A family is gathered around the dinner table: Dad and the kids have spaghetti on their plates, Mom is standing, serving spoon in hand. She cocks her head to the side and with a broad smile declares, “Don’t thank me, thank the savings.” The family freezes and a Geico logo appears hovering over the table as a voice intones, “You can’t skip this Geico ad, because it’s already over.” But the scene isn’t actually frozen — the family dog ambles up, slurping spaghetti off Dad’s fork. Human eyes dart nervously, but bodies and smiles stay plastered in place. Realizing his impunity, the shaggy beast climbs onto the table, gobbling up noodles, knocking over the salad, and generally causing mayhem.
An inside look at YouTube’s new ad-free subscription service
By Ben Popper | Photography by Cara Robbins
A family is gathered around the dinner table: Dad and the kids have spaghetti on their plates, Mom is standing, serving spoon in hand. She cocks her head to the side and with a broad smile declares, "Don’t thank me, thank the savings." The family freezes and a Geico logo appears hovering over the table as a voice intones, "You can’t skip this Geico ad, because it’s already over." But the scene isn’t actually frozen — the family dog ambles up, slurping spaghetti off Dad’s fork. Human eyes dart nervously, but bodies and smiles stay plastered in place. Realizing his impunity, the shaggy beast climbs onto the table, gobbling up noodles, knocking over the salad, and generally causing mayhem.
The ad, which won a Grand Prix at Cannes this year, cleverly manipulates the conventions of YouTube advertising: a short, often skippable marketing message that runs before the video you actually want to watch. Advertising has always paid the bills at YouTube, which, over the last decade, has grown from an oddball collection of clips into the world’s largest and most influential video portal. The service is on pace to earn around $5 billion in revenue this year. But starting today, advertising will no longer be the only way YouTube and its creators make money. The service is rolling out its biggest change yet: a monthly subscription offering that completely removes ads from the equation.
The new option is called YouTube Red. It costs $9.99 per month and will be available for purchase on October 28th, starting in the US, then rolling out worldwide. Along with removing ads, subscribers will be able to save videos for offline viewing, and keep videos running in the background on mobile. That means you can listen to a music video or a TED Talk while checking email or surfing Instagram. That monthly fee also gives you access to Google Play Music, meaning you get two streaming services for the same price Spotify or Apple Music charge for one without video. As a final enticement, YouTube will also begin putting new, exclusive content behind a paywall.
At a star-studded event in Los Angeles today, YouTube introduced a slate of new "Originals" available only to subscribers. The service plans to match its native stars with traditional Hollywood and television production talent, all backed by a generous helping of Google’s money. The company is hoping that for a rising generation of consumers, a horror series from PewDiePie or a documentary about Lilly Singh will be equivalent to HBO’s Game of Thrones, unique, must-see programming that draws paying subscribers.
With Red, YouTube is signaling a definitive shift from an ad-funded video-hosting service to a media company that will eventually go head to head with Hulu and Netflix. YouTube has the potential to dominate the industry: if just 5 percent of its US viewers were to sign up for the service, it would add more than a billion dollars in annual revenue to the company’s bottom line.
A week before today’s announcement, I visited YouTube’s Los Angeles headquarters to meet with Robert Kyncl, the company’s chief business officer. Kyncl is the man tasked with growing YouTube’s content offerings, revenue and hopefully, someday, turning a profit. He was feeling under the weather and showed up with a box of tissues in one hand and a bottle of kombucha in the other. Kyncl grew up behind the Iron Curtain in Czechoslovakia and was recruited onto a government-sponsored skiing team at a young age. He retains the athletic build and calm, confident demeanor of a highly trained athlete.
Over the last decade, Kyncl has made a name for himself as a deal maker at the intersection of traditional media and technology. After working as an assistant to a talent agent, in 1999 he took a job at HBO. There, he helped consolidate HBO’s Eastern European channels and launch HBO India. Later on as VP of content at Netflix, he helped lead the transition from DVDs to streaming video. From there, it was a natural jump to YouTube, which he joined in 2010. Kyncl describes his role as "making sure that this flywheel of value — between creators, users, and advertisers — is spinning at an increasing speed."
On the face of it, YouTube’s new ad-free subscription service seems like an existential threat to the advertisers the service has spent a decade courting. Kyncl, ever the salesman, argues that Red could boost creator earnings without cannibalizing the ad business. "We believe in the advertising business. Ninety-nine point nine percent of the content on YouTube will be free, as it always has been," he explained. "So the world that all of our advertising partners are used to remains alive and well and [watch time]continues to grow at an astonishing 60 percent year over year. There is nothing we are taking away from there, merely adding onto it."
