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The Verge reports that YouTube is trying a new business model:
According to multiple sources, the world’s largest video-sharing site is preparing to launch its two separate subscription services before the end of 2015 — Music Key, which has been in beta since last November, and another unnamed service targeting YouTube’s premium content creators, which will come with a paywall. Taken together, YouTube will be a mix of free, ad-supported content and premium videos that sit behind a paywall.
At first glance, this seems like a brave new move for YouTube, which has been ad-supported since its inception. But it turns out that ads on the platform actually haven't been doing that well - and have been pulling down Google's Cost-Per-Click ad revenues as a whole.
However, during the company's earnings call on Thursday, Google's outgoing CFO Patrick Pichette dismissed mobile as the reason for the company's cost-per-click declines. Instead it is YouTube's fault. YouTube's skippable TrueView ads "currently monetize at lower rates than ad clicks on Google.com," Mr. Pichette said. He added that excluding TrueView ads -- which Google counts as ad clicks when people don't skip them -- the number of ad clicks on Google's own sites wouldn't have grown as much in the quarter but the average cost-per-click "would be healthy and growing year-over-year."
If Google's CPC ad revenue would otherwise be growing, it makes sense to switch YouTube to a different revenue model. Subscriptions are tough, but consumers have already shown that they're willing to pay to access music and entertainment services (think Spotify and Netflix).
But what if those revenues don't continue to climb? Back in May, Google confirmed that more searches take place on mobile than on desktop. That pattern continues all over the web: smartphones are fast becoming our primary computing devices, and you can already think of laptops and desktops as the minority.
Enter Apple, which is going to include native ad blocking in the next version of iOS:
Putting such “ad blockers” within reach of hundreds of millions of iPhone and iPad users threatens to disrupt the $70 billion annual mobile-marketing business, where many publishers and tech firms hope to generate far more revenue from a growing mobile audience. If fewer users see ads, publishers—and other players such as ad networks—will reap less revenue.
This is an obvious shot across the bow to Google, but it also serves another purpose. Media companies disproportionately depend on advertising for revenue. The same goes for consumer web apps: largely thanks to Google, it's very difficult to convince consumers to pay for software. They're used to getting high-quality apps like Gmail and Google Docs for free, in exchange for some promotional messages on the side. In a universe web web browsers block ads, the only path to revenue is to build your own app.
From Apple's perspective, this makes sense: it encourages more people to build native apps on their platform. The trouble is, users spend most of their time in just five apps - and most users don't download new apps at all. The idea of a smartphone user deftly flicking between hundreds of beautiful apps on their device is a myth. Media companies who create individual apps for their publications and networks are tilting at windmills and wasting their money.
Which brings us back to subscriptions. YouTube's experiment is important, because it's the first time a mass-market, ad-supported site - one that everybody uses - has switched to a subscription model. If it works, and users accept subscription fees as a way to receive content, more and more services will follow suit. I think this is healthy: it heralds a transition from a personalized advertising model that necessitates tracking your users to one that just takes money from people who find what you do valuable. You can even imagine Google providing a subscription mechanism that would allow long-tail sites with lower traffic to also see payment. (Google Contributor is another experiment in this direction.)
If it doesn't work, we can expect to see more native content ads: ads disguised as content, written on a bespoke basis. These are impossible to block, but they're fundamentally incompatible with long-tail sites with low traffic. They also violate the line between editorial and advertising.
Media companies find themselves in a tough spot. As Bloomberg wrote earlier this year:
This is the puzzle for companies built around publishing businesses that thrived in the 20th century. Ad revenue has proved ever harder to come by as reading moves online and mobile, but charging for digital content can drive readers away.
Something's got to give.
Photo by Moyan Brenn on Flickr.