Dilemma Of YouTube’s Unplugged TV Part -1: Is A Subscription Model The Right Approach For Monetizing Video Content?
Alphabet’s (NASDAQ: GOOG, GOOGL) online ad company Google owns YouTube. According to Trefis estimates, YouTube makes up over 12.5% of Alphabet’s value. Trefis also estimates that it generated nearly $12.6 billion in revenues in 2015. However, Alphabet continues to explore avenues to boost YouTube’s revenues. While last year the company launched the ads free videos streaming subscription services on YouTube platform called YouTube Red, it is now exploring a paid YouTube subscription cable service called Unplugged that would offer customers a bundle of cable TV channels streamed over the Internet. [1] Through the launch of these services, the company is trying to disrupt the $64 billion video-on-demand (VoD) industry [2] and the $200 billion TV advertising industry. In this note, we explore the VOD industry and the subscription VOD model. In a second article, we explore how YouTube can disrupt the cable industry and monetize its skinny cable model through AVoD (see below).
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Current OTT market
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The over the top (OTT) television market is composed of subscription based video on demand(SVoD), Transactional VoD (TVoD) and Ad VoD (AVoD). The combined market size of the OTT market was estimated at $29.41 billion in 2015, and is expected to grow to over $64.78 billion by 2021, a CAGR of 14.07%. [3]
Subscription VOD is a type of service where the user enters into a subscription agreement that grants access to the video streaming services with no limits. Currently, SVOD makes up over 40% of this industry, and most of the revenue stems from the US. The most dominant player in SVOD industry is Netflix, which reported revenues of $6.78 billion in 2015. The majority of the revenue for this segment originates from the U.S. and Europe. Other regions have failed to contribute significantly. This is because under penetration of the internet and lower per capita income has limited the growth in revenues.
The transactional VoD service offers customers attractive pricing on selected pieces of content. TVOD services are great at effectively monetizing content that is more recent because this type of content is in demand by users. Additionally, content producers can garner premium based on the strength of their content and generate a higher revenue per view.
The AVOD model lets the users view the content for free, while the content platform and generator makes money by showing relevant ads. This stream makes up the majority of the revenue for OTT. While YouTube is the industry leader, this model is not widely explored but is gaining traction among other players in the industry.
YouTube’s Foray In The Challenging SVoD
YouTube forayed in SVoD with the launch of the Red subscription service last year. This service provides advertising-free streaming of all videos hosted by YouTube, offline and background playback of videos on mobile devices, and access to “YouTube Red Original” series and films. It has recently announced that it will launch the Unplugged Cable subscription service that will be available in 2017.
However, Trefis believes that certain challenges in SVoD service limits growth. This is evident from the Netflix content library, which has shrunk by 40% over the last four years as original content producers are not renewing their yearly contracts. Furthermore, Netflix has been slow with producing its own original content. As a result, users’ access to new content on Netflix has been limited, illustrating one of the major challenges in the SVoD space. These challenges will limit the growth of SVOD to $26.79 billion in 2020, according to Research and Markets. [4] Considering the challenges with producing original content that users favor over older re-runs of TV series and movies, it makes sense to syndicate content from various sources and offer an attractive alternative to monetizing this content.
Initially, YouTube plans to monetize its content through subscription. However, Trefis believe that it should consider the AVoD model as it has the reach and means to monetize the content more effectively. Furthermore, as stated earlier, the projected revenue for the SVoD industry will be far lesser than the online ads revenue and the TV ads revenues, which is being cannibalized by online video ads.
In the next note, we explore the market size and revenue that YouTube can generate with the alternate AVoD service for its curated and original (skinny cable) content.
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- www.bloomberg.com, May 6 2016 [↩]
- OTT TV & for Q2’16ideo Revenues To Generate $65 Billion, July 19 2106 [↩]
- OTT TV & video revenues to generate $65 billion, July 19 2106 [↩]
- Global SVOD Forecasts, Jun 15 2015 [↩]