YouTube pays out $1 billion to music industry (GOOG, GOOGL)

BI Intelligence

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In the past 12 months, YouTube has paid out over $1 billion to the music industry in advertising alone, according to a blog post from the company’s Chief Business Officer, Robert Kyncl.

The post highlights YouTube’s stance that the music industry needs two monetization models: advertising and subscription.

Although subscriptions will likely drive streaming music revenue growth over the next five years, the new stat attempts to justify YouTube’s ad rates, which music executives think is too low. Indeed, one executive from the Recording Industry Association of America (RIAA), Cary Sherman, cast doubt over YouTube’s royalty rates earlier this year, citing a disparity between the growth in streams and the growth in revenue from those streams.

Here are some other implications of the announcement:

• Music industry revenue growth has been stagnant for the past five years. From 2010-2015, music industry revenue hovered around $7 billion, with virtually no growth over the five-year period. But this year, revenue is expected to increase 7% year-over-year (YoY) to $7.5 billion, driven by streaming services.  
• Music could represent close to 20% of YouTube revenue. Assuming YouTube pays artists the typical 55% of the ad dollars generated by their videos, this would suggest the company generated over $1.8 billion in music-related advertising for most of this year — with $1 billion going to the industry, and the remaining $810 million staying with YouTube. According to estimates published by BofA Merrill Lynch, YouTube will generate $10.4 billion in gross revenue in 2016, suggesting around 18% of total YouTube revenue comes from ad-supported music content.

Music can also be a big lure to drive subscriptions. YouTube’s dedicated music experience, YouTube Music, is available through a Red subscription. Although it's nominally a video platform, YouTube also has the biggest music library by far, with an estimated 1 billion songs. The company said it’s increasing marketing of YouTube Music, and only needs to convert 3% of its 1 billion monthly user base to YouTube Red to match Spotify’s paid subscribers. 

Many digital media companies have embraced monthly and annual subscriptions. This business model allows digital media companies to provide a premium experience that offers more than the basic, often ad-supported service level.

Subscriptions are enjoying a new prominence as a revenue model for digital content and apps. Internet companies are exploiting the opportunity to boost ARPU (average revenue per user), thanks to recurring payments from a subscriber base.

BI Intelligence, Business Insider's premium research service, has compiled a detailed report on subscription revenue that looks at how prominent players in five separate categories have tried to build a subscription-based revenue stream alongside ad-based businesses: the categories are video, music, news publishing, social networks/messaging, and dating apps.

Here are some of the key takeaways:

• Most companies operate on a "freemium model." Subscriptions typically operate alongside an advertising business.
• Success in freemium boils down to offering a core audience exclusive value that can only be accessed beyond a paywall. The key is to target the most loyal audiences, and sell them on an expanded offering — bundles of features or content — that they find irresistible.
• Some publishers and apps have had mixed results with subscriptions, and vary in terms of how hard they have pushed them. Part of the problem is that ad-dependent companies are worried about limiting audience if they pack away too much value into a subscription tier.
• The proportion of paying subscribers within the total user base varies considerably across digital media industries. Each category is obviously different, and won't face the same challenges and opportunities in dialing up the percentage of subscribers and subscription revenue. Here are some of the proportions of subscribers in apps' user bases: Spotify (25%), WhatsApp (21%), Pandora (5%), Match Group (5%), The New York Times (3%), and LinkedIn (2%).

In full, the report:

• Analyzes the most common subscription-based digital media revenue models
• Explores the drivers that allows some subscription or freemium business models succeed
• Explains the revenue mix and business opportunity in several key digital media industries
• Outlines companies that have succeeded with subscription-based business models

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