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Is Shifting Away from Advertisements a Good Thing?

YouTube has been a large part of daily lives of people growing up in this digital age. Whether if it is to stream new music videos, watch comedies or watch online lessons, people always found YouTube to be the right place to go because everything was free and open with the simple cost of watching a 15 second video or watching a skippable 30 second video. However, last fall, Google, YouTube’s parent, released a new subscription service, called “YouTube Red”. YouTube Red is a premium subscription service that offers ad-free viewing, offline playback, and access to an upcoming library of original programming created by members of the YouTube community.

Upon its launch, YouTube Red has inspired a mountain of responses from various media publications, many of which have raised concerns about the new service. The biggest complaint so far from the YouTube community is having to pay for something that has always been “free”. However, YouTube was never “free”. It may not have cost any money, but consider the amount of ads one watch and how much time one put into watching them. There is still a “cost” to YouTube.

Advertisement prices are based on a cost-per-view (CPV) model. This means that if you create an ad that will be shown every time a user searches and decides to watch a video on a related topic. As a result, the amount that advertisers are willing to pay per view is often surprisingly high. A relevant, high-quality ad in a high slot will receive more views than an off-topic ad. So each advertiser has a revenue per view, the expected amount of revenue it receives per user who watches the ad. However specifically in this case there will be less incentive for companies to bid the same price for advertisement slots knowing that fewer viewers will actually see their ads. Like we learned in class, as each bidder’s value for the slots go down, so will the market clearing prices for these advertisement slots. This all results in YouTube producing less revenue from advertisements. Therefore, the new subscription fee should ideally equal or exceed the loss in revenue from advertisements. This is important in that, the higher number of views resulting from no advertisements before each video, has actually increased YouTube’s revenue.

YouTube earns a lot more from subscription fees than advertisement fees. Because of strong ties, highly dedicated YouTubers who spent many hours on the site will buy the subscription to save time. For example, given the non YouTube Red conditions, the user will only generate about 2 or 3 dollars in revenue each month. However with YouTube Red, the user generates $9.99 per month allowing YouTube creators to make a lot more money than they could ever make off of ads. It was interesting to see how music and entertainment has shifted their ways to producing revenue and how advertisement may become obsolete. This shift can ultimately cause a “following the crowd” movement towards medias with reduced advertisement standards.

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October 2016