Market Insight

YouTube launches subscription service with Red

October 23, 2015  | Subscribers Only

Dan Cryan Dan Cryan Executive Director – Research and Analysis, IHS Markit

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Google owned online video platform, YouTube, is to add a subscription option called YouTube Red. For $9.99 per month, the subscription:

  • Removes display advertising from YouTube. Branded content and show sponsorships will be unaffected.
  • Provides exclusive access to a slate of video titles in addition to existing YouTube content. 
  • Allows users to save and download videos for offline viewing, and provide more flexibility within the service’s mobile versions, such as allowing users to play videos in the background. This is understood to apply to all the service’s apps including YouTube Kids and YouTube Gaming.
  • Includes Google’s Play Music on-demand music subscription service.

YouTube Red is also bundled in with Google’s existing Play Music subscription. In effect, a single subscription covers two services and brands: YouTube for video and Play for audio. A free trial for US consumers will be available on 28 October 2015.

Advertising-supported YouTube continues to run parallel to Red, and almost all content will be available both to free and paid YouTube viewers. The online content offered by Disney-owned sports broadcaster ESPN is a notable exception. According to the company, it is not currently part of YouTube Red and has also been removed across the advertising-supported site due to ongoing rights negotiations.

Ten subscriber-only projects make up the initial slate of original Red content, including Scare PewDiePie, Sing It! by The Fine Bros and long-form content from Collegehumor, The Game Theorists and Rooster Teeth. They form a mixture of scripted, feature film and reality shows, which are scheduled for release in 2016.

Our analysis

YouTube Red is the first major subscription push from Google’s video platform and is positioned very differently to the 2013 launch of subscription channels. That subscription initiative was driven by the participating channels, rather than by YouTube itself at a platform level. By contrast, the new offer is YouTube branded and provides a suite of functionality that applies across the entire the platform and beyond (thanks to the inclusion of Play Music).

The new subscription is multi-faceted, combining video with music. In some respects this makes it more similar to Amazon Prime’s diversified content strategy – providing access to video, music, ebook lending and free shipping – than a purely video-focused offer from Hulu or Netflix. Google’s approach makes sense given the important role music plays in YouTube’s content mix – the service is already one of the most popular music services in the world, e.g. Taylor Swift’s YouTube channel has 16.5 million ‘subscribers’ and Ed Sheeran’s channel has almost 7.5 million (YouTube uses ‘subscriber’ in this context to denote the follow relationship, rather than paying customers). This gives Google a large pre-made audience for its premium music service and, as Spotify has illustrated, a free tier can be an effective acquisition strategy for a premium on-demand music subscription. Allowing paying subscribers to enjoy both YouTube and Play Music differentiates Google’s offer from the likes of Spotify and Apple Music, while the price is in-line with standard rate for on-demand music-only subscriptions. Nevertheless, despite the value that Google adds on top of a typical on-demand music subscription, the company faces a number of challenges with this approach. These challenges include addressing the product fragmentation inherent in its two-brand strategy; and persuading the YouTube audience, many of whom are generally understood to use the service because it is free, to start paying.

Looked at from a video-first perspective, rather than a music-first one, the service initially appears to be on less certain ground: $9.99 puts YouTube Red in line with Netflix’s new standard price, and more than Hulu’s standard $7.99 price. But where both of those services bring with them the promise of programming that is classically considered ‘premium’; the consumer appetite to pay for the sort of programming YouTube offers is less clear. However, some use cases have obvious appeal, such as saving kids content for offline viewing.

In this context the exclusion of all ESPN content from YouTube, not just YouTube Red, is interesting as it means that the video platform now lacks content from one of the mainstays of U.S. pay TV. However, IHS does not believe that this omission will have much impact on Google’s platform; for context, the official ESPN channel has less than 1.7 million ‘subscribers’ (in the YouTube sense of that term, see above).

YouTube Red’s role as a content funding experiment is likely to be more important for the long-term prospects of the service than the exclusion of ESPN. Put simply, if music is an obvious ‘quick win’ for YouTube Red, with clear differentiation against existing competition in a relatively established market; then the subscription’s role in funding content is can usefully be seen as its first major long-term bet, as is seeks to incubate programming with higher production values, and encroach further into the space currently occupied by traditional TV.

This time the company is starting small, only ten companies have received funding from YouTube Red to date, compared with hundreds of Original Channels the company funded in 2011 and 2013. Rather than push to break through to generalist content, YouTube is focusing on its strength area; putting money into the type of content responsible for its most passionate fandom – vloggers like PewDiePie and Joey Graceffa, who have huge, mostly teen, fan-bases. (For perspective, compared to ESPN, PewDiePie and Joey Graceffa have 40 million and 5.3 million YouTube subscribers respectively)

Owing to its base in unscripted and free-form vlog content, the newly-announced 10-project slate has a good helping of reality and unscripted content, alongside comedy and feature film. It also pairs established producers (feature producer Mandeville Films, digital studios New Form Digital) with online talent. Whilst no budget figures have been made available by YouTube, scripted series by established producers are expensive, representing a serious investment, perhaps approaching its series of $100 million spends with Original Channels.

Through cash injections like this, YouTube is seeking to propel a cycle of earnings that can raise budgets for creators, and allow them to make premium, glossier, longer-form content alongside their baseline vlog and low budget videos. YouTube Red needs to have a pipeline of special exclusives and must-see content to maintain subscriber interest. While ad-free and downloadable videos might add to the appeal of paying for a subscription, content will be essential to reducing subscriber churn.

Moving away from the lower-budget, highly prolific vlog and studio unscripted content, the founding-stone of many YouTubers’ popularity, is the long term bet for expanding the audience in YouTube Red’s strategy. It is a departure from YouTube’s primary content type but should fans opt to pay for it en-masse, it could raise the bar of content standards and deliver the top creators a major new revenue stream.

Geography
USA
Organization
YouTube
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