Member Mailing: YouTube Premium, Warner Bros. Discovery & Monthly Subscription Fees
Good afternoon!
The Medium identifies a few key trends each fiscal quarter that reveal the most important tensions and seismic shifts in the rapidly and dramatically changing media marketplace. The key trends help you answer a simple question: "What's next for media, and where's it all going? How are the pieces lining up for business models to evolve, succeed, or fail?"
Read the three key trends The Medium will be focused on in Q3 2023. This essay focuses on "There is a less-discussed lens on how the demand for “premium content” is being redefined by creators, tech companies and 10 million emerging advertisers."
In my first Medium Shift column for The Information, I wrote about how YouTube’s pivot away from premium content reflected YouTube seeing Hollywood’s future in the creator economy. The column considered the resignation of original content chief Susanne Daniels after six years in the role. YouTube had won multiple Emmys for its Originals content under Daniels’ leadership and even produced a handful of hits.
The departure of Daniels marked the end of a content investment strategy that aspired to build a content library for YouTube Red, a subscription service costing $9.99 per month. That library was called “YouTube Originals” and it targeted “a rising generation of consumers, a horror series from PewDiePie or a documentary about Lilly Singh will be equivalent to HBO’s Game of Thrones, unique, must-see programming that draws paying subscribers.”
I argued the significance of Daniels’ departure and the events leading up to it reflected the creator economy beginning to overtake legacy media as “premium content”. That has certainly played out since: A recent Think with Google research post revealed that 68% of Gen Z YouTube viewers agree that creators are why they visit YouTube.
Now, the story has evolved more about the competitive strengths of YouTube Premium’s broader value proposition. Without YouTube Originals, the value proposition of YouTube Red (2015 to 2018) and its successor YouTube Premium (2018-present) has been the same:
Music streaming (Google Play Music (2015-2018), YouTube Music (2018-now))
Ad-free streaming,
Background play on mobile phones, and
Downloads across YouTube.
So, the subscribers to the Premium tier of the most-consumed streaming service on TVs in the U.S. (according to Nielsen) are not paying for access to premium content. They are paying for a utility that makes content consumption a better user experience and with some additional perks.
Key Takeaway
Warner Bros. Discovery's struggles with churn and YouTube Premium's evolution both reveal that the demand for premium or Hollywood content over the internet cannot be captured with a monthly subscription fee, alone. The attempt to do so is a bad model for the consumer—who seems not need that access—and an even worse model for the distributor.
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YouTube Premium Subscribers
There are now 80 million subscribers to YouTube Premium, which is a helpful but not reliable number. Google does not break down its numbers for either subscribers to Music, alone, or those who subscribe to the ad-free service. Google includes free trials in that number, too. The total is up from 50 million in 2021 and 30 million in 2020, but we have little insight otherwise.
eMarketer (now Insider Intelligence) has previously estimated that there were 20 million YouTube Premium subscribers in the U.S. in 2020. It has also projected that number would grow to 40.5 million by the end of 2023, and 47 million by the end of 2025. So, 50% of the YouTube Premium audience is in the U.S.
eMarketer also estimates YouTube will have 236.1 million U.S. users in 2023, implying just under 20% of its user base pays for the Premium tier.
An interesting question is how those trends have translated into TV viewing audiences. YouTube said in April that it reaches 150 million monthly users on connected TVs across the U.S. Assuming 40 million of those are also YouTube Premium subscribers, that would mean 25% of its connected TV viewing audience is consuming ad-free viewing on connected TVs. Map that percentage back to Nielsen’s 9.1% figure for total YouTube consumption on The Gauge, and at most 2.4% of all TV consumption is by YouTube Premium subscribers. Conservatively, that figure could be as low as 1%—reflecting 50% of Premium subscribers consuming the service on TVs—and still be almost neck-and-neck with Paramount+ (1.1%), Peacock (1.2%) and Max (1.3%).
Unlike those services, the value proposition YouTube Premium offers consumers in exchange for a monthly or annual fee has nothing to do with paywalling access to content. It has everything to do with a better consumption experience on TVs and across devices.
YouTube Premium, WBD & Churn
It is worth considering this conclusion and these data points against something Warner Bros. Discovery CFO Gunnar Wiedenfels said at last week’s Bank of America Securities Media, Communications and Entertainment Conference: “For a decade, in streaming, an enormously valuable amount of quality content has been given away well below fair market value, and I think that’s in the process of being corrected.” He believes the culprit is a market “dynamic whereby you could sign up for a subscription VOD service today and spend two or three weeks, you're going through an enormous amount of content and then move on.”
Wiedenfels is highlighting two problems that the YouTube Premium tier effectively elides. First, Max seems not have enough library content to keep subscribers from churning out after 14 to 21 days. But, YouTube has more than enough library (500+ hours of content uploaded every minute). Second, the high monthly churn rates of Max (just under 7% as of June 2023, according to research firm Antenna), and Discovery+ (over 8%) imply that the consumers simply do not value access to a library, alone, in exchange for a monthly fee.
