YouTube 1, everyone else 0

YouTube is the master of both direct and indirect network effects. Take a look…

“With every user added and video uploaded, the whole network becomes more valuable to all.”

Let’s face it… YouTube is killing the game right now. Over 1 billion users (that’s close to a third of the world’s internet users). 300 hours of content uploaded every minute. That’s 5 hours uploaded every second. And all over the world, in the 70 countries with local YouTube sites and others, users are watching over 2,300 hours of video every second. Insane. So, how does it all work?

Becoming the Go-to Destination for Online Videos

YouTube was founded in early 2005, hosting only the now-famous video of one of the founders at the zoo. In 2006, YouTube began to prove its staying power, attracting 20 million users per month, 65,000 new videos per day and 100 million views per day. The more videos that were uploaded, the more people flocked to sign up and see what all the hype was all about. The more people that signed up and viewed and liked and shared, the more users uploaded videos. It’s a virtuous cycle and direct network effects at its finest. Or, if you want to segment content creators and content consumers into separate buckets, you could also argue that it was indirect network effects that fueled YouTube’s early growth. Either way, this thing was growing so fast (YouTube was the world’s 5th most popular website in 2006) that Google couldn’t resist purchasing it for $1.65B in stock. The only problem was, YouTube wasn’t making any money yet 🙁

Money In, Money Out

When the product’s free, they say the users become the product. “They” were right. To monetize all of those users, YouTube began showing ads during its videos in August 2007. To my YouTube faithful, those were the good ol’ days of transparent banner ads on the bottom of your video that could be “x’ed” out of. Good times. Nevertheless, the ad revenue drove YouTube into the black and made the site the go-to destination for social media savvy marketers. The more users and videos that YouTube had, the more advertising partners wanted a piece of the action. These indirect network effects created value for the marketers for sure and allowed YouTube to capture the value being created by its creative content producers. In some sense, the users benefited as well since the additional cash flow allowed YouTube to reinvest in its platform. Soon, the top YouTube video producers were making so much ad money for YouTube that the company had to give the content creators a slice of the pie. YouTube has paid YouTube “channel partners” hundreds of millions of dollars through its 45/55 ad revenue sharing program. Can you get rich on YouTube? Maybe. Go ahead and sign up, feed the machine, and find out.

Squeezing the Lemon

So… can ad revenue last forever? Can advertising partners feed the beast in perpetuity? Eh, probably. YouTube is the best darn video sharing website out there, with over half of the market. They can do whatever they want at this point (as we learned in the DIGIT platform strategy simulation). But YouTube knows that their ads have gotten a bit obnoxious. They must hear the feedback. That’s the problem with having a large user base… you don’t want them all pissed off. So, to appease the users that hate ads and would pay to have them eliminated, YouTube is rumored to introduce a premium, ad-free version of the site soon. After all, Pandora is doing it. Spotify and Apple Music and Tidal are doing it. YouTube’s most popular search term is “music.” It would make sense that they would start behaving like a music content provider, right? My question is, what does this do to the user base? Do the network effects continue? Would you pay to kill ads? How much would you pay?

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Student comments on YouTube 1, everyone else 0

  1. Part of the beauty of having a billion users is that there is bound to be some diversity — some users want a free experience and would never consider paying for a subscription service (which may very well be why they consume music on YouTube rather than one of the paid platforms), while there is a decent sized chunk that would love an ad-free product (and those other “rumored” features of background listening & offline mode). Regardless of which camp the content consumers self-select into, the indirect network effects between viewers and creators should remain just as strong as long as the “free” users don’t feel like their experience is deteriorating. For this reason, I think it’s really important to have a thoughtful promotion engine for the paid service so you don’t alienate or annoy your free users who will continue to make up the vast majority of YouTube’s user base.

  2. I don’t know that I agree that YouTube has won the game here. Yes, it is the most popular sharing site, but what does that really mean at this point? The media ecosystem at large is going through a major era of change. I would argue that “winning” would entail gaining a substantial share of the $485bn worldwide TV and film industry. YouTube’s revenues are estimated to be ~$4bn, a meager 5.8% of what leading cable provider Comcast brought in in revenue in 2014. Furthermore, the company is believed to only be breaking even. If we’re going to say that YouTube has “won”, shouldn’t they be doing a bit more than just breaking even? I agree that the company does exhibit network effects. However, they haven’t translated into meaningful dollars for the company.

    Sources: PWC Global Media Outlook, Business Insider

  3. Re: advertisements — YouTube is definitely working to improve the advertisement experience, for both users and advertisers. The relatively new TrueView format, for example, enables users to skip ads; advertisers then only pay for the ads that users actually watch to completion. Makes for a much better ad viewing experience, and I believe is part of the new advertising future (along with other formats such as branded content / advertainment).

  4. Great post! I think the ad-free version could further enhance the indirect network effects, thus empowering Youtube even more. With their “recommended for you” suggestions, this could create another way for users to intake online content. A huge reason why many users probably don’t spend even more time on youtube probably relates to the intrusive advertisements. It is conceivable that with this premium version, users will ingest even more content on the platform, thus attracting even more content providers!

  5. YouTube is a bit unique when in comes to platforms, as it is not merely a double-sided but rather a multi-sided platform: users, creators and advertisers. In most new online (double-sided) platforms, there is typically a chicken and egg problem… a struggle to build up one side while the other might still be nonexistent. The network effects in YouTube’s case are even more difficult to realize, as you’re building up not two but three sides at once. And I think this is a big reason why YouTube’s ad revenue still under-indexes compared to its user base and cultural influence. It will be incredibly interesting to see how the platform grows and changes when the ad-free product ultimately rolls out.

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