Q2a-c: Freemium Strategies, Consumer Psychology and Pricing
YouTube Premium vs. and Netflix
It’s 2019, and it seems like everyone is trying to get into the subscription-based streaming market. The current major players, Netflix, Hulu, and HBO, are getting ready to face the onslaught of new offerings from Disney, ABC, Amazon, Apple, and others. Yet one company that seemed to have an easy move into subscription-based streaming has tried and failed for several years now: YouTube.
The first iteration of YouTube’s premium service debuted in 2015 with YouTube Red. Since then, it has undergone a rebranding, renamed simply to YouTube Premium (YTP for brevity) in 2018. At the end of 2016, it had only accrued 1.5 million subscribers (current subscriber levels are unknown).
Compare this with Netflix, which grew from about 80 million subscribers at the end of 2016, to over 120 million at the end of 2018. The market has clearly grown rapidly, yet YTP remains a minor player. So where did YTP go wrong? Why has it failed to convert YouTube’s enormous cache of 1.5 billion monthly active users into fully paid monthly subscribers?
The YouTube Value Proposition
If there’s one company that’s revolutionized the way humans have consumed video content, it’s YouTube. Founded in 2005, it was initially an intimate video sharing website, where users could post unstructured content mostly for their friends and family. 14 years later, YouTube has become a huge subsection of the entertainment industry in its own right, earning parent company Google billions of dollars in ad revenue annually. Being a YouTube personality has become a full-time profession, and accruing a dedicated viewer base can be done by anyone with a video-creation tool, a personality, and a bit of luck.
YouTube was so revolutionary because it democratized the distribution of video content: creators post for free, and viewers watch for free. In the early days, network effects quickly cemented YouTube’s dominance as the premier platform in both quantity and quality of content. The first famous YouTubers built their audiences with a widely appealing genre: comedy. But as YouTube audiences grew, creators in the most niche of genres and topics discovered that even they could find viewers that would eagerly consume their content.
YouTube’s value proposition to viewers was and continues to be free access to literally millions of hours of video on a colossal variety of topics, in different formats and lengths, aided by a sophisticated algorithm that recommends an endless queue of new videos tailored specifically to the viewer’s tastes.
Let’s take a brief look at the original subscription-based streaming service: Netflix.
Netflix: Brief History and Value Proposition
In its early days, Netflix was a mail-only CD rental service akin to Blockbuster, allowing subscribers easy access to a diverse library of third-party content. This way of distributing entertainment was already fairly innovative for its time; Netflix cut costs by avoiding physical stores, and customers loved the convenience of having their rentals delivered right to their mailbox. Netflix then made the move to bring its content online as a streaming service, predicting correctly that the internet would be the ultra-efficient and convenient channel of distribution for its entertainment properties.
Once the transition to fully online content consumption was complete, and the mail-service was discontinued, Netflix had built a streaming empire… off of other people’s stuff. The second correct prediction they made was foreseeing the need to create original content to survive. Before the creation of Netflix Originals, they were at the mercy of third-party content providers who could pull their offerings at any time or extort them for outrageous licensing fees. Furthermore, Netflix Originals was a brilliant way to keep an audience captivated with new and exciting content that would justify the monthly fee after users had exhausted older material.
Thus, Netflix’s current value proposition is this: for a small monthly fee, have ad-free, unlimited, and offline access to a variety of premium long-form content, some of which is exclusive to our platform. Share your plan with family members and friends, and binge for as long as you want.
These two transformations, one of distribution method and one of vertical integration, ended up forming the basis of an extremely effective business model that has allowed Netflix to sustain huge growth. It’s no wonder why everyone else is rushing to copy them, and it remains to be seen if Netflix will survive the loss of third-party content from its libraries as legacy entertainment companies make their content exclusive to their own platforms.
Based on the above excerpt of an article on YouTube versus Netflix, please answer the following questions. In all your answers, be thorough and precise.
a) (10 marks) Summarize YouTube’s value proposition and discuss whether the (freemium) concept of YouTube Premium is consistent with it. Discuss how this relates to the fact that YouTube Premium keeps failing while Netflix keeps thriving.
b) (10 marks) Explain whether and how YouTube can leverage the existing brand, infrastructure, and market penetration (i.e., user base) to create a sustainable, premium, subscription-based streaming platform? Should YouTube conduct a complete rebranding for this new platform or keep the YouTube name?
c) (10 marks) The YouTube Premium Subscription is currently priced at $11.99 per month and allows members to watch their favourite videos without ads, download videos for offline viewing, listen to audio in the background with the YouTube Music app, and access exclusive content (that was accessible for free before YouTube Premium was introduced) on YouTube and YouTube Music. Please explain why customers might still be reluctant to subscribe to the service at the current price, despite the great offer. Apply what you have learned about consumer psychology and pricing to support your arguments.
