YouTube…Better Late than Never?

Recently, YouTube created a stir in the online video world by announcing plans for a new distribution model. For now, 54 of the channels carried by YouTube will offer streamed video content through subscriptions costing between $0.99 and $7.99 a month. This is a first in many ways. Not only is YouTube breaking from its longstanding practice of offering free (mostly user-generated) video content to consumers over a vast network of channels, it is also fundamentally changing how revenues from that content are raised and shared.

If there’s any real surprise in YouTube’s move to the new model, it is not that it has done so but rather that it has taken this long. According to the New York Times, plans for monetizing some video content have been in the works since at least 2011, and many content creators have been open about their desire to provide content for a fee. Also, conditions have long existed to favor such a change. To understand why, one needs to look no farther than the economics of “multi-sided markets.” In a “standard” market, buyers obtain goods or services from sellers at prices that both parties accept.

There are just two parties to such transactions, and only one of them is the consumer or user group. In a multi-sided market, in contrast, a central intermediary or “platform” enables multiple user groups to reach other. The platform itself neither produces nor consumes anything — it is a pure facilitator of transactions among the user groups, and it pays for its own costs by charging one or more of those parties for their use of the platform. A newspaper or magazine can be a two-sided market, bringing subscribers and advertisers together. Other examples abound: credit card companies, HMOs, and operating systems, to name a few. YouTube, in fact, resembles a three-sided market, by providing a well-organized and diverse platform to bring together content creators, content consumers, and advertisers.

These parties are connected in multiple ways: content creators need to convey their programming to consumers, consumers need to receive desired content from content creators, and advertisers need to convey information (often in the form of user-generated content) about goods and services to content consumers. In this setting, the value of the multi-sided market to each user group rises as the other groups grow larger, a phenomenon often called “multi-sided network effects.” A successful platform, therefore, tries to take advantage of these network effects by making every effort to maximize the transactions among the different user groups. Most often, this requires figuring out what, if anything, each user group should pay to use the platform.

YouTube consumers have come to expect free content, even though YouTube (and its owner Google) incurs cost to distribute content. Advertisers alone have so far carried the burden of paying for that cost. Any move to allow (at least some) content creators to charge consumers for content creates a potential revenue stream for the content creators and, at the same time, potentially reduces the advertisers’ burden. Under the new model, YouTube now has multiple revenue options: (1) revenues solely from advertisers (as before), (2) revenue-sharing with content creators that can now charge for content, and (3) a combination of the two. The secret sauce for YouTube to find the right pricing balance will be an understanding of how network effects operate.

If content consumers are highly price-sensitive and resist having to pay for content they have always viewed as free, then YouTube should continue to seek revenue mainly from advertisers who stand to benefit from a growing base of consumers. This form of subsidy to consumers can be withdrawn from those that are willing to pay a fee for at least some types of content (for example, children’s programming, sports, or specialty programming) — presumably the rationale behind the selection of the initial group of 54 paid channels. Importantly, the price charged for any content should be calibrated by consumers’ price-sensitivity; across-the-board uniform prices for all forms of paid content will not provide much mileage.

What are YouTube’s prospects for a successful launch of the new distribution model? A lot of the advertising on YouTube takes the form of interactive content that consumers can view at their option. Regarding viewing behavior, Centris’ analysis of clickstream (website use) data shows that YouTube is next only to Facebook and Google in the number of visits per day, surpasses the two giants on minutes per visit, and is in the top tier of daily hours per unique visitor among non-specialty sites. Also, YouTube consumers are “more sticky” (i.e., make more page switches within YouTube’s website) than Google consumers and somewhat less sticky than Facebook consumers.

Furthermore, Centris’ analysis of (paid or free) streaming sites shows that YouTube has almost twice the number of visits (over 45 million) within the past month than its nearest rival, the subscription-based Netflix. Finally, it is telling that up to a third of exclusively YouTube consumers (i.e., those who use no other form of streaming, whether paid or free) are willing to pay for YouTube-provided content (an average of $16 per month among those willing to pay). All of these facts augur well for YouTube’s new distribution model. The multi-sided network effects are clearly evident and they are backed up by a reasonably high willingness to pay for an ostensibly free service. Of course, only time will tell whether this break with the past is going to truly pay off.

 

-Written by Dr. Andy Banerjee, SVP Analytics at Centris 

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