A premium-viewing experience is coming to YouTube, and it's easy to be skeptical. Google (GOOG 9.96%) (GOOGL 10.22%) is reportedly gearing up to charge for a subscription plan that strips away ads, tacks on exclusive content, and allows users to view clips offline. The plan will set video buffs back $10 a month, sources tell tech blog The Verge.
YouTube hasn't yet had much success in persuading the freeloaders on its site to pay up for either digital rentals or channel-specific subscriptions. However, plenty of things make this a more welcoming climate for Google this time. Let's check them out.
1. YouTube has never been more popular
We're five years removed from the time when YouTube struggled to get viewers to for premium streams, and two years removed from when channel-specific subscriptions failed to generate serious traction. Google's inability to get YouTube users to pay for the service might seem to be the biggest roadblock to getting it right this time, but we're also talking about a site that has only grown its audience over the years.
YouTube now has more than 1 billion users worldwide, and the number of hours spent on the platform has soared 50% over the past year alone. If just 1% of YouTube's audience pays up we're looking at $1.2 billion in annual revenue. That would move the needle for a site that reportedly took in $4 billion last year.
2. Folks are more receptive to paying for digital content
The monetization challenge for a site such as YouTube is that the brand gets associated with free content. Netflix (NFLX -0.63%) has always charged for its digital smorgasbord, so it doesn't have to reposition the product. This doesn't mean YouTube's efforts will be futile.
Pandora (P) was in the same boat. The streaming radio platform continues to be consumed primarily by freeloaders, but Pandora One -- its premium offering -- is gaining traction. Less than 5% of Pandora's users today are paying for Pandora One, but if YouTube achieves that kind of penetration it would generate more in subscriptions than it currently generates in ad revenue.
3. Streaming TV is a viable platform
Netflix is the best thing that ever happened to YouTube, validating the presence of tollbooths for a streaming service. It's not just Netflix. This year alone we've seen the launch of Sling TV and now HBO Now.
The future of television is clear: Millennials will continue to cut the cord, assembling a collection of streaming services in place of costly cable and satellite television plans. A home will subscribe to Sling TV for a sample of live and traditional broadcast television, enhancing that with premium content from Netflix and/or HBO Now and/or Amazon Prime. If a service is differentiated -- and YouTube certainly fits the bill with 300 hours of video being uploaded every minute -- it will thrive.
4. If you build it they will come
The vast majority of YouTube users won't pay, at least right away. The value proposition of shelling out $10 a month to nix ads for a better viewing experience might not resonate with folks. However, let's not forget that the paywall itself will attract content that is exclusive to premium members. Studios that don't want to cheapen content by making it available for free will be able to justify the subscription model. That's the road Netflix has paved.
By the same token YouTube's most magnetic indie channels are likely to post extra footage available only to paying subscribers since Google will share that subscription revenue with partners, allocating 55% of the revenue collected to publishers based on the volume of content streamed from their channels.
5. Google's global reach is greater
It only helps YouTube that Google is the company behind Android, the world's leader in smartphone and, more recently, tablet OS market share. This makes it easy to incorporate YouTube icons in mobile computing devices, and that's where the real growth has been. Mobile advertising revenue on YouTube has doubled over the past year.
It is with mobile devices that one of the premium platform's features -- the ability to save content that can be streamed when the viewer isn't online -- will resonate nicely. Google is too big to fail, and it's why even you will reluctantly pay for premium YouTube later this year.
