- Google will soon introduce a new service on YouTube that bundles its new subscription music service with ad-free service.
- The new service has a good revenue potential courtesy of the huge YouTube user base, but not very good profit potential.
- This might, however, change when Google starts using data from its core websites for ad-targeting on YouTube.
When Apple (NASDAQ:AAPL) announced that it would allow users of Safari browser to use third-party ad-blocking extensions, it was abundantly clear that Google (NASDAQ:GOOG) was one of the companies in Apple’s crosshairs. Google makes more than 80% of its revenue from selling ads, and the company simply has to fight anything that threatens its gravy train. A few weeks ago, Google had introduced a workaround that denies users of popular ad-blocking extensions such as AdBlock Plus the usual option to bypass YouTube video ads after five seconds thus forcing them to watch entire ads. Now Google has gone a step further and announced a new subscription service that will allow users to watch YouTube videos without the usual ads, for a fee. This is also something Google had been trying out with an ad-free experience named 'Contributor', on websites.
Google is prepping a new service that will bundle YouTube’s Music Key Service with a new service that will provide ad-free content on YouTube. Music Key Service is already in beta and is only available to select users on an invitational basis. The service is designed to provide ad-free access to YouTube Music videos. Google offers the beta version of the service for free but is expected to charge a promotional rate of $7.99/month for a lifetime for the first batch of users and afterwards match Spotify at $9.99.
Google has, however, decided to sweeten the previous deal by bundling the two services together for just $10/month for the combined service. It’s quite obvious that Google is trying to offer a better deal than Spotify, Apple, and a host of other subscription music services that charge a similar fee. One thing is, however, almost sure: Google is going to have a hard time trying to make money from the bundled service. Spotify already loses money on its subscription music service yet the company does not have to worry about payments to non-music video partners, unlike Google which struck a licensing deal with Merlin which carries thousands of Indie labels.
One big advantage that Google has over Spotify is its massive YouTube user base. While Spotify has about 50 million users, YouTube has over 1 billion monthly active users. Spotify finished fiscal 2014 with 15 million subscribers and 45 million monthly users of its free ad-supported service. Spotify finished the year with revenue of $1.22 billion, good for a healthy Y/Y growth rate of 45%. If YouTube is able to monetize its new bundled service at only half Spotify’s rate, then the company could be looking at a new revenue stream in excess of $10 billion, or about 17% of its annual revenue.
While the revenue potential of the new service is admirable, the effect on Google’s bottom line will probably not be as good. Google realized revenue of $4 billion from YouTube in 2014, good for 33% Y/Y growth, but could only manage to breakeven after paying for content costs. This is primarily because of poor CPM rates for YouTube ads. Indeed, Google blamed YouTube for its falling CPM rates during the company’s last earnings call.
Google’s ability to make money on YouTube is hampered by its limited ad-targeting methods it employs on the platform. Google has in the past only used data from its DoubleClick platform when targeting YouTube audiences with ads. DoubleClick data, unfortunately, represents just 30% of the data available to the company, which essentially leaves the company in the dark regarding the preferences of majority of users on the platform.
Google, however, might get a much needed reprieve when it starts using data from its core websites for ad-targeting purposes on YouTube as earlier reports indicated. This is likely to allow YouTube videos to command better CPM rates, which might help to offset the costs associated with the new services.