beta, is regularly priced at $9.99 per month (with a $7.99 intro price). Given that YouTube’s goal is for every video it hosts to be on the SVOD service, including music vids, it stands to reason that the monthly fee for ad-free YouTube will be either the same as Music Key — or higher. (There’s been speculation YouTube will fold Music Key into the SVOD service, but Google currently expects to keep them separate products.) Is ad-free YouTube worth more than Netflix? Maybe to some, but again: The stuff you get on YouTube SVOD will be the same as on the free website and apps. It’s questionable whether the other features promised for the service — offline video viewing and playback on mobile devices while other apps are in use — will be enough for users to open their wallets.
- A successful SVOD service could hamper YouTube’s ad business. YouTube’s entire Brandcast pitch at the 2015 NewFronts was about how amazing the platform is for marketers. Now comes the subscription-video service — which, if it takes off (surmounting the headwinds described above), could reduce audience reach for the most popular (i.e. monetizable) YouTube content. So, at a high level, Google doesn’t want to do anything to slow down that train. The Internet colossus touted YouTube’s momentum in reporting Q2 earnings last week, claiming the top 100 advertisers on average spent 60% more year-over-year, and that YouTube mobile viewing alone attracts more U.S. viewers 18-49 than any single cable network.
- YouTube doesn’t have a history as a programmer. The Google philosophy has ruled at YouTube. That means, for the most part, that users have to search for videos or discover them via algorithm-based suggestions (not human curation). “YouTube is a hard place to find the thing I don’t know I want,” said an exec at another large content partner. “In order to be a subscription service, you have to understand content.” Nor has YouTube owned any of the content on its site, or except in a few select cases had exclusive windows for it. That said, YouTube is accelerating efforts to get the right content in front of the right audience: This week it announced Susanne Daniels, MTV’s former president of programming, as head of original content development. Hiring a TV veteran like Daniels signals YouTube’s intent to produce and present material in a television-like way.
In short, YouTube’s subscription-video service may never catch fire. But Wojcicki and other execs clearly believe the initiative is worth a shot: After all, even if only a tiny percentage of YouTube’s 1 billion-plus monthly users pay up, that could be a significant amount of new revenue.
Some YouTube partners are rooting for the SVOD experiment to succeed. They’re just not convinced it can.
“I love the idea of multiple revenue streams,” said a senior MCN executive. “The challenge is, I’m not sure it’s an offering consumers are going to pay for… We’re not sure it will work.”
