Will YouTube’s New Subscription Model Work?

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YouTube (GOOG) is planning introducing a new subscription service that will feature original content from its stable of homegrown YouTube stars as well as premium content from Hollywood studios. The initiative is part of YouTube’s plan to earn revenues from its massive user base.

Even though it reported $4 billion in revenues last year, YouTube failed to turn a profit. The entry of a number of major entertainment studios and Facebook Inc. (FB) in the online video streaming space has further ratcheted up the pressure on the service to report profits.

But the success of the service, which will reportedly charge $10 from users and is ad free, depends on a number of factors.

Here are two of them:

Will Users Pay?

YouTube has built its reputation on free content. Users and viewers flock to the service to upload videos expressing themselves and, also, to search for their favorite soundtrack or movies. In turn, this made the service the second-biggest search engine in the world and brought in advertising dollars. There is a possibility that locking part of its content behind a paywall may result in a user mutiny.

On the other hand, an industry-wide move towards paid video content makes the chances of that happening fairly low. Besides, YouTube has successfully cobbled together a network of studios, ranging from Time Warner Inc. (TWC) to Comcast Corp’s NBC (CMCSA), to provide content for its new service. This, combined with its own YouTube stars, should ensure programming variety and user stickiness.

Is It A Win-Win Deal?

YouTube launched a similar program back in 2013. The service’s paid subscription pilot program provided funding to independent content creators to launch multi-channel networks (a combination of different YouTube channels related to particular themes) to produce high-quality videos.

But, the initiative failed to take off for a number of reasons including disagreements over revenue sharing. Back then, the service offered a 45% cut from ad revenues to content creators. But creators charged that the amount was far too low to make a viable profit from Youtube’s “content farm.” This time around, the service is offering 55% of subscription revenues to creators. But, major entertainment studios are reportedly miffed at the deal because their production costs are higher in comparison to independent content creators. Whether YouTube can create an equitable mix of free and paid content to make the economics work this time around remains to be seen.

The Bottom Line

The key question here is whether Youtube can successfully make the transition from free content to paid content, which is part of the future wave. If the paid subscription model is a success, it could result in a revenue windfall for Youtube.

Credit Rakesh Sharma (freelance journalist)

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