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You'll Have to Wait Longer for Ad-Free YouTube

By Jamal Carnette, CFA - Jun 28, 2015 at 11:55AM

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After announcing a subscription-based, ad-free version of YouTube, Google has run into problems with content partners.

Source: Google.

Google's ( GOOGL 2.45% ) ( GOOG 2.57% ) plans to add a subscription-based option for its YouTube business has apparently hit some speed bumps. The search giant announced its intention to introduce an ad-free YouTube offering last year, but the service hasn't come to market, nor has much been announced regarding its future rollout.

According to website The Information, there's a reason for that: Many content creators are questioning the updated monetization model and its effects on their ad-based income streams.

Ironically enough, Google recently went in a different direction with its Google Play Music offering. After initially seeking to monetize the service via a subscription-based model, the company expanded it to include a no-cost, ad-supported version in the U.S. This is essentially the model that YouTube currently operates. Adding further irony, content creators in that business (the musicians) actually prefer the subscription-based format as it's typically more lucrative on a per-artist payout basis.

YouTube is losing to Facebook
You can't blame YouTube for seeking a new way to monetize content. After becoming the de facto video hosting and sharing format, the company is now facing increasing competition, most notably from Facebook ( FB 1.84% ).

Facebook has added a native video option on its social-media platform. During last quarter's conference call, CEO Mark Zuckerberg announced that the company was averaging 4 billion total videos viewed daily.

While that appears to be a total figure -- not simply native Facebook videos -- social-media analytics firm Socialbakers found that Facebook video posts exceeded the number of YouTube videos for the first time in November 2014. The shift is even more pronounced with brands and media, which are seeing higher levels of interaction on the site from native videos than for hosted YouTube content. In the face of this competition from Facebook, it's wise for Google to seek another way to monetize its content -- but its YouTube division might not be the answer.

Powerful suppliers, competition, and substitutes
YouTube's problem is it is under threat from powerful suppliers, competitors, and substitutes. As essentially a video uploading site, the service is theoretically only as good as the content it offers. Of course, YouTube's brand cachet is top-notch, and it has billions of "suppliers," so the service has been steadily growing the number of daily views -- it expects to reach 8 billion per day by the end of this year. All contributors aren't created equal, however, as many of YouTube's contributors are not looking to make money on content but rather to share videos with friends and whomever stumbles on their site.

The large content creators, who treat the site as a business venture, are highly in demand and are compensated well under the current system. For example, Swedish YouTube celeb PewDiePie makes an estimated $4 million per year through his YouTube channel by parlaying his 9.2 billion cumulative video views into significant ad-based revenue.

While there are no direct reports that he is one of the content providers pushing back against Google on the subscription plan, it could be hard to force an unproven and potentially less-lucrative model upon the star.

Google certainly has some leverage, as it hosts videos and provides the monetization method as well. But considering that YouTube now faces competition and substitutes, Google appears to be struggling to dictate terms to major content providers. So those clamoring for a totally ad-free YouTube will have to wait a little longer.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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