How Can YouTube Persuade Users to Pay Up?

By Markets Fool.com

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Source: YouTube.

In October, YouTube CEO Susan Wojcicki told Re/Code that Google might experiment with a subscription offering for YouTube. The plans were confirmed recently when Google sent out a letter to its content creators updating terms of service for its YouTube Partners Program.

Google didn't provide much in the way of details, but The Verge reports that YouTube will allow partners to place certain content behind the paywall for subscribers only.

The Verge is also reporting that YouTube is expected to charge $10 per month -- a price more in line with Netflix and Amazon Prime. At face value, that pricing simply doesn't make sense for YouTube, which offers mostly amateur videos. At the same time, if the price is too low, Google will lose money it otherwise would have made from advertising. If YouTube is intent on charging more than Netflix for a monthly subscription, how will it convince users to pay?

Is Vessel getting to YouTube?
Former Hulu CEO Jason Kilar recently launched Vessel, a premium short-form video service. Vessel offers early access to some of the top content from YouTube creators for $2.99 per month.

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Vessel poached some of YouTube's top talent. Source: Vessel.

With the option to place content behind a paywall, it sounds like YouTube is targeting users considering Vessel, as well as content creators attracted to its business. If that's the case, YouTube ought to charge a similar subscription price.

YouTube might benefit from charging users $2.99 per month, but it's not clear. The company reportedly generated $4 billion in net revenue in 2014. While YouTube attracts 1 billion viewers on a monthly basis, it must assume the people who would be interested in a subscription service currently use YouTube the most.

Applying the 80/20 principle -- that 20% of users create 80% of revenue -- to those 1 billion viewers implies that YouTube's top 200 million viewers generate approximately $16 per year on average for YouTube. Factor in that the revenue is split with the creator 55/45, and YouTube would barely take home more than that per subscriber at $2.99 per month. In other words, YouTube would have to sign up hundreds of millions of users to its subscription service at $2.99 for it to be worthwhile.

Going premium
Google may be looking to include more premium content in the subscription video service, which would allow it to compete more with Netflix and Amazon. While both have duked it out for exclusive rights to premium television content, YouTube has remained on the sidelines.

It's not like Google doesn't have the money to compete. The company has more than $67 billion in cash and investments on its balance sheet. Netflix's cost of revenues last year totaled $2.2 billion, which includes payment processing and content delivery on top of content licensing expenses. Of course, that number continues to go up, but it shows that Google definitely has the cash to compete if it so desires.

Bundling premium professionally produced content with its own original content could differentiate it from the competition. Some of YouTube's content is already considered worth paying for, in fact. Maker Studios -- a multi-channel YouTube network -- has a channel on the new Sling TV service.

Making a bundle
Another option for YouTube is to bundle its subscription video product with one of its other services. Last fall, YouTube announced Music Key, which allows users to stream music videos ad free for $9.99 per month. YouTube may offer subscribers an option to go completely ad-free on the platform for an extra fee, which could encourage more users to sign up for the premium music streaming service.

Additionally, YouTube could offer subscribers a discount on digital movie rentals on the platform, or just include a free rental every month. The company is eager to get more people paying to rent movies, and saw massive success when it released The Interview the day before it hit theaters. The company could leverage the momentum from that release, and somehow bundle premium video rentals with its subscription option.

Lots of options
YouTube is a versatile platform with potentially lots of cash at its disposal. With the advertising prowess of Google behind it, it doesn't need to offer a particularly attractive deal to its users. However, Google believes there's strong enough demand to offer a subscription service. If it can leverage that demand to improve other aspects of its business like premium video rentals or Music Key, or start a new business with content similar to Netflix or Amazon Prime Instant Video, it would be very beneficial to investors.

The article How Can YouTube Persuade Users to Pay Up? originally appeared on Fool.com.

Adam Levy owns shares of Amazon.com. The Motley Fool recommends Amazon.com, Google (A shares), Google (C shares), and Netflix. The Motley Fool owns shares of Amazon.com, Google (A shares), Google (C shares), and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.