YouTube's subscription play has mixed start

The moment of truth is coming for YouTube Red.

On Wednesday, YouTube will launch its first slate of original programming for its ad-free subscription streaming service. Three months after launch, it’s hard to gauge exactly how well YouTube Red is doing. YouTube has not disclosed subscriber numbers. But currently, the YouTube app is the 22nd-highest grossing app in Apple’s App Store, behind Netflix and Hulu but ahead of HBO Now. The Red subscription the only in-app purchase available in the app, though, which suggests YouTube is already pulling in some revenue from subscriptions.

When asked how much YouTube Red is contributing to the bottom line today, Digiday received a mixed response from multiple executives at top YouTube networks.

Three months in, two sources said that YouTube has been hitting its early target, which was a promise to drive 5-10 percent in additional revenue via subscriptions on top of whatever revenue growth creators saw on the ad-supported side. Two other executives said YouTube Red was doing less, with one of the executives complaining that Red is only providing “a few bucks to a few hundred bucks” per channel per month. Another YouTube network source, looking at a sample monthly period of viewership for one of its channels with multiple million subscribers, said the channel received only 7 cents per minute watched by Red subscribers, versus 33 cents per minute on the ad-supported side.

All sources qualified their responses by adding that it’s still too early to tell how much YouTube Red will ultimately end up contributing to their bottom line.

“The jury’s still out on how that trickles down to creators,” said one of the YouTube network executives. “But it’s encouraging that consumers are spending dollars to access that experience.”

YouTube is being afforded a lot of patience with YouTube Red largely because of the consistent revenue stream the company delivers via advertising. For instance, one YouTube network said it’s commanding $18 to $25 CPMs online, though revenue is often driven down by a smaller mobile and international ad business.

Video creators are also patient because they’re no longer solely reliant on YouTube for revenue. Facebook, Snapchat, Instagram and others all offer potential new revenue streams. In fact, this increased competition is a large reason why YouTube introduced YouTube Red, with the promise that it would allow creators to make even more money on the platform.

One way YouTube hopes to keep its top homegrown stars interested in the platform, as well as drive viewers to pay for subscriptions, is through expensive original content. However, unlike YouTube’s last venture into funding original content, which saw it spend more than $200 million largely on mainstream Hollywood talent, this time the company is exclusively focusing on its biggest stars.

“They are only paying top dollar for shows that feature YouTube celebrities,” said one producer who’s held discussions with YouTube. According this source, YouTube has been willing to spend anywhere from $500,000 to $1 million, if not more, for original content with top YouTube talent attached.

It’s not the only way YouTube is incentivizing content creators to focus on YouTube. Discovery Digital Networks, for instance, releases new content for its Nuclear Family sketch comedy channel exclusively on YouTube for three days. These type of deals are coming out of conversations between networks, creators and YouTube’s sales team, which is trying to incentivize people to make content “pop” on YouTube first, said an unaffiliated network source.

While a strong bench of original content isn’t a new customer-acquisition strategy, YouTube might have a leg-up on its predecessors in the subscription streaming space, according to Rich Raddon, co-CEO of Zefr, a video marketing and technology company.

“The diversity of content on YouTube is enormous. If they can effectively pinpoint viewers watching a certain kind of content, there is going to be a percentage of people who will be willing to pay for that type of content,” said Raddon, whose company has helped companies like Netflix, Amazon and Hulu target potential subscribers on YouTube. “YouTube is already the platform where all of these other platforms are pulling viewers from, so there is a lot less friction to getting people behind the paywall.”

For its part, YouTube hasn’t put any marketing dollars behind YouTube Red. That will change as the first of its original films and series roll out. As it has previously done for top creators on its platform, the company plans to advertise its original content, mainly on YouTube and other digital platforms, supported by some TV and out-of-home placements. For its TV shows, like “Scare PewDiePie,” it will also use a trick employed by TV networks: offering the first episode for free while leaving the rest behind a paywall.

Which means the real test for YouTube Red is still to come.

“Remember, the subscribers numbers don’t have to be enormous,” said Raddon. “Today, everybody likes to talk in billions — there are a billion people on YouTube. Netflix has almost 75 million global subscribers — that’s an enormous number, but it pales in comparison to a billion. If YouTube can get a fraction of its audience to pay for YouTube Red, it’ll be a success.”

Images via YouTube