YouTube may offer ad-free subscription service

YouTube, the video-streaming service owned by Google (GOOG), is exploring whether to offer paid subscriptions that would let users watch content without advertising.

"YouTube right now is ad-supported, which is great because it has enabled us to scale to a billion users," YouTube CEO Susan Wojcicki said at a Re/Code conference in Half Moon Bay, California. "But there's going to be a point where people don't want to see the ads."

The option, one of a number the company is considering, could benefit users willing to pay for ad-free YouTube videos, but it's also a way for the service to address some potential significant limitations in its business model.

YouTube has roughly a billion users, a number approaching those who use Google for search and who are on Facebook (FB), and it is looking for ways to boost revenue. eMarketer estimated last year that YouTube could top $5.6 billion in ad revenue, although that was at the high end of various estimates. A report from The Information in July 2014 pegged YouTube's 2013 revenue at $3.5 billion, with net revenue, after payments to video creators, of $1.5 billion. That would amount to abut 7 percent of Google's total revenue and would be small even compared to Facebook.

One problem Google faces in boosting YouTube's profits has to do with the nature of video advertising. In short, advertisers are loath to pay for what users don't see. There are two general types of ads on the YouTube. One is the type that allows people to opt out after a few seconds, meaning that advertisers don't have to pay when people don't watch the ads. The other type is the so-called pre-roll spot that runs before a video starts. If consumers decided to wait for the video they want, YouTube makes money.

YouTube generates far less revenue per user than other Internet giants. Then there is the mobile factor. According to Wojcicki, half of YouTube's traffic comes from mobile. That channel is increasingly where companies want to advertise. But ad rates can be low, with both Google and Facebook having seen mobile as a cause for downward pressure on ad rates.

For YouTube, offering paid subscriptions could help alleviate that problem. Should people opt in, YouTube and Google could make significantly more money from consumers dislike watching ads. Such viewers also could become heavier users, giving Google even more of the behavioral consumer information that is ultimately so useful in targeting other ads and profitable for the company.