YouTube has been experimenting with subscriptions for years, its latest product, YouTube Premium seems like another attempt to get users on board.
In 2018, YouTube launched its YouTube Premium subscription for $11.99 per month. YouTube Premium would deliver an ad-free experience of YouTube, enabling background play and downloads for offline viewing and access to premium content on YouTube. Two years after its launch, YouTube Premium had amassed 20 million subscribers, a fraction of the total number of users that are visiting YouTube each day. Why did the platform launch a paid version and how does it fit in the overall strategy of the company?
YouTube’s massive growth and the building of a platform
Youtube was founded by Chad Hurley, Jawed Karim and Steve Chen, who worked together at PayPal. In May 2005, they launched a beta of the video website, which resulted in 30,000 visitors per day. They decided to open up their service and YouTube launched on December 15, 2005 where it already generated two millions video views per day. Just a month later, daily video views had grown to 25 million. In an interview with CBC founder Chad Hurley, he commented that at the time they still believed that 30 million views per day would be the plateau. In hindsight this was a very humble target as the platform grew exponentially.
A few months later in March 2006, users were uploading 20,000 videos per day. The site was a massive hit, with the website playing 100 million videos per day in the summer of 2006. In October of the same year, Google acquired the startup for $1.65 billion. The New York Times noted that the video platform would help Google root itself in the video space, where it has been struggling, just scratching 10 percent market share with its Video product.
YouTube appoints new CEO
In 2014, Susan Wojcicki was appointed CEO of YouTube, replacing Salar Kamangar who was senior VP of YouTube. Wojcicki was a product manager for AdSense, Google Book Search and Google Video. This made her a favorable candidate as she was familiar with video and advertising solutions. In an interview with Fortune, she said that when she arrived at YouTube, the company was operating as Google was during the early 2000s. The team had large ambitions, but lacked the amount of people to make their dreams come to life.
Whilst at YouTube, Wojcicki observed that younger generations used video content to engage with creators. This was a completely different dynamic than streaming platforms such as Netflix, that solely served series and movies. She said that YouTube was operating in a different space compared to traditional over-the- top television. YouTube had many creators making their own content and creating their own communities. So one of the first targets was to expand on this unique experience and foster further interaction between viewers and creators. To enable this strategy, it set out to promote the stars on the platform through advertising.
In 2015, Robert Kyncl, head of content and business operations at YouTube, spoke to British news website The Guardian about the future of the platform. He remarked that it would be focusing on mobile, and ensuring that the experience would be compatible with carrier networks around the world. He elaborated by saying that ad-supported video would mostly take place on mobile devices as growth at television had flat lined as it didn’t deliver the same level of interactivity that a smartphone can. The market for advertisers had stalled on television and a platform such as YouTube could deliver a growth opportunity. But advertising may sound very lucrative, YouTube was looking for other streams of revenue.
A few months after the interview with Kyncl, YouTube announced its first premium product, YouTube Red. Users could enjoy an ad-free service for $9.99 per month, save videos for offline viewing, play videos in the background on mobile devices and access exclusive content. The service was priced just below Hulu, which had a subscription fee of $11.99 per month. But why did YouTube come up with its own paid subscription?
YouTube’s revenue and Google’s ad dependency
YouTube has been growing steadily over the years. In 2016, the platform had 1.35 billion users, two years later it grew to 1.58 billion and in 2021, it reached 1.86 billion viewers. This made the platform a great portal for advertisers, who would have access to a large global audience. But growth has been slowing over the years, the amount of users grew by 13% in 2016, but it dropped to 7.5% in 2018 with user growth dropping to 4.9% in 2021.
The potential for YouTube as an ad platform was reflected in the revenue it was able to pull in. In the last quarter of 2018, YouTube generated $3.6 billion in ad revenue, the following quarter, revenue dropped to $3.02 billion, but recovered to $3.6 billion, growing to $4.7 billion in the fourth quarter of 2019. In 2020, figures published by Alphabet, revealed that YouTube generated an impressive $15 billion in revenue, the equivalent of 10% of its total revenue. The Verge noted that this made the ad revenue six times larger than Amazon’s streaming video platform Twitch. While these numbers sound amazing, Google’s dependency on ads is a topic which has been circulating for years.
The company made great investments to reduce its reliance on ad revenue. In 2009, ads still accounted for 96.8% of its revenue. In 2013 this number decreased to 92% and dropped further to 85% in 2018. Despite its decreased reliance on ad revenue, it still takes up a majority of its business, which has fallen under scrutiny with tightened privacy regulations around the world. One incident that proved the volatility of its ad business was large advertisers such as Nike, Expedia, Acer, Alibaba and others pulling their ads from Alex Jones’ channel, who through conspiracy theories has gained a large following, but also igniting several controversies. Such controversies are not new to the platform, but it proves how quickly the tides can turn.
YouTube goes into subscriptions
In May 2013, YouTube was piloting subscription models through a paid channel subscription starting at $0.99 per month. It would start the program with the UFC and Sesame Street. In July, Variety reported that the pilot was slow to catch on. Sesame Street saw moderate success with its $3.99 monthly fee and Cuban, charging $1.99 per month, noted that performance was not amazing. The addition of channel subscriptions becomes clear when placing it in a larger context.
YouTube was seeing the enormous revenue that Netflix was pulling in. In 2016, Netflix had a revenue of $8.83 billion, growing to over 10 billion in 2017 with $11.69 billion and more than doubling its revenue in 2020, to $24.99 billion. The streaming giant had a far more durable business model, as it was able to generate a predictable monthly recurring income, which even if viewership decreased or the inflow of new users slowed down, it would always have a positive cash flow. YouTube, on the other hand, had to ensure that users kept coming back to the site and spent as much time as possible on the platform to serve ads.
Google wants to stabilize its revenue with YouTube Premium
Google has had massive success with YouTube, adding a strong stream of income to its overall revenue. It helped the video streaming website to professionalize and gave it the focus and resources it needed to grow. But as the advertising business of Google saw a meteoric rise, the tech giant had to find new ways to stabilize its revenue as competition in the advertising space increased from companies like Amazon who ate away precious market share.
The controversies surrounding its ad business also proved that it could become very volatile and advertisers are quick to pull the plug on their ads when controversies arise. In the short term, Google is looking for new ways to keep its ad business a worthwhile endeavor, but the company will have to look for ways to decrease the risk that lurks around online advertising. A strategy the search giant has set is expanding its subscription services which it started piloting with as early as 2013. YouTube Premium is another evolution of its attempts to monetize and stabilize its revenue. YouTube however will keep experiencing an uphill climb, as its users have been enjoying free ad-supported content for years. The question remains will they reboot Premium just like with its Red product, or keep pushing till they’ve reached their target.