Yesterday YouTube got a lot of coverage of its new licensing deal for hundreds of movies from Paramount because separately, the studio's parent company, Viacom, has been involved in a bitter copyright litigation with YouTube for years. While it's noteworthy that the parties are able to do business despite suing each other, the bigger question here are whether YouTube's initiative to rent Hollywood movies makes sense and can succeed?
Back in November, when YouTube announced a licensing deal with Disney, I wrote that YouTube could be poised to disrupt online movie rentals. In fairness, "disrupting" anything requires that there's enough critical mass to begin with, and with online movie rentals, that's barely the case. Using IHS data, by my calculations, the U.S. online movie rental market probably totaled a measly $200 million or so in 2011, tiny by any standard (note that Apple's iTunes has about 66% market share as well). As subscription rental services like Netflix have soared in popularity, viewers have shown little love for one-time movie rentals (or purchases for that matter).
My belief that YouTube could potentially shake things up and grow the market was primarily based on the company's willingness to offer deeply discounted $.99 promotional rentals. Underscoring the power of low pricing, late last fall, ALL of YouTube's top 10 rentals were $.99 specials. I reasoned that if YouTube committed to this strategy (which guaranteed a loss on each rental given Hollywood's pricing), it could jumpstart the business and gain a footing compared to iTunes, Amazon and other incumbents.
Flash forward to today however, and the $.99 promotional approach appears to be gone. In fact, YouTube's rental pricing is in line with other outlets — for example, its pricing for 4 of the Paramount titles touted in YouTube's post yesterday, Hugo, The Godfather, Transformers and Ferris Bueller's Day Off — is comparable to Amazon's.
Without a pricing advantage, I'm hard-pressed to see how YouTube's movie rentals will get much traction. The reality is that consumers are faced with numerous choices for movie rentals these days, which has commoditized the business. Plus, Netflix's experience shows that viewers are gravitating toward watching immersive TV series online, not movies.
Meanwhile, Hollywood continues insisting on its absurdly restrictive 24-hour rental period limitation which hampers the user experience, thus dampening demand. Last but not least, YouTube and others will get no help from Hollywood's marketing machine; rather the industry is focused on making its new UltraViolet standard a household name to offset sagging DVD sales.
Online movie rentals are a small business, with limited growth prospects. As such, it's unclear to me why YouTube is trying to break in, unless Google views it as a relatively easy add-on outlet to Google Play (until recently Android Market), the content and app store meant to support it burgeoning device business. YouTube has formidable strengths: a 40%-45% market share of all online video viewing, a new $100 million original content initiative and an innovative ad model.
These feel like the areas YouTube should be emphasizing, as it benefits from Google's near-limitless resources. Unless I'm missing something big, it seem there's little to be gained for YouTube in the online movie rentals space.