Taking a free product and making people pay for it has traditionally been a very difficult feat for a company to pull off.
SiriusXM managed to do it when it brought Howard Stern's radio show over from free, over-the-air broadcast channels, but it has not succeeded with attempts to mimic that success. Channels branded to Oprah Winfrey and Martha Stewart failed to gain traction with listeners, and an effort to make Eddie "Piolin" Sotelo a Spanish-language answer to Stern lasted less than a year.
It seems people apply a lower bar to what they will watch or listen to for free than entertainment they actually pay for. That's the history Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) YouTube will have to buck as it tries to launch Red, a paid version of the popular streaming site.
What is YouTube Red?
Essentially, YouTube Red lets people use the popular video service without having to sit through ads in exchange for paying $9.99 a month. It also gives subscribers access to some premium content and the ability to save videos to watch when offline. Members also get access to a not-quite-launched YouTube music service, which the company explained in a blog post:
YouTube Music is designed to make discovering, watching and listening to music easier than ever. Any song or artist you choose on YouTube Music will start you on a personal journey through one of the richest music catalogs; just sign in, tap a track you love, and see where your music takes you. And as a special bonus -- YouTube Red works with Google Play Music, so subscribe to one and automatically get access to the other.
The company also promised "member-only access to new, original shows and movies from some of YouTube's biggest creators."
Netflix is a huge barrier
Any company moving into delivering a subscription-based video service has to measure itself against Netflix (NASDAQ:NFLX), the industry leader by quite a bit. The streaming service, which has over 66 million paying members globally, does not necessarily stop people from joining alternative services, but it does set the bar for value.
In this case, it's hard to see how Red, which is charging the same price Netflix charges new customers, offers an even vaguely comparable proposition. Getting to skip commercials is nice, and the music service might be useful, but even if you assume people want original programming from YouTube personalities, it's hard to see anyone paying $9.99 a month for the service.
Netflix has established that $9.99 a month gets you top-tier, big-budget originals starring major Hollywood stars. Hulu, HBO Now, and Amazon Prime Video have further confirmed that notion for consumers. YouTube will be countering those impressive services with low-budget fare starring celebrities it created, like PewDiePie, Joey Graceffa, and Toby Turner. (If you're over 30, you'll have to believe me that these are the names of actual stars in the YouTube universe).
YouTube has played this wrong
If YouTube had offered Red at $3.99, or even $4.99, then maybe it could have attracted a decent subscriber base from its heaviest consumers, but it seems very unlikely that the paid service as it's currently constituted will appeal to any significant amount of people.
There's simply not any substance there. Getting an ad-free experience is nice, but sitting through a 30-second spot every now and then is a much better value than shelling out $9.99 each month. Netflix is cheap enough that it's not an either-or decision, but Red is simply lacking.
YouTube over-reached, here. It won't be a threat to the streaming leader, and it's likely that this service won't gain any significant traction with consumers.
Daniel Kline has no position in any stocks mentioned. He rarely watches YouTube, but enjoys seeing cats fall off things hilariously. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (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.