Why YouTube Premium is So Expensive

YouTube Premium, the paid subscription service from the world‘s largest video platform, costs $11.99 per month in the US. That‘s a significant amount of money for a service that many people access for free with ads. So why exactly is YouTube Premium so expensive? As it turns out, there are a lot of costs that go into making Premium possible, costs that aren‘t necessarily obvious to the average user.

In this article, we‘ll dive deep into the real reasons behind YouTube Premium‘s $11.99 price tag. We‘ll explore how music licensing, original content production, creator revenue share, and potential lost ad revenue all factor into the cost of your monthly subscription. By the end, you‘ll have a much clearer picture of where your money goes and why YouTube charges what it does for Premium. Let‘s get started.

The Biggest Cost Driver: Music Licensing

While there are several factors that contribute to YouTube Premium‘s $11.99 price, perhaps the single biggest one is music licensing costs. In order to offer ad-free music streaming through the YouTube Music app, which is included with Premium, YouTube has to pay substantial royalties to music labels, publishers, and artists.

These music industry stakeholders have significant leverage in negotiations with streaming services like YouTube. They know that music is a key part of the value proposition for many subscribers, so they‘re able to demand a large cut of subscription revenue in exchange for the rights to their catalogs.

Just look at Spotify, the world‘s leading music streaming service. Spotify pays out nearly 70% of its total revenue to music rights holders. While YouTube hasn‘t disclosed the specifics of its music licensing deals, it‘s likely that they‘re paying a similar percentage for YouTube Music.

So how much of your $11.99 YouTube Premium subscription is going to the music industry? Let‘s break it down with some educated estimates:

• ~$7 to music licensing
• ~$2 to creator revenue share
• ~$1 to original content production
• ~$2 to YouTube

As you can see, music licensing alone likely accounts for more than half of the YouTube Premium subscription fee. That‘s before even considering creator payouts, investments in original content, or YouTube‘s cut. Clearly, the costs of offering an ad-free music service are a major factor in Premium‘s pricing.

Original Content Doesn‘t Come Cheap

Another significant cost that goes into YouTube Premium is original content production. YouTube Originals, the platform‘s slate of exclusive series, movies, and documentaries, are only available to Premium subscribers. But creating this programming requires sizable upfront investments.

While YouTube hasn‘t revealed exactly how much it spends on Originals, industry reports suggest it‘s likely in the hundreds of millions per year range. That‘s certainly less than the $17 billion that Netflix spends annually on original content, but it‘s still a substantial amount of money for a company that has historically relied on user-generated videos.

High-profile YouTube Originals like Cobra Kai, a continuation of the Karate Kid film franchise, can cost upwards of $30-50 million per season to produce according to industry insiders. That‘s due to the need to pay for big-name actors, experienced showrunners, and high production values to compete with other premium content.

YouTube sees these Originals as a key way to drive new subscriptions and keep existing subscribers engaged with the service. But they‘re also a major drain on the bottom line. The hope is that they‘ll attract enough new paying members to offset their hefty production budgets.

Without the $11.99 subscription fee, YouTube likely wouldn‘t be able to invest nearly as much into original programming. Premium revenue is what makes these expensive but potentially lucrative bets on original content possible for the platform.

Giving Creators a Bigger Cut

When you pay for YouTube Premium, you‘re not just supporting YouTube – you‘re also directly supporting the creators you watch. That‘s because YouTube gives a significant cut of subscription revenue to creators based on how much watch time they drive from Premium users.

Creators receive 55% of the revenue generated from Premium subscribers watching their content. That‘s notably higher than the 55% revenue share that creators typically get from advertising on the free version of YouTube (though in some cases, such as for smaller channels, that ad revenue share can be as low as 30%).

Here‘s an example of how this can benefit creators financially:

• On ad-supported YouTube, the typical revenue per 1,000 views (RPM) in the US is around $10
• For YouTube Premium, the estimated RPM is much higher, potentially in the $50-60 range
• So getting 55% of that higher Premium RPM can lead to significantly more earnings per view for creators

This generous revenue share is great for incentivizing creators to make content that appeals to Premium subscribers. But it also means that YouTube has to give up more of each subscription dollar than they would from advertising.

