• Can Free, Ad-Supported Online Video Make the Hard Leap to a Paid, Subscription Model?

    Three items last week brought to mind one central question I've long wondered about: can traditionally free, ad-supported online video providers make the leap to a paid, subscription model? The first item was a long piece in Variety that chronicled the struggles the first set of YouTube content partners trying subscriptions is having upselling their free viewers. Second, Reuters broke the news that Machinima, one of the biggest online video players (and a big YouTube partner) is planning to go it alone in creating its own subscription service to complement its free, ad-supported offering. And third was the milestone news that Netflix, by far the most successful online subscription service, garnered 14 Emmy nominations, including 9 for "House of Cards" alone.

    How do these all tie together?

    First, a quick step back. The vast majority of today's online video viewership is free, ad-supported and typically shorter-form. Online video has grown dramatically over the past 5 years, as the medium has transitioned from user-generated dominance to a point where a wide range of content providers are creating increasingly high quality original productions, many with large fan bases. However, the fact that most online video providers (with the notable exceptions of Netflix, Hulu Plus, Amazon Prime and a handful of others) rely solely on advertising differentiates them from cable TV networks (and increasingly broadcast networks) which sell ads AND collect monthly fees from pay-TV distributors. HBO, Showtime, Starz and other "premium" TV networks don't have ads, but still rely on pay-TV operators for lots of marketing and customer service.

    This distribution model gives TV networks not only a second revenue source, but also a highly STABLE one, as I explained last week. Whereas advertising swings with factors like the economy's health, recent audience size and composition and competition, TV networks have long-term, fixed deals with distributors that pay them month-in and month-out, regardless of these factors. This provides the networks with a critical financial cushion to help fund expensive original productions.

    For obvious reasons, many in the online world would dearly love to see this type of paid distribution model take off, yet to date it hasn't. Currently no online distributor is willing to pay a wholesale rate to online video content networks and then package them into an online subscription service for consumers. YouTube has created the infrastructure for its partners to sell their OWN subscriptions, but it hasn't created a master service including a number of them. Netflix, Hulu Plus and Amazon also don't operate like pay-TV, choosing to license specific programs/movies as opposed to carrying and paying for entire networks.

    As a result, we have an online video world where content providers would like to reap the benefits of a stable subscription-based model, but are essentially being forced to try doing so on their own as Machinima will attempt. But there are steep content, promotion and support challenges involved. Differentiated content must be created and offered on the paid tier. Prospective subscribers need to be educated continually about these choices and convinced to subscribe, creating an ongoing marketing expense (ask Netflix!). Finally, subscribers must be supported with customer service. Add it all up and only the biggest free video content providers, like Machinima, would be willing to give standalone subscriptions a go.

    Meanwhile, however, Netflix's Emmy nominations last week demonstrate the benefits of having a robust subscription business to fund high-quality long-form originals that can compete with the best of TV. If you think about the broader dynamics in the video industry, these types of productions will be necessary to drive cord-cutting and cord-nevering because most people won't give up pay-TV - no matter how expensive it gets - for a smattering of short-form online videos.

    Until online video can truly make the hard leap from a free, ad-supported model to paid subscriptions, online video will be mainly an adjunct to pay-TV, though an increasingly robust one.