Business Matters: Market Is Ready for YouTube Subscription Channels

Questions popped up as soon as YouTube unveiled its paid subscription channels Thursday. Will people pay a monthly fee to watch videos on YouTube? What will the impact be on cable TV? Can YouTube compete with Netflix?

YouTube has been an advertising-supported business until now. In announcing its subscription channels, the company said the new business model is a way for its partners to have more flexibility in monetizing their content. The 51 subscription channels for the rollout -- more will be added over time -- range from music concerts (Qello) to motorcycle maintenance (Fix My Hog) and are heavy on content for children.

YouTube Launches Paid Subscription Channels

Subscription channels should work at YouTube because YouTube doesn't have to reinvent the wheel. Thanks to Netflix, Hulu and Lovefilm, the notion of paying for online access to a catalog of videos is already familiar to millions of consumers. Netflix has 34.2 million paying subscribers -- 27.9 million in the US and another 6.3 million in other countries. Hulu, available only in the US, has over 4 million subscribers. Amazon-owned LoveFilm has nearly 3 million subscribers across Europe.

But success will come down to content, prices and platforms. The content may not need to be mainstream and popular to work in a subscription model, but consumers will need to perceive it as having value. Hyper-focused content such as Fix My Hog's motorcycle maintenance tips ($6.99 per month or $49.99 per year) may connect with a niche audience in need of its information. Baby First PLUS's educational videos for toddlers ($1.99 per month) could appeal to a wider audience.

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Prices could be an issue for some of YouTube’s subscription channels. Netflix charges $7.99 a month for roughly 60,000 titles. The YouTube channels charge from $0.99 to $4.99 for a much smaller selection of titles (some of which are also available on Netflix). If $7.99 is the established reference price, YouTube’s subscription channels will need to add value in ways other than lowering price and/or adding titles. (A reference price is a price consumers expect to pay or believe is reasonable for a product or service.) Superior editorial, curation or recommendations are examples of features that could bring the subscription channel’s prices closer to the reference price.

The fact that channels are hyper-focused and individual may provide value to consumers. Consumers can’t subscribe to cable television one channel at a time, although Sen. John McCain is working on a bill that seeks to give cable consumers the ability to pick and choose cable television channels. But YouTube allows consumers to pick and choose what channels they will pay for. A consumer interested only in yoga videos, for example, can pay for one channel rather than pay for a wide range of titles (the Netflix model). In this way, YouTube’s subscription channels are like an a la carte version of Netflix.

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Success also depends on platforms. YouTube has grown through the Web and mobile usage, but some content will be better suited for television sets (where subscription content is typically viewed today). Qello's high-definition concert videos are best brought to life on a large screen. Big Star Movie's independent feature films were meant for a big screen, too. Viewing on a television requires a set-top box such as Google TV or Boxee, a participating cable or satellite set-top box, a smart television that has the YouTube app or a game console. The biggest hurdle here is probably going to be educating the consumer about watching YouTube on televisions.
 
YouTube's subscription channels present an opportunity for content creators. Owning content is one thing, but finding great distribution partners is another. There is a great deal of music video content -- or much more on the way -- that needs better distribution and monetization. This subscription model may not gain momentum immediately, but the market should be ready for it.