YouTube's Subscription Plan May Be Crazy Enough to Work

YouTube fans who hate the ever-growing number of ads popping up may soon be able to buy their way out of the marketing missives. Speaking at last week's Code/Media conference, YouTube content chief Robert Kyncl announced that a new premium subscription model may be on the way later this year.

Kyncl was taking about the site's long-anticipated Music Key program, which will offer up streaming music videos free of the ads. However, many of the leading outlets reporting the news initially misreported Kyncl's comments. They talked up the new offering as a way for premium viewers to obliterate ads across all of the site. This culminated with CNBC, IGN.com, Yahoo (YHOO) and others playing this up as YouTube's response to Netflix (NFLX).

Google's (GOOG) (GOOGL) YouTube was able to get most of the initial reports to clarify that it's just the music subscription model that is being fine-tuned ahead of a public launch in a few months. This will be more of a shot at Spotify or Pandora (P) than it will be a fight with Netflix for home theater disruption. Then again, it's probably just a matter of time before it does come face to face with Netflix for prime time supremacy.

The Bumpy Road to Premium Subscriptions

YouTube runs the world's largest video-sharing website. There are now more than a billion users, watching hundreds of millions of hours of content a day. There are plenty of video sites out there, but YouTube's watch time soared 50 percent in 2014.

However, unlike Netflix, which is primarily enjoyed on large TV screens through set-top boxes, tethered computers and video game consoles, YouTube remains a desktop and mobile diversion. Google pointed out in its most recent earnings call that mobile revenue through YouTube has doubled over the past year.

This naturally makes it easier to compare YouTube to music-streaming and other apps that are also mostly consumed on smartphones and tablets, making it a natural for Google to dive into a premium music service before giving the site itself the inevitable push to premium. Google recently rolled out a beta version of Music Key, and now we know that the public launch is just some fine-tuning away.

Pay to Play

The challenge for Google will be getting people to pay. It hasn't done a very good job of that in the past. Its first notable foray into premium offerings was when it added five critically acclaimed Sundance-screened films five years ago, serving them up as digital rentals for $3.99 apiece. It was a flop.

YouTube's next push came in 2013 when it approached some of its biggest stars to set aside exclusive content that would be made available to premium subscribers paying between $1 and $5 for each channel. That move also failed to gain sizable traction.

The challenge for YouTube isn't all that different than what Pandora faces these days. Both are sites appealing mostly to freeloaders who are willing to put up with ads for free content. This is why Music Key will face an uphill battle. If an online platform is available as either a free ad-based service or a premium ad-free offering, most folks will go for the free version. If Netflix offered a free service with ads, it would be huge. If HBO did the same thing with HBO Go, it would fly through the roof.

This finds YouTube in a challenging position. Stripping ads isn't enough to win over credit card billing information. It needs to stand out. Music Key may hope to get there given its video catalog, but the site's best shot at succeeding in premium is making the whole site available that way, accompanied by a Netflix-like push to get its app in front of every set-top box, video game console, and smart TV.

Sooner or later, YouTube is going to get premium right. It just may have to stumble a couple more times before that happens. However, even if that never materializes, there's no reason for Google investors to worry. When you're the world leader in online advertising, there's nothing wrong with thriving through an ad-based business.

Motley Fool contributor Rick Munarriz is active on YouTube. HisMoonpies channelhas amassed nearly 4.5 million views, closing in on 15,000 subscribers. He owns shares of Netflix. The Motley Fool recommends and owns shares of Google (A and C shares), Netflix and Pandora Media. Try any of our Foolish newsletter services free for 30 days. To read about our favorite high-yielding dividend stocks for any investor, check out our free report.