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YouTube's forthcoming subscription music service is more than a potential rival to Spotify and Apple's Beats. It could eventually compete with Netflix.
Google's video service confirmed for the first time this week that it plans to introduce an ad-free subscription-based music service this summer. The product will let consumers consume music videos or audio without ads and without a live internet connection. But it could use the same tactics it's employing to get music labels on board to also bring in video far beyond music.
The expectation has been that YouTube would roll out the music service as some type of standalone music product. That won't be the case. It will instead be a new paid tier on the existing YouTube service, the company told Ad Age on Tuesday.
Converting part of YouTube to a freemium model is a first step to establishing real dual revenue streams. While YouTube added a la carte channel subscriptions last year, its revenue still stems overwhelmingly from advertising. After revenue sharing, YouTube took in $850 million from video ads in the U.S. alone, up 50% from the year before, according to eMarketer estimates. There are no estimates on its channel-subscription revenue so far.
To encourage music labels to participate in its paid service, YouTube is not offering them separate deals for it. Instead it is asking labels -- which five years ago signed new pacts to make their artists available on YouTube's mobile service -- to sign deals spanning both the ad-supported free service and the coming ad-free subscription one. Labels who refuse to sign on for the subscription service are, in effect, simultaneously declining to renew their deal for the ad-supported service.
YouTube acknowledged the long-term possibility of a subscription service beyond music when speaking with Ad Age on Tuesday but didn't commit to any plans.
A full-blown subscription service would pit YouTube against Netflix and Hulu to compete for consumers willing to pay for content. That might be a bit of an asymmetrical battle, with different audiences in play. Netflix and Hulu benefit from libraries of movies and TV shows that people are accustomed to paying for through rentals and cable subscriptions. YouTube's library, so to speak, is more about video-game footage from PewDiePie and beauty and makeup guides like Michelle Phan. And while its videos have become a dominant entertainment format for younger viewers, they have also been free.
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"It is the problem when you try to convert a free service to a freemium service," said James McQuivey, a Forrester Research analyst. "You have to give people content in premium that they can't get anywhere else."
YouTube might have better luck with an approach focused on specific areas of content, Mr. McQuivey suggested, calling music and gaming two of YouTube's biggest categories. "Instead of a global YouTube subscription, you could have a music subscription and a gaming subscription because people passionate about these behaviors could generate revenue," he said.
YouTube is already implementing this strategy with music, where the new service won't be limited to label-signed artists. YouTube's music content spans music videos from Grammy winners like Adele as well as fan remixes, covers by YouTube stars and original songs from relative unknowns. All of those acts post music content to YouTube and could be eligible to sign deals for the subscription music service, YouTube said.