Why The Media Has Been Wrong About YouTube Networks

Posted on Sep 15, 2013 | 38 comments


For much of 2013 I  watched the press write articles about how the YouTube “MCNs” (multi-channel networks) were doomed and tried to square that with the data I was watching at the one I invested in, Maker Studios, who has had one hell of a year.

Maker announced it has raised $62 million this year, acquired an amazing off-YouTube distribution network and grown its business in monetary terms by almost 300% year-over-year off of an already large base.

Along with Greycroft Partners we were the first investors in Maker Studios 3 years ago when the company had no revenue and limited infrastructure. With so much misinformation about YouTube networks in the press over the past 6 months I thought I’d use this opportunity to tell you about what my belief was about that market 3 years ago, how that has evolved and why I believe online video is set to continue to revolutionize the video industry at a more rapid pace than even the past three years.

So can you successfully build a YouTube network?

YouTube Revenue Split

Most startups I know that work in the Apple iOS ecosystem complain because Apple takes a 30% slice of their revenue and yet I often point out that 30% has for years been a common revenue share for one who provides “distribution.”

YouTube takes 45%.

YouTube hates this comparison and claims they provide so much more to their ecosystem than Apple does to its iOS ecosystem. I agree with YouTube (that they provide more (hosting, ad sales, etc.) but not that this justifies taking a 45% revenue share. If YouTube really cares about dominating the future of Internet video it should take less because at 45% it will only encourage video producers to seek alternate distribution and will make it easier for competitors to emerge.

2. Talent Revenue Split

If you want to be a YouTube MCN producer the problem is compounded by the fact that of course the talent needs to make money as well.

Industry averages for talent revenue shares are about 70% with top talent making even more.

This revenue share comes after the YouTube split. Of course it’s a competitive market so MCNs competing for top talent not only compete on rev share to talent but also to services that they provide talent.

3. MCN Margins

This is why the smartest analysts thinking about the MCN space have often compared the MCNs to “ad networks” which are the middlemen who sit between advertisers and publishers and often take a 15-17.5% margin.

And this about where the YouTube haters stop their argument: That YouTube networks are sandwiched in between 2 powerful & competing forces and that it’s hard to build a business this way.

If you think of yourself as a middleman I agree with you – this is a crappy business. But the best MCNs are so much more.

If you’re thinking about building an online video network today you need to think about:

  • Producing your own content (not just aggregating)
  • Building direct customer relationships with viewers (who want to tune into your channels)
  • Developing O&O (owned & operated) businesses (outside of YouTube)
  • Having business models that aren’t only ad-based

I will talk about these strategies in my next blog post.

For starters I’d like to tell you what I tell every startup that wants to “build a YouTube business.”

Don’t.

There is no such thing as a YouTube MCN. It’s a made-up term and not even a good one at that. YouTube is a video distributor, not your end business goal.

So you don’t “build a YouTube business” you “build a video business and distribute your videos on YouTube.”

You need to think like a producer of any kind and think about distribution more broadly. It’s why I like to simplify and talk about candy bars.

4. Sell Through Walmart

8% of every dollar spent in America is spent at Walmart – astounding, I know. They have more than 4,000 locations and sell more than $34 billion / month. In fact, if Walmart were a country it would be the 19th largest in the world.

So imagine what it’s like to be a supplier to Walmart. You don’t exactly get to make the margin you might like but as a candy bar supplier you need to be there to build awareness of your product with consumers if you want to be a large, mass-market product.

Your goal at Walmart ought to be to build customer awareness and ultimately persuade a sub-segment of the Walmart shopper to come buy your candy bars at specialty shops or at your companies website directly, where you’ll make much better margin.

Newsflash – you’ll never have as many customers as Walmart because they sell every kind of product but there are many other retailers who distribute candy bars as well. Selling at smaller retailers will net you fewer customers and higher margins.

So you don’t “build a Walmart candy bar business” – you distribute products there – and at margins lower than you’d like.

And by the way, if you don’t manufacture any of your candy bars yourself you are merely a middleman packaging up somebody else’s product and taking a vig on helping get customer distribution. Sound interesting? Meh.

Ok. Back to video. Newsflash:

5. YouTube Powerhouse

YouTube is the Walmart of video. It is where the world shops when they want to consume online video. So while we might find 45% distribution fee excessive it has clearly earned the right (for now) to charge the margin it wants to get.

Just how dominant is YouTube in online video?

6. YouTube Marketshare

So as video content producers we need to understand that if we want to build mass-market video brands we need to distribute via YouTube.

For year’s I’ve been telling this to the niche video producers who clung to distributing only via their websites (O&O). Their logic was, “I can make $25 CPMs on my website while on YouTube I can only get $2 CPMs,” which basically meant I should shut up.

Except for 2 things: 1. YouTube has infinitely more customers than their websites & 2. It is the world’s best customer acquisition for video consumers to get them to come to your O&O where you can make your $25 CPMs.

7. Maker Studios

This is always how we saw Maker Studios. YouTube is our best, but not only, distribution source.

Maker is now a powerhouse in its own right. We have a large engineering staff led by the insanely talented Ryan Lissack (who was my co-founder at Koral and with whom I worked for many years before persuading him to leave SF for LA.)

