YouTube will attempt to monetize it’s service with paid subscriptions by asking users to pay a monthly or yearly fee to block pre-roll advertising before music videos play. Many YouTube music videos have ads that play before the video begins, which users can often times skip after a few seconds by clicking on the Skip Ad overlay that appears at the bottom right of the video window.
Mashable writes that Google, the company that owns and operates YouTube, generated about $53B last year. Google doesn’t break out revenue for YouTube, but cites a report from The Independent, which quotes anonymous sources estimating the service added only $3.2B in to Google’s bottom line, short of analyst predictions of $5B.
To improve the numbers, Google AdSense and AdWords exec, Susan Wojcicki, took over CEO role at YouTube in February after reports indicated YouTube losing market share to AOL and Facebook, resulting in a drop in ad rates. A subscription music service is one way the company is seeking to add to their bottom line. However, many independent record labels are not happy after receiving an updated agreement reducing compensation in the future. And, in an increasingly crowded content marketplace, new content creators are finding it more difficult to find an audience and generate revenue to support programming.
More companies today are looking to the consumer to pay a subscription fee to turn off ads in content and consumers have gotten used to paying a nominal fee to block ads. However, as more services turn to this type of offering, consumers will be faced with having to decide which services they really need. YouTube is now entering a subscription world, competing with Netflix and cable television for the consumers dollar. It remains to be seen if enough people will pay to block ads on YouTube, when they already have a Spotify subscription, combined with a cable subscription (or at least high speed Internet) at home and Sirius/XM in the car.
Today, consumers are faced with an issue of privacy. Accept the freemium advertising model and agree to be tracked and targeted for ad wherever you go. There are now ad auction exchanges set up to deliver advertising to websites instantaneously as traffic ebbs and flows. Prices rise where there is more traffic and reduce where there is less. This makes Internet advertising more efficient, while at the same time putting pressure on media creators to keep eyeballs on their content. That’s why Internet meme sites like Upworthy, which promote short, viral content scientifically analyzed and optimized to constantly drive eyeballs. Users are also tricked into staying engaged by being forced to to click through page after page of images, so that the site can deliver more page refreshes to deliver more ads. It’s for this reason, it is not a stretch to see why consumers would want to pay YouTube to turn off ads. The question is, can YouTube be trusted to deliver a completely ad free experience?
When we first started paying for Cable TV, cable companies delivered ad-free programming, but soon realized they could both charge consumers for content and display ads at the same time. Given that the quality and amount of content was far more than was available on free television, cable companies got away with this for many years. But now with cable’s monthly costs reaching into the hundreds of dollars and other media competing for our attention and wallets, as well as the Internet supplying high quality content, many cable subscribers are cutting off their TV and paying only for high speed Internet access.
The same has happened at Sirius/XM. While many of the generic, programmed music channels are ad free, we’re starting to see some content creators that license content to the popular satellite radio service insert ads in their programming. Again, consumers have grown accustomed to this, so their is little outrage when it happens. However, as we make our way into a world of asking consumers to subscribe to everything, companies need to be careful about stepping over the line.
As for this blog, we do host advertising and recently turned off ad units being delivered by one of our partners, who now publish video content inside advertising blocks. Those types of ads have become intrusive and are affecting our readers ability to focus on our content, so we’ve turned them off in favor of our general Google AdSense program. That begets the question, do Internet companies really need advertising to survive?
In YouTube’s case, billions of dollars in ad revenue last year is nothing to sneeze at, but can one solely base their entire business on advertising? History has shown that diversification is critical. Finding and testing alternative revenue models is important. The over reliance on advertising without a strategy for expanding revenue in other ways is now proving troublesome for YouTube. Facebook faced this issue for the past two years and quickly found mobile revenue from ads as well as allowing anyone to place a targeted ad or promoted post to get attention to their content in Facebook would be its future. In a closed network like Facebook, controlling the ad revenue stream is different than simply selling ads to brands. They’ve created products around promoting likes and shares, which is advertising like, but also a utility for content creators who want to employ the tools to reach a wider audience. What kinds of tools can YouTube give to content creators to promote content in the YouTube network?
Lastly, it’s important to note reliance on advertising is something that our brightest minds are looking at and trying to solve. In a recent The Atlantic article, “The Internet’s Original Sin,” author and Director of Civic Media at MIT, Ethan Zuckerman, writes:
Advertising became the default business model on the web, “the entire economic foundation of our industry,” because it was the easiest model for a web startup to implement, and the easiest to market to investors. Web startups could contract their revenue growth to an ad network and focus on building an audience. If revenues were insufficient to cover the costs of providing the content or service, it didn’t matter—what mattered was audience growth, as a site with tens of millions of loyal users would surely find a way to generate revenue.
Zuckerman, who was a former employee of Tripod.com, the company that created what we now know as the pop-up ad, which is an ad placed on a pop-up page that appears on top of the content you’re viewing, says that there are two kinds of ads: expensive and cheap. The expensive ad is the one that pops up in Google when you’re ready to buy something. It’s a lead generator, which is why companies will pay top dollar to get your attention.
The cheap ad is the ad that competes for your attention with the content the user is interacting with. Those ads are obviously going to pay less to the content publisher, because interest to action is low. Therefore, web publishers must look for other ways to monetize their digital business, because we’ve gotten to a point where so much freemium content is available, advertising prices are dropping considerably and these companies will not be able to survive on ad revenue alone.
Needless to say, YouTube have their work cut out for them. We’ll be watching to see how this new ad free model plays out and how consumers adjust to companies asking them to open their wallets, instead of agreeing to view content in exchange for their eyeballs.