If everything plays out as Kyncl hopes, there will be more money, more content, and more viewership overall. Still, if the most passionate fans stopped looking at ads, wouldn’t that make the service less appealing to marketers who want their brands associated with YouTube stars? "Let’s take it to the extreme," said Kyncl. Say every paid television customers in the United States — 100 million individuals — sign up for YouTube Red. That would still be less than a tenth of YouTube’s total audience, barely making a dent in the number of eyeballs that would be available to advertisers. Kyncl laughed — "and we have a very long way to go to that kind of number."
YouTube Red is not the first time the service has tried to get users to pay for videos. Back in the spring of 2013, YouTube rolled out paid channels. A year later, the service introduced Fan Funding — a tip jar where fans could donate as they please. Those products didn’t catch on, either because creators and users never fully understood them or were unaware they existed. On a platform as large as YouTube, narrow a la carte solutions have a big challenge in terms of discovery and comprehension.
That lesson was relearned when the company launched Music Key Beta last year, a monthly subscription service that became the seed of YouTube Red. Music Key Beta was focused exclusively on music videos, and for $9.99 a month, users could remove ads and use the app in background mode. Even among users who enjoyed the service, the biggest pain point was that it wasn’t all-encompassing. "The most common and most frequent point of confusion was why this set of features didn’t work across YouTube," says Kyncl. His daughter, for example, loves music from the Disney film Frozen, but couldn’t find it on Music Key. "To her it’s music, but it won’t be in the service, and that seems odd to her."
The response to Music Key led to a massive shift in strategy. Initially the plan was to create and license content only across verticals where YouTube was strongest: music, gaming, and kids. Each vertical would get a dedicated app and be available to subscribers ad free and with power features. But after the response from beta testers of Music Key, Kyncl and his team decided it was all or nothing: YouTube Red will work across every video on YouTube as well as inside the dedicated Music and Gaming apps.
Getting permission to include every single video on YouTube ad-free was no easy task. Kyncl and his team had to convince millions of independent creators, large and small, many of whom worried that their fans would be forced to pay in order to see all their videos, of the benefits of a subscription model. Independent musicians and labels whipped up righteous anger across the web. Fans and media glommed to the story. But for users who choose to opt out, the vast majority of videos will still be available on either side of the paywall, with ads for ordinary users and ad-free for subscribers.
YouTube also had to convince its big music label, television network, and movie studio partners. Many of these big media companies requested a more favorable cut of the subscription revenue than the service was offering to the average YouTuber, on the grounds that their premium content would be the main driver of subscriptions. But YouTube held out, and in the end almost all the big players came along. The only one that hasn't is Disney, but YouTube plans to forge ahead regardless, saying it has 98 percent of its content covered by agreements with rights holders.
The ability to land these deals and largely dictate their terms shows the position of strength from which YouTube is negotiating. It makes a lot of sense. Network and cable television have been experiencing massive ratings declines, while the hours spent watching YouTube is up 60 percent year over year, with an average session on mobile lasting over 40 minutes. On mobile alone, the service reaches more 18- to 34-year-olds than any cable network in the US. If a subscription model works, and that’s a big if, YouTube will begin earning far more per user than it could through advertising. I would have to watch thousands of videos each month to reach a payout of $9.99 in ads. But how will this new business model work for creators?
Dehlia Ford-Feliz never expected to make money posting videos on YouTube. She was simply a diehard Philadelphia Eagles fan who wanted a way to share her reactions to the latest games. But when the team’s rabid fan base found her clips and began sharing them, Ford-Feliz found her videos racking up tens of thousands of views. Over the last few years, she has made YouTube into a full-time career, posting several videos a week and doing live broadcasts around game days.
"I make a little bit of money from ads, not much, but something," she recently explained. The real money these days is in product placement — Ford-Feliz recently signed onto a major fantasy sports league as a sponsor. She also hosts live tailgate parties and sells merchandise. "A lot of fans actually reach out to me because they want to donate," she said. Fans mail Ford-Feliz cash and checks; one man asked if he could send her a monthly payment of a few hundred dollars. But he wanted Ford-Feliz to sign a formal contract. "I didn’t feel comfortable sharing my personal information. It’s a struggle because you want to make fans happy and of course you want to grow your business, but there isn’t an easy way to do that directly on YouTube."
YouTube Red won’t address Ford-Feliz’s direct payment problem — the pay per channel and donation system that the service previously implemented was a flop, and Kyncl is adamant about not trying that again. But he believes that in the long run, Red could meaningfully increase what creators earn.