We do not know YouTube Premium’s churn rate. Presumably, it is lower and closer to Netflix’s (around 3.5%) because YouTube has an exponentially larger library than Netflix's. Since launching streaming in 2007, Netflix has raised billions in debt over the past 15 years and spent it on building out a library that can serve the “very broad” tastes of consumers. It writes in its long-term view: “The internet allows us to offer a wide variety, and to have our user interface quickly learn and make recommendations based upon individual users' tastes.” Meaning, Netflix has built a library that serves its technological back-end.
Netflix also offers additional perks (e.g., free mobile games, Full HD (Standard) or Ultra HD (Premium), spatial audio (Premium)) as part of its monthly fee. Obviously, Netflix is not offering a music service and that is not on its strategic roadmap. But, YouTube does so because it makes sense (it is the destination for consuming music videos) and because it already has the platforms to do so (Google Play, YouTube Music).
Ultimately, both Netflix and YouTube Premium are utilities that offer various experiences built around or on top of the streaming experience. From the perspective of a subscriber paying a monthly fee, the differences in the value propositions of the two platforms versus Warner Bros. Discovery’s two streaming apps are extraordinary.
YouTube Premium & Creators
The data points shared by Gunnar Wiedenfels also unintentionally hit home the competitive value of the YouTube Partner Program for YouTube Premium. This program enables over two million YouTube creators to monetize their audiences in additional ways beyond ad impressions. When engaging with their favorite creators, audiences can pay for merchandise (both creator-owned and third-party owned products), for Super Chat (having messages highlighted for the creator), for Super Thanks (effectively, tips for content), and for channel memberships (exclusive perks and content for monthly paying members).
YouTube Premium users view this creator content without ads (creators get an undisclosed share of Premium subscription revenues) and any engagement with a creator via these offerings will be additional spend on top of the monthly or annual subscription fees. Any YouTube Premium subscriber watching YouTube instead of Max or Discovery+ is not just lost engagement. It is also a lost ad impression for the lower-priced ad-supported tier of both services (Max at $9.99 per month and Discovery+ at $4.99 per month).
Also, at least 50% of content consumed on YouTube is creator content (as YouTube CEO Susan Wojcicki revealed to YouTuber Hank Green in a 2020 interview). It is reasonable to assume this translates on U.S. televisions, too. Nielsen’s The Gauge shows that YouTube (9.1%) now gets 9X the usage of each of Paramount+ (1.1%), Peacock (1.2%) and Max (1.3%). It gets 4.5X the usage of Disney+ (2%). If 50% of YouTube consumption is for creator content, only, that is still multiples higher than the legacy media competition.
Another implication is that 50% of YouTube Premium consumption is offered additional conversion funnels around creator content whereby a subscriber can be monetized in additional ways. That said, YouTube has shared little insight into the type of revenues being generated from these funnels. We only know that YouTube has distributed $50 billion to creators over the past three years.
But from a competitive perspective, these data points reveal how Wiedenfels sounds like he is only scratching the surface of Warner Bros. Discovery’s competitive challenges. Its largest competitor in streaming is not only capturing multiples of audience attention per month across devices in the U.S. YouTube also captures additional household spend on top of a subscription when a YouTube Premium subscriber pays for any one of the creator offerings. If the pie seems smaller as YouTube takes more share of streaming consumption in the U.S., the pie feels even smaller as the economics of the creator economy kick in.
The Irony of All Ironies
There are two notable takeaways here. First, the YouTube Premium story began with the same strategic worldview as Warner Bros. Discovery and other legacy media streaming services: Content distribution over the internet will expand and redefine "must-see programming" for consumers. But, the addition of 50 million Premium subscriptions after "Cobra Kai" was sold to Netflix—and the show's subsequent success—revealed that YouTube subscribers did not value access to that premium content in exchange for a monthly subscription fee.
Second, the value of a monthly subscription to a subscriber to Max or Discovery+ is proving to be both limited and costly. There is no marginal offering from Warner Bros. Discovery that will prevent a subscriber from churning out after 14 to 21 days. 30-day periods seem to be too long for a monthly subscription fee to Max or Discovery+. Also, consumers are effectively suffering from one to two weeks of breakage (or longer, if they forget to cancel their subscriptions) because Warner Bros. Discovery management has yet to change their worldview on streaming. Their need to do so is growing rapidly: The closer the churn rate gets to 8.2% the more Warner Bros. Discovery is losing a subscriber for every subscriber gained per month.
Ultimately, what Warner Bros. Discovery's struggles with churn and YouTube Premium's evolution both reveal is that the demand for premium or Hollywood content over the internet cannot be captured with a monthly subscription fee, alone. The attempt to do so is a bad model for the consumer—who seems not always need that access—and an even worse model for the distributor.
An Amusing Final Note
On this point, it is amusing that Wiedenfels predicted the solution to consumer churn will be “more upward pressure on the monthly subscriptions” from the supply side. In other words, the proposed solution is not to improve the value proposition of the streaming apps for consumers beyond content but instead to raise prices to extract more value out of the problematic consumer behavior. Obviously, raising prices on an elastic demand will only reduce the consumer base.
The better solution is to figure out what additional consumer services to build on top of Max and Discovery content. The irony of all ironies is Warner Bros. Discovery is unable to build any technological solutions for subscribers because it has been paying down the $58 billion in debt (now $47.2 billion) it inherited from AT&T, part of which was raised to build a library of content in the first place.