Reports surfaced in April that YouTube was close to launching its long-awaited subscription service. The Google (NASDAQ:GOOG) (NASDAQ:GOOGL) subsidiary sent out a letter to content creators with some details on the upcoming subscription offering and how it would impact them. Apparently, some content creators didn't like the terms of YouTube's proposed offer.
As a result, YouTube is having trouble getting the subscription option off the ground since some of its top content producers won't agree to its terms. With growing competition from platforms like Facebook (NASDAQ:FB), Vimeo, and upstart Vessel, top content creators have more leverage against YouTube than ever before. Unless YouTube acquiesces to creators, the subscription service may never launch.
Don't mess with a good thing
There are two groups of content producers that have problems with the terms of YouTube's subscription service, according to The Information. The first is the television networks that upload content directly to YouTube, but also have exclusive contracts with Hulu and Netflix that won't allow them to put their content on any other subscription service.
Those companies have the opportunity to opt out of YouTube's subscription service, but it would require their channels to become private. That means users wouldn't be able to find their videos through search. Since networks use YouTube largely as a promotional channel, they'd no longer have a reason to upload videos to YouTube.
The second group of content makers reportedly with a problem are native YouTube stars. These are content producers that have built an entire business off of the ad revenue generated from their views on YouTube.
YouTube has rewarded these content producers in the past with Google Preferred, which allowed big brand advertisers to only advertise with the top 5% of content producers. As a result, their average ad revenue per view is higher than most YouTube channels. Producers at the bottom of that top 5% (i.e., the 95th percentile) are likely to see the shortest end of the stick in a subscription service since subscription revenue is split based on time spent watching each channel.
Defending against Facebook
Facebook is rapidly encroaching on YouTube's territory. The company reports users watch more than 4 billion videos on its platform every day. YouTube says it too generates "billions of views" every day, but native Facebook videos have soundly overtaken embedded YouTube links on Facebook.
What's more, Re/Code reported Facebook is going to start sharing ad revenue with top content creators starting this fall. That puts more pressure on YouTube to appease its content creators, since Facebook may soon become a viable alternative for creators that make a living from the ad revenue on YouTube videos.
Facebook is also reportedly offering top YouTube content creators signing bonuses in exchange for an exclusive window on their content. The same is true of Vessel, which offers early access to top short-form Web videos for $2.99 per month. YouTube has answered back, reportedly offering signing bonuses.
More recently, YouTube started producing its own original content featuring some of YouTube's top homegrown talent. It made deals with Smosh, the Fine Brothers, and AwesomenessTV to produce shorts and feature-length films that will stream exclusively on YouTube.
Finding a profitable monetization strategy
YouTube generated about $4 billion in ad revenue last year and still didn't turn a profit. It's faced with the challenge of attracting more ad dollars despite growing competition from Facebook and others for digital video ad dollars.
Alternatively, it can diversify its revenue streams with something like a subscription service. But in order for that to work, YouTube needs content creators to get on board. While they're currently in a stalemate, I expect the content creators to win this battle as competing video platforms cut into YouTube's leverage.
Adam Levy has no position in any stocks mentioned. The Motley Fool recommends Facebook, Google (A shares), Google (C shares), and Netflix. The Motley Fool owns shares of Facebook, Google (A shares), Google (C shares), and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.