Could Bitcoin Save YouTube?
Summary
- YouTube has problems with its current model.
- Bitcoin's lack of transaction fees allow for the use of micro-payments.
- Micro-payments are a solution to annoying ads on the internet. Users don't want ads and they don't want to pay high subscription fees.
- Small payments per video are a natural solution to this problem.
This article discusses how Bitcoin (Pending:COIN) will transform YouTube (NASDAQ:GOOG) (NASDAQ:GOOGL) through the use of micro-payments. These changes won't affect YouTube in the next few years, but thinking about it now will keep you ahead of the curve for when they do happen in 5-7 years.
Currently the model for how online video content is serviced to the consumer is broken. It isn't just online video where problems exist. Even in this very article, you can see ads on the side bar that don't add to the consumer's experience. Personally I have only clicked on the banner ads on this site or any other site by accident. This creates a poor experience and is leading to a declining amount of money advertisers are willing to spend per ad. All advertisements aren't negative for the internet, however. The ads shown in Facebook (NASDAQ:FB) newsfeed are becoming a value added experience because Facebook has the knowledge of your preferences. Google search ads are a positive because they are catered toward your current interests. While annoying ads may increase awareness of a product, actual sales is what advertisers care about more than anything. This article may help to solve the conundrum my readers have when they typically respond "I never click on YouTube ads. How do they make money? How is this sustainable?"
The precise clarification of which ads belong in the value add versus the value subtraction bucket may be debatable, but it is clear YouTube ads are in the latter category. Google has gotten much better at targeting ads to specific viewers with TrueView technology, but I think most of my readers would agree that they never click on the ads. This is an unfortunate situation because I am paying for YouTube with my time. I am inefficiently wasting a few seconds of my life and the advertiser doesn't even get anything out of the ordeal since I didn't pay attention or click on the ad. YouTube could get better at targeting ads and advertisers can get better at creating specialized content, but the situation isn't ideal because I am focused on what the video content will be about, not buying a product I am not interested in. Some YouTubers do paid product promotions which usually are entertaining and a value added solution, but this can't be the solution for smaller YouTubers. It is a patch that doesn't solve the problem completely.
The problem for Google is the cost-per-click is declining rapidly as you can see from the chart on the bottom. Google blames the recent decline on YouTube. Declining cost-per-clicks is a problem for both the content creator and YouTube. It means YouTube will have to service more ads to make the same amount of money. YouTubers aren't getting paid well as it is, so any decline in this rate is problematic. According to TubeMogul, in 2012 YouTubers received about $9.35 per thousand views. This declined to $7.60 in 2014. It is now generally accepted that the rate is about $5 per thousand views.
While YouTubers can make money though other ways such as selling products, this decline hurts the motivation to make more videos. YouTube expects creators to make about 30% of their earnings from making videos. YouTube cannot afford to pay content creators to make up for this lost revenue, so it has no viable solution.
Besides creating a separate product or doing a sponsored video there are two other ways for YouTubers to make money from their videos. These two options are Patreon and Vessel. Patreon is a donation website that allows YouTubers to collect tips from their viewers. Like a Kickstarter donation, donors can gain access to certain rewards if they donate. An example would be a Skype call with the YouTuber or a mention in a video. I expect the number of YouTube channels accepting Patreon donations to increase in the next few years. Patreon takes a 5% commission on the money given to content creators. This is a terrible deal for YouTube, since it doesn't get a cut. Patreon is a part of the solution to the problem of content creators' low pay, but personally I don't like it. The reason why I don't like is because I don't want to pay for a good I am not interested in. The reason why I like a creators is because of the channel's videos. I don't think it make sense to pay for a Skype call when the videos are what is providing me with value, not the Skype call.