With the advertising model, YouTube takes 45 percent of the revenue, and the remaining 55 percent goes to creators. With Red, creators will be paid a percentage of the total subscription revenue, minus YouTube's’s cut, based on the watchtime of their videos each month. The more devoted their fan base, the bigger that check could become. YouTube won’t share the exact percentage it plans to take from Red, but says creators will still get the majority of subscription revenue.
Jack Conte, the founder of the crowdfunding service Patreon and a musician who makes a large part of his living through videos, doesn’t think Red will bring about significant improvements for creators. "Subscription services are great for consumers. Pay 10 bucks and have any song or any video in your pocket, whenever you want," he says. "But for the creators, there is still way too much of a middleman."
Conte says a subscription service like YouTube’s risks replicating the dynamics of today’s streaming music world, where even millions of listens bring in paltry revenue. "My art might be worth $10 to a superfan, but if she is listening on Spotify, even with a subscription, I am still only getting pennies every time she interacts with what I have made."
Kyncl thinks highly of services like Patreon, but says he doesn’t want to try and bring that model to YouTube. "The narrow a la carte-focused solutions or funding mechanisms only get to the superfans. What we can deliver is not only the superfans, but also the casual fans, and where you generate the most amount of revenue, is the casual fan area." YouTube is the place where anyone can start, and where the biggest stars are well rewarded. In the middle, where full-time creators might struggle, they can turn to merchandising, crowdfunding, and offline events to fill the gap. "We have to look at what we are strong at," says Kyncl. "And that’s scale."
When it comes to scale, to the sheer size of its video library, YouTube has no peers. And with more than 400 hours of new video uploaded every minute, it is unlikely that anyone will catch up soon. But in terms of its audience, YouTube no longer stands alone. Video, specifically mobile video, is the hottest segment of the advertising business, and hundreds of billions of dollars, slowly shifting away from television, print, and other traditional media, are up for grabs.
YouTube’s toughest and most rapidly rising rival is Facebook. In September of 2014, Facebook said that it was serving up 1 billion video views a day. Less than a year later, that number had climbed to 4 billion daily views. The videos were also no longer coming from YouTube. Today more than 70 percent of Facebook videos are uploaded natively, and the social network is aggressively courting advertisers and talent. "In addition to YouTube, we see our clients getting big traction on platforms like Facebook, Instagram, Snapchat, and Vine," said Dan Porter, head of digital for one of Hollywood’s top talent agencies, WME-IMG. "It’s clear that right now, talent is up for grabs."
Porter says that Red could play a key role in that battle for stars. "Subscription, if it succeeds, could go a long way to keeping talent on YouTube, because it could help fund bigger scripted series." Brian Weiser, an industry analyst with Pivotal Research, agrees. But he thinks in order to really compete as a subscription service against the likes of Netflix, Hulu, and HBO, YouTube will "need to start licensing premium content."
Kyncl also believes Red needs premium content, but he is committed to creating it on YouTube’s terms. The service has no plans to pay big bucks to license the NFL or Seinfeld, Kyncl told me. He sees Hulu, Amazon, Netflix, HBO, and others all bidding for the right to show the same films and TV series, all trying to grab the hottest actors, producers, and directors to make originals. He wants to move against that tide. "To us what is important is we are not doing what everyone else is doing, competing for the same sources of material, the same creative elements. We are looking for people who are proven to work really well on our platform."
YouTube Originals pair stars who were born on the platform with top talent from film and television. "What we realized is that in many cases, content creators on YouTube have worked on a shoestring budget for many years, and have built super fan bases basically on zero budgets," says Kyncl. "In order to scale up, it takes a different kind of enterprise, a different kind of skill set; there is [a] story-telling skill set, there is showrunning, etc." In the near future, PewDiePie will be matched with the producer of The Walking Dead to make a scripted horror series very different from his one-man vlogs. YouTube Originals is also helping to produce and promote a documentary about the world tour of comedian Lilly Singh.
Left to its own devices, YouTube will continue to grow rapidly, to produce its own specific brand of stars, and to attract millions of passionate fans and billions of casual viewers. But can it find a way to take that talent and supercharge it into something that appeals to a wider audience? Is it possible for YouTube to grow into something more serious, or is it just throwing away money by crafting polished, professional shows that simply won’t thrive on its platform?
Money from subscription revenue, Kyncl hopes, will help figure that out. YouTube is already shelling out millions to keep its top stars from straying. It hopes that the subscription revenue will provide another enticement for them to stay, and provide ammunition to battle a growing crowd of competitors from the worlds of web and television.
"What’s happening is that the internet is doing to cable what cable did to broadcast. It’s just broadening the set of choices," says Kyncl. "You have to really learn how to function in a fragmented world. I think that YouTube is incredibly well positioned for that world."
Edited by Michael Zelenko