Who Will Pay For YouTube Videos? Alchemy Networks Has One Answer

Math Hoffa, an artist on the Rap Battle Network. Credit: Alchemy Networks Inc.

Who will pay the monthly subscription fee to access a YouTube channel?

Peter Griffith, Chief Executive of Alchemy Networks, believes he has one good answer to that question: afficionados of rap battles, an urban art form dating back to the 1970s in the Bronx that has quietly -- and profitably -- seen a Renaissance in the digital era.

Griffith's Alchemy Networks operates one of 30 pilot channels on YouTube's paid subscription tier announced Thursday. The property, Rap Battles Network, features rap battles events from New York and New Jersey to Las Vegas and Los Angeles.

For many YouTube channels, switchng to a paid subscription carries a real risk of losing viewers who will balk at having to pay for content that has historically been free for much of the video platform's 8-year existence. For channels that rely heavily on young viewers and teens who don't have credit cards, that can be a particularly serious hurdle. In the U.S., 17.7% of YouTube's viewers are teens.

"Do we know this will work?" Griffth said. "We don't. For us, it was a huge concern. But we do have anecdotal evidence that our particular audience is willing to pay for this type of content."

How much? For live rap battle events, tickets can be as high as $75 for general seating, $300 for V.I.P. seating. And like boxing matches, there's also online pay-per-view for many of these live events. One recent event, "World Domination 3," produced by King of The Dot drew 5,000 viewers who paid upwards of $25 each to watch via UStream. On YouTube, however, most of the videos have been free. Now, Alchemy, based in Los Angeles, is betting that hardcore rap battle fans will shell out $2.99 a month, or $25 a year, to access at least 16 top live events featuring known battle rappers such as Loaded Lux, Math Hoffa, Daylt, Dizaster, T-Rex and Iron Solomon.

"The rap battle culture is a hyper niche on the YouTube platform," said Anthony Maddox, head of development for Alchemy Networks. "It's an underground phenomenon tied to disenfranchised youth who see it as an authentic way to express their frustrations, the way hip hop used to be. But it's not just in the U.S. There are kids all over the world embracing rap battle as a form of expression. We're seeing rap battle channels take off in Scandinavia, China and Korea."

One of the top rap battle leagues, for example, is in the Philippines. The Flip Top league's 749,000 subscribers have watched the leagues videos 279.1 million times.

Maddox and Griffth want to scale their business both internationally and into the popular mainstream. Maddox certainly has the experience for the job, having once been head of Sean P. "Diddy" Combs' Bad Boy Films, among other traditional media positions.

In the coming months, as YouTube rolls out the subscription option to a wider selection of content creators, channels will have to make the same calculus as Alchemy Networks -- remain free and rely on advertising, or switch to paid subscriptions and hope the fees will surpass the loss of advertising that could result from any exodus of viewers.

The analysis will depend on the channel's target audience. Alchemy's viewers are somewhat used to paying for access to live content. Others channels aimed at young children, such as National Geographic Kids, Jim Henson Family TV and Sesame Street, could also tap into parents' willingness to pay for high-quality, advertising-free content. And sports, even niche sports such as cycling or wrestling, can and do command paying viewers on other platforms.

For YouTube, the addition of a subscription tier is a vital step forward in the evolution of the platform from purely user generated content to premium content that can be monetized in a variety of ways. 

"At some point we’ll have to get used to subscriptions for everything," said Russ Crupnick, an analyst for NPD Group. "Otherwise, we really will live in a world where online entertainment means dancing cats."

Crupnick, however, is skeptical that YouTube will succeed in dethroning cable television or even rival streaming companies, at least in the short term.

"In the TV arena of subscription streaming, Netflix has a 94% share, with HuluPlus following at 5%," Crupnick said, drawing from recent figures from NPD’s VideoWatch Digital tracking service. "Certainly, YouTube would like some of those share points, and a piece of the revenue that Netflix collects from its subscribers."

Among the most immediate hurdles is payments. Google, which owns YouTube and has largely given away most of its key software products, only in recent years has started to build up a database of customers with credit cards via its online marketplace, Google Play, and through its Google Wallet payment system. While Google does not disclose the number of accounts it has on file, analysts widely concur that Apple's iTunes and each have much larger databases. That means new subscribers to YouTube channels are likely to have to pull out their wallets and enter credit card information, a process that stops many consumers cold.

"There’s still too much friction in the registration and purchase process," Crupnick said. "It’s another account, another bill, another password."