Facebook and YouTube Want to Offer More Premium Content

Both Facebook (NASDAQ: FB) and YouTube are getting into premium subscriptions. Facebook announced Subscription Groups and YouTube announced Channel Memberships last week as a way for both websites' biggest contributors to monetize their content. Both allow each websites' best contributors to sell access to exclusive content for a small monthly subscription fee.

For Facebook, it's one of its first forays into allowing users to monetize the content they produce for the social network. For the Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) company, YouTube, it's a new platform for regular users to diversify away from advertising. And it presents an interesting opportunity for the largely free websites to generate additional revenue from the 2 billion or so people that use each of them every month.

People will pay for premium content

Facebook and YouTube are late to the party when it comes to offering small subscriptions. Companies like Patreon have been enabling creators to accept donations and sell subscriptions for years. Facebook even bought one of those Parteon-like companies, Tugboat Yards, about three years ago. That acquisition has thus far led to the fundraising platform used on Facebook similar to GoFundMe.

Bigger companies have enabled creators to sell subscriptions, too. Amazon allows Twitch streamers to sell subscriptions to fans, and Amazon even facilitates the marketplace by including a free subscription for Prime members. Not to mention all the mainstream music- and video-streaming services charging between $5 and $15 per month.

The internet, and its ad-supported model, has largely created the expectation that content should be free. But people still show a willingness to pay for things they value, especially when they feel a connection with the creator.

And that's exactly where Facebook and YouTube excel.

Both companies have done an excellent job at creating communities. Facebook says there are over 1 billion Groups on its platform. There are more than 5,000 YouTube channels with over 1 million subscribers. These are users that have created a real connection with the person or people furnishing content, and consumers will support them.

What subscriptions could mean for Facebook and YouTube

Facebook has been facing the challenge of ad load saturation on its flagship product for about a year now. It's managed to sustain high revenue growth rates thanks to strong demand for its ad products pushing average ad prices higher. But Facebook can't rely on ad prices continuing to move higher forever. At some point, advertisers will experience diminished returns that force them to find less expensive ad products. Facebook is thus looking to expand engagement beyond its core News Feed product with things like Watch and Stories.

Subscriptions offer another way to diversify away from advertisements. At the same time, it encourages users to spend more time on Facebook. And that time spent will be, presumably, well spent because Group administrators are providing premium content to their subscribers. Improving the quality of time spent on Facebook is one of CEO Mark Zuckerberg's goals for this year.

Meanwhile, YouTube has faced a number of controversies and complaints from advertisers about showing their ads next to objectionable material. That's led the company to become more strict on who it lets monetize their videos, resulting in creators complaining. The new subscription option is a way to make everyone happy.

YouTube has more competitors now than ever, and it can't afford to have disgruntled creators. Facebook will happily welcome them to its Watch platform or the recently launched IGTV on Instagram. And considering there are 2.2 billion Facebook users and 1 billion Instagram users, there's a significant audience on both platforms to attract creators. Offering them 70% of subscription revenue (and other monetization options) is an olive branch to creators to keep their best content on YouTube.

It will be interesting to see how these two products develop for companies that are so heavily reliant on advertising. Facebook and Google have been dominant forces in digital advertising for so long, but the duopoly is starting to show some cracks. Subscriptions could become an important part of their businesses in the not-too-distant future.

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