youtube red illo
Illustrated by James Yamasaki

On a sunny October morning in Los Angeles, a few hundred YouTube staffers, video personalities and media types are gathered at the company’s ­massive 41,000-square-foot West Coast outpost, which, in a simpler age, served as Howard Hughes Airport. The indulgent trappings of a web 3.0 business are all here: free campus bikes, arcade games, photo booth and a massive 36-screen monitor by which YouTube will introduce its newest product, YouTube Red. The $9.99-per-month ­subscription service features original video programming, ad-free audio and video, offline playback, continuous ­streaming, song recommendations and access to the Google Play Music ­subscription service.

The presentation is led by chief business officer Robert Kyncl, 45, now in charge of business development for both YouTube and Google Play Music, who declares YouTube Music is about “artists and fans ­connecting through songs.” YouTube users, he says, don’t just listen to or watch music; they share, remix and cover songs on a ­platform that can reach a billion people a month.

YouTube's Robert Kyncl Overseeing Google Play: Exclusive

With that kind of reach, why is YouTube Red competing with other $9.99-per-month ­subscription ­services like Spotify, which has roughly 20 million ­subscribers, as well as music and video offerings from Amazon and Apple? Kyncl says the company’s impetus was a desire for dual revenue streams -- labels and publishers prefer the royalties of subscribers over “freemium”; the new system would provide both -- and better features for users. “It could be transformative for the industry,” he says. “That’s why we decided to invest into it.”

But the music biz isn’t ­necessarily cheering. After 10 years of living as uneasy bedfellows with YouTube, complaints of comparatively low revenue paid to rightsholders for their content persist.

“YouTube and Google have been borderline criminal in the way they approach the proper ­exploitation of copyrights,” says Robb McDaniels, former CEO of digital distributor INgrooves, comparing the company’s massive scale to the low ad-based revenues it pays. Matt Pincus, founder of SONGS Music Publishing (Lorde, The Weeknd) concurs. “YouTube was super hostile to music,” he says, pointing to challenges he has faced working with the service on ­identifying content, ­collecting ­revenue and removing ­unlicensed music -- although he notes things have gotten “quite a bit better” in the last three years.

While Kyncl doesn’t address those charges directly, he stresses the company’s desire to work with the music business on solutions. “The door is open for suggestions for better business models to drive higher engagement and revenue,” he says. “We have common goals -- we’re leaning into the industry more than ever.”

So how do the numbers shake out? Billboard ­estimates ads at YouTube and Vevo made roughly $230 million for labels from the 85 billion streams tracked by Nielsen Music in 2014. By comparison, 79 billion on-demand audio streams by Spotify, Rhapsody, Rdio and others ­generated roughly $630 million -- nearly three times the ­revenue per stream of video. Why the difference? Partially because every stream at Spotify is ­monetized; not all YouTube and Vevo streams are accompanied by ads due to fears that too many of them will repel viewers.

YouTube's Ad-Free Subscription Service YouTube Red Arrives

Kyncl calls such ad-revenue estimates "incorrect," putting YouTube's global tally over $3 billion in ­payouts to rightsholders since 2007. While Kyncl declines to provide further details, he adds that "ad ­revenue is very significant and growing." On the accusation of mismanaging copyright, a YouTube representative says, "We've invested tens of millions of dollars and tens of thousands of engineering hours into building one of the most sophisticated copyright-management ­technologies on the planet, Content ID." 

Yet to the music business, that revenue is dwarfed by the prospect that high-value ­subscribers can offer: According to Spotify’s ­financial statements, 91 percent of revenue comes from subscribers, who make up just 27 percent of users. It’s tantalizing to consider the revenue that even a fractional percent of YouTube’s billion users converted to subscribers could add to the music business’ diminished coffers.

Of course, there’s no guarantee YouTube can attract these high-value subscribers. YouTube Red is not the platform’s first foray into music subscriptions: That came in 2014 with YouTube Music Key, which never made it out of beta and will be put out to pasture at the end of the month. Says Kyncl: “One thing we learned from Music Key was that features like offline playback, background listening and no-ads didn’t work across all of YouTube content. That’s why offering the service across all of YouTube was a key user requirement for us.”

But can a free, ad-supported video site with music videos coexist along side a subscription service? Kyncl cites anecdotal examples: the high rate of music-­subscription adoption in Spotify’s home country of Sweden, where YouTube is fully available, for example, and the uptick in U.S. music ­subscriptions, which grew by nearly $100 ­million year over year, according to the RIAA. And then there’s Adele, whose “Hello” video clocked 100 million YouTube views in less than five days while also becoming the first song to sell 1 ­million ­downloads in a week. “That’s further proof that YouTube is a great place to discover content and drive commercial activity around it,” says Kyncl.

What remains unclear is the overall impact that YouTube’s freemium tier will have on ­consumers’ decision to plunk down $120 a year for what is essentially added convenience. Skepticism aside, the music industry would love to see the paid ­platform succeed, albeit with terms more ­favorable to rightsholders than they currently see. “Paid models are always significantly better for songwriters than advertising models,” says David Israelite, head of the National Music Publishers’ Association, echoing a widely shared sentiment. “I’m rooting for YouTube Red’s success.”

This article was originally published in the Nov. 11 issue of Billboard.