Tuning into YouTube's economics

It’s curious that a site that’s built its reputation on a winning combination of viral videos and rampant pop-up advertising is moving to introduce a subscription strategy. But, if the latest FT.com report is true, YouTube might soon be asking you to pay some sort of a fee to access a select portion of its content.

This is by no means a new development. In fact, both the FT and AdAge broke the story back January. But the latest report brings with it more details about the pricing and adds a level of certainty to ongoing speculation that Google’s online video arm will embrace subscriptions. 

According to YouTube, there’s a simple explanation behind the move. By introducing a subscription system, it’s offering its content creators another potential source of income from their work. And in that statement lies the beauty of its business model: YouTube takes a cut every time a user profits off their content.

If subscriptions do turn out to be a success, it could see some YouTube entrepreneurs double their profits. But it could also spark a debate as to why YouTube needs to pocket up to half of the revenue generated.

How does YouTube generate revenue?

It’s difficult to gauge exactly how much YouTube or any other user earns from their efforts on the site, but most estimates suggest that it takes a 45 to 50 per cent cut of the profits.

Right now, the site has two major revenue sources. The first, and most profitable, is advertising.

Remember Psy, the K-Pop superstar that drove the nation to the brink of insanity with his viral song Gangam Style? Well, back during the song’s heyday the video ad platform TubeMogul claimed that Psy made around $870,000 off ads from generating around 889 million YouTube views. It also estimated that YouTube kept around the same amount for itself.

The second, and lesser known, revenue source is its rental system. Google currently allows viewers to rent full length movies and features off YouTube, but it also allows certain content providers to bar access to their content with a paywall.

What’s interesting about this feature is that it disables the ads around their videos. That means that a content maker can choose to either profit off ads or directly charge users for access to their content, not both.

Again, YouTube takes a clip off what you charge. A spokesman from the company couldn’t confirm the amount taken from this service.

The subscription plan

And that brings us back to YouTube’s expected third revenue source, subscriptions.

YouTube will give content creators the option to put all of their videos under a monthly subscription. Around 50 specialist YouTube channels have already signed up to be first in line for the service. And just like its ad plans, it’s likely that YouTube will take a significant slice of the revenue generated.

While there are no confirmed details as to how this subscription system will work, if the speculation based on AdAge’s initial report holds true it could be YouTube’s most ambitious monetisation method to date.

That’s because it allows content creators – and consequently YouTube - to get two clips from consumers from the same content. Users will pay to access the content, and then may also have to sit through ads to watch it as well. It might not be a desirable prospect for YouTube fans, but it is great news for the site’s superstars who may be looking to further monetise their videos.

The other bit of guesswork relating to YouTube’s subscription plan is whether it will draw in premium video content - like TV shows or miniseries. But some producers may be reluctant to make the dive, given that they surrender up to half of their content’s profits to the site. Other up-and-coming video services have found a niche in providing a service that offers more profits to content creators. For instance, Australian start-up Koondoot allows users to keep up 80 per cent of the profits from their clips.

It’s fair to say that YouTube’s take of the profits are justified, given the sheer amount of data needed to power the service and the fact the company does all the legwork in terms of drawing in advertising.

But given that the service is in a good place to capitalise off the rise of online video advertising, it’s a wonder whether it will one day move to give the content creators a bigger slice of the pie.

This point is really just the tip of the iceberg. As more media companies look to profit off of user-generated content it seems only logical that content creators are going to begin to question the worth of their work. YouTube’s subscription strategy may be clever, but it also inadvertently opens it up to a raft of questions around who should really be making most profit off its service.