Paid YouTube Could Disrupt the Home Entertainment Market

Last Updated Aug 26, 2010 2:34 PM EDT

The day may come when consumers purchasing video on YouTube may force Apple (APPL), NetFlix (NFLX), Amazon (AMZN), Best Buy (BBY), Walmart (WMT), Cablevision (CVC), DirecTV (DTV) and their ilk out of the entertainment-at-home market -- and even if that day's a very long way off, it's still a very real possibility

The Google (GOOG)-owned site has planned to offer video rentals for some time. Recently, YouTube expanded some preliminary tests into a full-bore commercial operation, providing movies, television shows and animations to consumers for fees ranging from 99 cents $5.99. Now YouTube is expanding its paid service and allowing some content producers to charge for viewing their videos.

With the paid programs, just as with purchasing a video from the Apple Store, interested customers open an account and plunks down credit card information via what's called the YouTube Store. Then they can stream movies and other video entertainment. Theatrical releases such as Brothers are in the line up, but so are more obscure film festival flicks such as Metropia, a feature-length digitally animated thriller voiced by Vincent Gallo and Juliette Lewis. Rental categories range from Bollywood to Learning & Education. Big blockbusters may be lacking, but give YouTube time.

What will be fascinating is to see is whether Google can leverage the free viewers who flock to YouTube â€"- the site claims that "hundreds of millions" of videos are viewed daily on its site -â€" and turn them into paying customers. Just as NetFlix has been pushing Blockbuster (BBI) toward bankruptcy, YouTube could, if it gets the service right, put pressure on existing entertainment providers. YouTube viewers not only are a potential market for paid-for video, they also are the draw for advertisers on the site. Because it already generates advertising revenue, YouTube Store costs are substantially covered.

In providing access to paid, independently produced entertainment, YouTube is adding a unique, potentially market-changing service that also costs it almost nothing. The service could provide filmmakers big and small with alternative access to viewers, and not one that's free or advertising based, but one that generates income based on popularity.

Sure, James Cameron isn't going to distribute the Avatar sequel through YouTube, but what if he had the notion to polish the test animations of some tentative projects and push them through YouTube? Not only could he gauge audience reaction, he could generate income to forward the project and generate substantial -- i.e. monetary -- evidence of its viability that could be used to woo investors.

The YouTube route could prove attractive to established, independently minded filmmakers both famous and obscure and to newcomers who need to break through. A Kevin Smith or Jim Jarmusch starting out today might not have to max out credit cards or borrow film stock to get their careers going, not with YouTube to assist them.

Even if it never becomes a paradigm changer, YouTube's paid services will at least get Google basic data and credit card numbers from users, which it can use in market research and promotions for other kinds of moneymaking ventures.

YouTube is providing a new twist on home video entertainment and the Internet likes new twists, as the existence of this blog attests. And it comes cheap. As they look to the future, in-home entertainment providers that compete with the service should consider its potential.