The 55% creator revenue share puts pressure on YouTube to set a higher price for Premium in order to have enough left over to fund their other costs and make a profit. If YouTube gave creators a smaller cut, they could likely charge less for Premium. But attracting and retaining top creators is key to YouTube‘s success, so sacrificing subscription revenue is seen as worthwhile.

The Opportunity Cost of Lost Ad Revenue

There‘s another less obvious but still important factor contributing to YouTube Premium‘s high price: the potential advertising revenue that YouTube loses out on from each Premium subscriber.

Premium users don‘t see ads, but if they were on the free tier watching the same amount of content, they would generate significant ad revenue for YouTube. So the $11.99 subscription cost has to be high enough to offset that lost ad potential.

According to data from eMarketer, the average YouTube revenue per user in the US is around $10 per year. However, that includes all users, even those who rarely watch videos and thus generate little ad money. For power users who watch an hour or more per day, that revenue potential is much higher, estimated to be $50-100 per year.

Given that YouTube Premium subscribers are more likely to be power users (since they‘re the ones most willing to pay for an ad-free experience), YouTube is likely losing out on $50-100 in potential ad revenue per Premium member per year. The $11.99 monthly fee helps compensate for that opportunity cost.

So while YouTube has to pay out some of that subscription fee to creators and cover music licensing and original content costs, a good chunk of it is making up for the ad revenue they‘re not getting from Premium users. It‘s a balancing act between generating new subscription dollars and sacrificing potential ad income.

Maximizing Revenue from the Most Engaged Fans

At $11.99 per month, YouTube Premium is clearly not trying to appeal to everyone. The vast majority of YouTube‘s 2 billion monthly users are happy to keep watching videos for free with ads. Instead, Premium is really designed for YouTube‘s biggest fans, the ones who derive the most value from the platform.

An estimated 10% of YouTube users are considered "power users" who watch an hour or more of video per day. While that‘s a relatively small segment of the user base, they generate an outsized portion of YouTube‘s overall watch time and engagement. Roughly 50% of all views come from these power users.

It‘s this 10% that is most likely to pay for Premium in order to remove ads, play videos in the background, and access exclusive content. They‘re passionate enough about YouTube to spend more time on the platform than almost anyone else, and they have a higher willingness to pay to improve that experience.

For YouTube, the $11.99 price is an attempt to maximize adoption and revenue from this high-value audience segment. If the price were much lower, say $5 per month, YouTube would attract more subscribers but likely not generate enough total revenue to offset their music licensing costs, creator payouts, and lost ad potential.

On the flip side, if YouTube were to raise the price to something like $20 per month, they‘d probably see much lower adoption, even among power users. The $11.99 seems to be the sweet spot where YouTube can get a good portion of its most engaged fans to pay, but still keep the price palatable for those who watch a ton of video.

The Bottom Line

So why is YouTube Premium so expensive? The real reason is that the $11.99 price factors in all of YouTube‘s underlying costs – the music royalties, the original content spending, the generous creator revenue share, and the potential for lost advertising dollars.

Could YouTube charge less for Premium? Possibly, but it would likely mean sacrificing quality in some way, either by reducing the revenue share to music labels and creators or investing less in exclusive programming. And even if YouTube lowered the price, the service would still likely only appeal to a small segment of its most engaged users.

Ultimately, YouTube Premium is not necessarily meant to be a mass-market product. It‘s a way for YouTube to generate more revenue from its most passionate fans and to test out a different business model beyond advertising. The $11.99 price reflects the costs of providing an upgraded, ad-free experience with bonus features and content.

For the casual YouTube viewer, the free ad-supported version will always be there. But for those who can‘t get enough YouTube and are willing to pay to improve their experience, Premium is the way to go – even if it does come at a relatively high price.