4 Dec 2015

How YouTube RED might conquer the video world

Wietse writes*

YouTube, while only 10 years old, has become a giant player on the internet. It’s the third most visited website, with over a billion users and billions of views a day. It started as a website used primarily for cat videos and content stolen from Family guy, but it has quickly evolved into much more than that.

To explain the explosion of content, one of the most important factors (in my opinion) is that the costs of entering the market are very low: anybody with a camera and an internet connection can become a content creator. This is the main difference with traditional television, which costs much more, and where you need to convince a network to let you go on the air. What this means, is that there are more creators, and there is more competition between them, which generally leads to more innovation (Aghion et al. [pdf])

Even though there is a lot of innovation, YouTube still isn’t remotely as big as television. This is (partially) due to the fact that the production quality on YouTube is generally still quite low. There are no big story-driven series for instance. This is most likely (at least partially) caused by the low amount of money that creators generally earn, when compared to the amount of views they get: They get roughly $2 per 1000 views. For comparison, an average TV program gets around $25 dollars per 1000 views. This means that the budgets on YouTube are comparatively low, which hurts the ability of creators to produce high quality content.

Creators are pursuing different solutions to this problem: getting sponsors (which are mentioned inside the video instead of in pre-rolls), selling merchandise, and asking for donations. This has improved the quality of YouTube content, but it still can’t match television.

This is where YouTube RED** (an ad-free, $10/month version of YouTube) comes in. If this becomes big, it could change the world of video. First of all, it will increase the income of YouTubers, because a share of the $10 will be much higher than a share of the advertising. Increased income will cause an increase in the supply of high quality content.

However, a perhaps even bigger improvement is the potential change of YouTube’s goals. Currently, the main goal is to get more people to see more advertisements, because that’s how they get money. This gives little incentives to produce very high quality content.

If YouTube RED becomes big though, YouTube won’t care as much about the amount of views. They’d care about the amount of subscribers. This means that they need to change strategy, and instead of provide more things; they need to provide better things to encourage more people to actually spend money on Youtube. This will likely lead to YouTube investing in series which they are already starting to do. With these extra investments in creators and extra earnings the creators get, YouTube might in the future produce high quality series that can compete with television, HBO, etcetera. If we combine this with the easy entrance into the market and the innovation that brings, this might just make YouTube the biggest player in the world of video.

Bottom line: YouTube already encourages innovation which explains their success, but to compete with television they need to increase their earning and spending. The introduction of YouTube RED might just do that.

* Please comment on these posts from my microeconomics students, to help them with unclear analysis, other perspectives, data sources, etc.

** [Not to be confused with RedTube, a porn site. -- David]