The second possible choice for YouTubers is to put their content on Vessel. This is a great solution for some YouTubers and will gain traction in the next few years as well. However, it also has problems. YouTubers have to sign a six-month contract to be on the service. It also only works for YouTubers who are accepted into the program. From the consumer's side, some viewers don't want to pay for content they can see on YouTube anyway. This isn't financial information like on Seeking Alpha where the timing is relevant. Vessel subscribers also receive less ads, so there is significant value to the consumer considering the current options available. The content creators also make more money because the subscription fee and the ads allow Vessel to give out more money than YouTube does. Another problem with Vessel is it is a content aggregator. This means you are paying for the videos you watch and the ones you don't watch. Personally, I'm only a fan of one channel on Vessel, so it is an inefficient way to spend my money.
I want to pay the specific content creators I like. I don't want to watch ads. The solution for YouTube is tips through micro-payments with Bitcoin. Currently, the viewer must pay a decent sum of money to make the transaction worth it because of transaction costs. There is also a problem with accepting money from various currencies and then exchanging it. Viewers will not give $5 to a YouTuber for a video. Some viewers are even complaining about the $3.99 per month payment for Vessel, so the willingness to pay for content isn't high.
With Bitcoin viewers can pay small sums of money to the content creator. These sums would be equal or greater to the amount of money content creators get paid for advertisements. Five dollars per thousand views works out to one half of a penny per view. I would much rather pay a half of a penny per video I watch instead of watching a 15-second ad. Since 15 seconds is 1/240 of an hour, this equates to $1.20 per hour. For most viewers, their time is worth more than $1.20 per hour. This doesn't even add in the annoying in-video ads which the viewer has to close to see the whole screen.
The viewer would also get the knowledge that he/she is paying for the content that is valuable because it makes him/her feel like he/she is supporting the channel. If I want to pay a YouTuber in the current situation, I have to click on an ad. This makes no sense whatsoever. If you aren't convinced of this micropayment model, you need to be reminded the cost-per-click will be declining in the next few years and ads are going to become even more prevalent. This would make the Bitcoin model make even more sense economically.
The way YouTube would implement this payment is on a per-channel basis. You would be able to agree to make micro-payments for whatever channel you want. I could agree to pay 1 penny per video for a content creator I am a big fan of. I can watch ads for videos of creators, I am not subscribed to. Viewers who don't have enough money to subscribe to channel could agree to watch the ads.
Adblock Plus also plays a part in this scenario. As I have mentioned in aprevious article, there is a problem with Adblock Plus, since these viewers are not monetizable. Google has not destroyed Adblock Plus either because it is currently too small to worry about or it is worried about users fleeing to other services if it makes them watch ads. With Bitcoin providing a viable solution, I don't see why Google couldn't clamp down hard on Ad-block. Besides this clamping down on Adblock Plus, the motivations of the viewers also change with this micropayment scenario. Currently people who use Adblock Plus, do it because they hate annoying ads and don't see the consequences of their actions. If a micropayment is offered as an option, I don't see why a subscriber wouldn't want to make a donation of a few cents to support a channel. There will always be free-riders in the system who don't donate or watch ads, but I think it will be less of a problem than it is now.
The near-term solution for content creators is to use Vessel or Patreon, but Bitcoin should provide a better solution in the long-term. YouTube's near-term solution is to put more ads that are better at targeting the correct demographic. If it tries to implement a paid service, it may have trouble because it would have to charge a few dollars per month which wouldn't go over well with many people. The reason why the payment would be so high is the minority of paid subscribers would have to subsidize everyone else. The Bitcoin system allows everyone to pay a low amount. Because the payments are so low, it has a higher chance of being successful. Maybe you wouldn't pay $5 per month to watch YouTube ad-free, but would you pay 50 cents? Chances are you might. YouTube would get a percentage of this payment, just like it does with its current partnership program. This is why I believe Bitcoin can solve YouTube's problems.
This video inspired this article. Ignore the beginning part about net-neutrality.
Additional disclosure: Investors have copied my Facebook investment on Instavest.
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