YouTube: An Example of a Successful Product with Network Effects
https://digital.hbs.edu/platform-digit/submission/youtube-1-everyone-else-0/
Emerging digital content platforms like YouTube are becoming the go-to video entertainment destination for users, businesses who seek to advertise their products to users, and content creators who seek to share their creative videos with a wide range of users from around the world, thanks to YouTube’s global network comprised of more than 1 billion users. YouTube’s ability to generate increasingly powerful indirect network effects has made it an influential hub for attracting users with all kinds of interests. YouTube is indeed the perfect example of a product with network effects: with every user added and video uploaded, the entire YouTube network becomes more valuable to all. With more users on the platform, more businesses are inclined to advertise on YouTube to generate greater sales and more content creators are incentivized to upload videos for more views, subscribers, collaborations, and pay – resulting in more and more users logging on to the YouTube network.
For businesses with network effects like YouTube, scale and value are strongly correlated. Greater scale leads to greater value for users, which consequently attracts other users to join the platform, increasing scale further. Similarly, videos that receive more views are more likely to receive even more views because users are more inclined to watch videos with a high number of views – which is information made available to the public on YouTube’s platform, for they can see that videos with more views are enjoyed and shared by more people – resulting in an information cascade where users help increase the popularity of the video because they see more people watching the video. This rich-get-richer phenomenon allows the YouTube network to expand rapidly but only after network effects are activated. These network effects are activated once the content is uploaded and shared on the platform. Thus, it is important to recognize that content platforms like YouTube became so valuable in the first place because there are users who are willing to post videos on the platform. This rich content is what enabled YouTube to provide more value to new users rapidly because they are able to demonstrate immediate value to users through its existing network. As the primary source of value for users, video content has become YouTube’s most important competitive advantage.
Thus, given how valuable content is to users, advertisers, and the YouTube business itself, it comes as no surprise that YouTube pays content creators, especially those with upwards of 1 million subscribers, a substantial amount of money for uploading videos on the platform. While the exact details of how much they are paid remain confidential, the lifestyle that most YouTube content creators live becomes the object of envy to other YouTube users who see potential in making money off of making YouTube videos. This reminds me of the direct-benefit effect learned in class where users experience an explicit benefit when they align their behavior with the behavior of others, which in this case, is upload videos on YouTube to imitate the success of influential content creators who are able to make a living off of making YouTube videos. Because YouTube monetizes its videos by displaying advertisements on the platform and pays content creators a substantial percentage of their ad revenue for videos watched by a certain number of users, this reward system incentivizes content creators to upload more video content. This business model fueled YouTube’s early growth and caused the platform to experience tremendous success in just a short amount of time.
Started as a freemium product, YouTube is highly accessible by virtually anyone with access to the Internet. However, having 1 billion users on the platform – and the scale and diversity that comes with it – enables YouTube to afford showing ads to its users. Because of its large pool of users, they were able to monetize their platform by showing ads during videos and on the sidebar of their app and website. While YouTube is consistently trying to improve its user experience by offering users a premium service called YouTube Premium by which users can watch videos ad-free and access full movies for streaming, most users are unwilling to pay a monthly subscription fee so most often stick to the freemium version. Either way, YouTube is able to make money off of its current revenue model: advertisers pay YouTube when showing ads to freemium users and YouTube premium users pay YouTube when choosing to watch videos ad-free. Hence, YouTube is the perfect example of a successful product with multi-sided network effects for it knows how to take advantage of its assets (i.e. content) to succeed in the marketplace.