YouTube's Music Key Subscription Service: The Impact on Hollywood

Illustration by: Chip Wass

Video creators cheer a potential new buyer as Google bets on viewers paying for shortform content (but will anyone watch?)

A version of this story first appeared in the Dec. 5 issue of The Hollywood Reporter magazine.

Netflix has built a more than $22 billion company around its subscription streaming video service. Hulu's 5 million paid members helped drive it to $1 billion in revenue in 2013. So it's no surprise that ad-supported video behemoth YouTube sees potential in a paid hub of its own. And that effort, announced Nov. 12 with a music service called Music Key, already is being welcomed by Hollywood content creators who see digital dollar signs.

"We're incredibly excited that a marketplace is forming around shortform [video]," says Reza Izad, CEO of Collective Digital Studio, which works with YouTube creators like Video Game High School's Freddie Wong. "The addition of subscription revenue will be hugely valuable to all of us who are playing in that game."

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Music Key, the Google-owned streamer's $9.99-a-month service, could be just the beginning. YouTube CEO Susan Wojcicki says the company already is at work figuring out how to give users more ad-free options. "We're early in that process, but if you look at media [companies] over time, most of them have both ads and subscription," she said in October, offering few details.

The results of that quest could have huge implications for the creative community, which has been buoyed in recent years by such big-spending digital buyers as Netflix, Hulu and Amazon. At the same time, critics of YouTube charge that its ad split with creative talent is too one-sided. But the question remains: Will viewers pony up for short videos they've always watched for free?

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YouTube, which is estimated by eMarketer to generate net revenue of $1.13 billion this year, experimented with subscriptions in 2013 by giving top creators the option to charge. But several channels since have complained about the lack of viewers, and the same challenge could plague YouTube's newest paid efforts.

"It's all going to come down to the value proposition," says Nielsen analyst David Bakula. "In a space like this, which is fairly crowded already and getting more crowded by the day, you have to set yourself apart." Netflix, Amazon and Hulu, which are projected by RBC Capital Markets to spend a collective $6.8 billion to license programming next year, have turned to tentpole exclusive deals and original content to draw viewers, and the shortform streaming players are likely to follow that model. YouTube and Vimeo already are funding creators directly.

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Creative Strategies analyst Ben Bajarin believes YouTube has a head start because it boasts a built-in user base of more than 1 billion monthly viewers (Netflix has 53 million global subs). "What makes YouTube interesting is that they already have, by far, the largest group of people listening to music and watching video on their site," he says. "Netflix and Spotify have to go out and acquire those customers, but YouTube already has them."

Still, YouTube will have competition. Vimeo CEO Kerry Trainor says his company plans to launch a subscription service next year; Hulu alum Jason Kilar is expected to offer an ad-free tier when he unveils his stealth startup Vessel; and YouTube multichannel net­work Fullscreen — which was acquired by Otter Media, the joint venture from the Chernin Group and AT&T — is said to be priming a mobile-focused paid service.

If YouTube subscriptions don't take off, it runs the risk of losing its top creators to competitive platforms, some of which have started wooing talent with big upfront paychecks and favorable ad splits. All those moves benefit talent.

Says Izad, there's "a big motivation for them to get it right."

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