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Straight Talk Consumer and Entertainment Services

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Recent comments by YouTube CEO Susan Wojcicki suggest that the Google-owned online video platform will soon expand the availability of its ad-free subscription-based offering, YouTube Red, from five to around 100 countries. But while Ovum believes that Netflix, Amazon, and other premium OTT video incumbents should certainly keep an eye on the progress of YouTube Red’s impending expansion, there is no need for panic. Here are three reasons why:

Convincing mainstream users to pay for ad-free YouTube will be difficult

YouTube’s huge scale has been achieved through its availability as a free, albeit ad-supported, utility available to all internet users with a connection capable of supporting video. YouTube Red’s ad-free experience may appeal to “superfans” of the platform’s many creators, or those particularly averse to online advertising, but most existing users – especially those in emerging markets – will continue to be happy to put up with a few ads in exchange for free access. As a video service, YouTube Red – which costs $9.99 per month in the US – simply doesn’t offer the same kind of value as the likes of Netflix. Plus, uptake of Netflix is often representative of the number of people able and willing to pay for OTT video services in many markets: although YouTube only needs to get a fraction of its global users to pay in order to meet, or even exceed, Netflix’s total global subscriber count, actually doing so will be a major challenge. Indeed, we estimate that – at 1.5 million – standalone YouTube Red subscribers accounted for less than 1% of total YouTube users in the US in 2017 (Figure 1), where the service has been available for over two years. For comparison, Netflix added six times as many new paying subscribers in the US between 2015 and 2017.



YouTube Red’s biggest impact will be on the music streaming market

However, YouTube Red subscribers’ ability to access Google Play Music, play sound from (primarily) music videos in the background on mobile devices, and download videos for offline play offers significantly more value. The fact that music videos account for nine of the 10 all-time most-viewed videos on YouTube demonstrates that it already serves as a music service for many internet users. This is putting pressure on music streaming incumbents Spotify and Apple Music, both of which have already made moves to also offer exclusive and original multimedia content. Spotify has even teamed up with premium online video platform Hulu in the US – YouTube Red’s biggest current market by far – to offer students combined access to both services for just $5 per month. But as YouTube Red expands to new markets, competing with the value and breadth of multimedia content offered by Google’s comprehensive (if confusing) combined offering by striking such deals on a global basis will be expensive and difficult, if not impossible. This will be especially true if reports of Google streamlining its music streaming proposition into a single YouTube-branded platform come to fruition.

YouTube Red doesn’t compete with Netflix and Amazon for content

Although YouTube Red’s business and service model certainly shares similarities with both Netflix and Amazon Prime Video, there remains one significant differentiator: content. Certainly, much of the exclusive content on YouTube Red – which is often shows starring prominent YouTubers – will feel “premium” to certain viewers. However, YouTube’s originals have not received the same levels of critical acclaim or consumer interest as the mass of blockbuster movies and shows available on the biggest premium SVOD platforms, which cost billions of dollars to acquire and create. The fact is that most of YouTube’s 1.5 billion users do not go to YouTube to watch what would be termed as traditionally “premium” content. YouTube would have to spend billions of dollars on such content to truly compete with Netflix and Amazon. If reports that Google has frozen original content spend on YouTube Red in the “hundreds of millions” for the next two years are true, this is not likely to change any time soon.

For YouTube, growing its overall audience – rather than converting existing users to paying subscribers – will have a bigger impact on its future growth prospects. The company is already active in its efforts to reduce barriers to YouTube consumption in emerging markets, and recently launched its offline-first YouTube Go app in 130 new markets. YouTube Red is a worthy and affordable experiment for YouTube, as it looks to diversify its revenue streams in already mature markets, but finding ways to connect with its next billion users in emerging markets should be YouTube’s main long-term priority.

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