How YouTube Red Puts the Squeeze on Netflix

Increased competition is forcing the subscription streaming giant to play defense

YouTube would like 10 bucks, please.

The Google-owned video platform on Wednesday unveiled YouTube Red, a venture into subscription video on demand. For $9.99, users will be able to browse videos on YouTube ad free.

The centerpiece of the offering is a slate of original scripted and unscripted projects set to premiere in 2016 and available only to subscribers. The move puts YouTube, long the dominant ad-supported digital video platform, in the same space as Netflix, long the dominant ad-free subscription video platform.

That space is getting crowded. And Netflix is being forced to react to the crowding.

YouTube is only the most recent in a series of challengers to Netflix. Earlier this year, HBO and Showtime each launched stand-alone streaming services. Hulu, which has operated under a dual paid-subscription and ad-supported model since its 2008 launched, rolled out an ad-free option last month. And Fullscreen, which began life as an aggregator of content on YouTube, said it will launch its own off-YouTube subscription service later this year.

Even cable network Lifetime jumped in with its boutique Lifetime Movie Club offering in July.

Netflix, meanwhile, is seeing its growth slow, at least in the United States. Stock prices dipped last week when, as part of its third-quarter earnings report, the company reported lower-than-expected gains in U.S. subscribers.

And the company is now asking for more money from new subscribers. Last month, following Hulu’s ad-free announcement, Netflix raised the monthly cost of its standard streaming plan from $8.99 to $9.99.

It’s not coincidence that the price increase came on the heels of more expensive offerings being rolled out by other brands.

Netflix has long been considered the benchmark for what customers would be willing to pay for a streaming service. But when HBO New debuted in April, it did so with a $14.99 pricetag. Showtime’s eponymous service costs $11.99, as does Hulu’s new ad-free product.

“It’s responsive,” Brian Solis, principal analyst at Altimeter Group told TheWrap of Netflix’s price hike. “I believe that everyone is trying to improve margins for the coming increase in content value.”

All that movement in price appears to have pushed what consumers are willing to pay upward, if only slightly. During a Q&A with reporters Wednesday, YouTube Chief Business Officer Robert Kyncl indicated that YouTube Red’s $9.99 price tag mirrored the ceiling for consumer expectations. “We’ve seen consistently that subscription services over the Internet priced over that amount are having a tough time gaining tremendous traction,” he said.

And Netflix isn’t going away any time soon. Earlier this year, a Janney Montgomery Scott analyst estimated that the company will spend as much as $5 billion on content in 2016. A March report found that the company accounts for 37 percent of all North American downstream Internet bandwidth during peak hours, versus 16 percent for YouTube. Netflix is still Goliath, even if more and more Davids are lining up to take their shots.

But the leveling off of Netflix’s domestic growth and the fiddling with price — last month’s change was the second price adjustment in a little more than a year — demonstrate that competition is real and the marketplace will support multiple competing services.

Whether YouTube Red can be one of those legitimate competitors is unknown. Not all creators and companies on YouTube have agreed to the new terms of service required for subscribers to view their videos ad-free (Disney is among those who haven’t signed on yet). And the original programming slate is heavily focused on YouTube-bred talent such as PewDiePie and Lilly Singh.

Playing to its base with original programming represents a risk for YouTube, as fans of its biggest stars are used to watching them for free. But it also represents opportunity. Hulu and Amazon have sought to challenge Netflix with the same sort of premium dramas and comedies that can be found on Netflix — and which HBO and Showtime have been making for years.

YouTube’s originals efforts are being led by former MTV programming chief Susanne Daniels, who inherited the current slate when she walked into the job three weeks ago but is already adding to it. Her challenge is to find content that appeals to younger viewers, potentially by leveraging the popularity of YouTube’s native talent and embracing formats, such as reality programming, that other services have avoided.

Netflix, meanwhile, is steeling itself for a future of muscular competition, in part by moving aggressively into international territories, where its growth has exceeded recent targets.

“We’re really big on everybody has got to get into streaming,” CEO Reed Hastings said Oct. 14 during the company’s earnings call. “It’s been our main message for several years that what is known as channels is going to become apps, and that all of these providers need to have great apps, on a phone, on a tablet, on a TV.”

As that vision becomes a reality, thanks to cord cutting and the fraying of the traditional cable bundle, Netflix is positioned to remain the leader in the field. But if it wants to retain that position, it will need to continue to respond to the increasing number of challengers looking to dislodge it.