It’s what the industry has never understood about us. Yes, we understand that it’s all about providing high-quality content. But we’re a technology company that produces great video not the other way around. By being a great tech company that provides video we have the assets to:

  • Capture customer information and use this to build direct relationships
  • Distribute content off of YouTube with more control over the video player, making higher margins for our talent and for ourselves
  • Provide tools for creators that help them build viewership (the average Maker video producer is getting multi-100% increases in viewership in the first year of working with us)
  • Give access to music that is legal, avoiding lawsuits and ensuring revenue isn’t captured by other IP owners
  • Offer tools to allow content producers to build their own websites & mobile apps

So now you know a large reason Maker recently acquired Blip, which not only had great off YouTube videos & traffic but also had killer technology assets and a great tech team.

Expect to hear a lot more about Maker technology in the next 18 months.

And if you want to know more about the technology argument of why people like Maker are succeeding over traditional content produers you can read this short post or watch the video interview linked there where I talked a lot about this strategy.

So for those building networks on YouTube I encourage you to think about them as important distribution, not the end game. YouTube is the top end of your customer funnel.

8. YouTube Funnel

But you can’t be stuck in a 16.5% margin world and build an amazing & valuable business.

In my next post I’ll cover why online video is such an exciting opportunity for company building right now and how we think about building businesses with appropriate margins nearing 50-60%. I’ll cover why most VCs have stayed away from online video networks and why I believe they’re missing an important growth trend that looks more like a scalable tech business than the “hits driven” business they all fear.

And in the post after that I’ll talk about where I see YouTube’s own vulnerabilities from competition (Amazon, Facebook & Twitter) and how I think the future of online video may unfold.

9. Online Video Healthy Margins

The next post in this series is How to Build an Online Video Business and Avoid Platform Dependence.

And if you have a bit of extra time and want more insight than I can share in a blog post you might consider watching this video interview I did with Jon Miller on the future of online video. It’s a year old and predicts much of what happened over the past year.

  • Adeel Vanthaliwala

    Great post Mark, this makes me think about how upworthy is going to move forward since they haven’t produced any of their original content. Can upworthy survive without their own content just by relying on its insanely big and fast growing distribution ? Similar to youtube and other video distribution networks even though upworthy is not really video distribution only.

  • http://dandemole.com Dan

    Great read. Been discussing this with our team. Article provided a lot of data and insight into the model… Thanks. We service the music to a lot of the networks and have been working through the business model for some time. The successful ones ultimately have a “bigger” endgame in mind besides YouTube success (maker, awesomeness, etc)

  • http://reecepacheco.com/ reece

    great post Mark

    i agree that many VC’s and people in tech are missing the boat with online video, and its insane potential

  • http://www.linkedin.com/profile/view?id=18847600&trk=tab_pro BillMcNeely

    Just finished up with StartupGuruTV ( Online Bloomberg for Startups) Lean Canvas yesterday. I found this article extremely insightful.

    I actually had not given any thought posting our original content to YouTube but now I will.

    The article also gave me a new out look on what to consider a channel.

  • Jean-Michel Koenig

    Hi Mark, I see that you have talent receiving 20% of the revenues under the new business model. I’d be very interested to hear your thoughts on what the future of distribution looks like for higher value content that costs several $m to produce?

  • José Ignacio

    Great post! I have been following some of the channels that are part of Maker Studio the past years and have seen how the quality of the production has increased and other revenue streams emerging (product placement and collaborations with brands).

    I have also seen a similar trend in countries outside the US, especially in Latin America. This represents a huge opportunity, were you have a young population, connected everywhere and replacing time watching TV with time spent online.

  • http://robertsaric.com/ Rob Saric

    Very useful post Mark! I agree with your Walmart comparison. YouTube is a great catalyst to build customer awareness and ultimately persuade a sub-segment of those users to digital properties that you can better engage and monetize in your funnel. We’re experimenting with producing original high quality instructional learning content in a niche with the goal of pulling that audience towards our member paid content. This is a serious opportunity and your article articulates it beautifully.

  • http://twitter.com/chrisamccoy Chris McCoy

    Incredible post, Mark. We’re working pretty closely with dev team at YouTube on advanced API integration around video, personalization, real-time, and sports: https://twitter.com/chrisamccoy/status/379329514238533632

  • Sofia Fenichell

    This post sums it up perfectly. I love the funnel. What is your view mark on networks that aim to become the Whole Foods of video – to continue the analogy. Or networks that have a highly targeted demographic in mind that is underserved by Youtube which skews highly male and millennial. I estimate that 2/3rds of Youtube views are men (not users but views) and most of their MCNs skew male. And fairly low quality. The ‘good stuff’ that other people might like to watch is going unnoticed. People are calling it ‘bad content’ because its not viral but I know you know the difference between virality and network effects and how Youtube operates. Really curious for your view. Amazing article. Thanks.

  • Nik Souris

    Awesome basis and perspective! Ultimately success for these folks like the candy manufacturer will come done to branding and how well these producers are able to build their following and give them a place free of the “distractions” that come with a “Wal-Mart” distribution.

  • Phillip Horlings

    Fancy seeing you here!

  • http://www.onetact.co/ Rishi

    Mark, Media and YouTube reminds me…when are we seeing more of UnscriptedVC? ;) j/k I know you’re super busy and appreciate you taking time to post stuff here.

  • http://influads.com/ damiansen

    Very, very interesting stuff.

    Mark or others, I have a question on the ad sales side of the equation: Programmatic vs Direct Sales on Video, how will ad sales evolve on this medium?

    I ask this since the success of video is attached to ad dollars shifting from TV, which is currently dominated by Direct / Account-driven Sales (more expensive). Digital video ads, like other digital ads is moving a lot toward programmatic. Any thoughts on how will the transaction happen?

  • Ginger Matthews

    I love your insight, Mark. It’s obvious that you’ve been on the convergence track for a long time, as have I. Key in this debate is the ability to have a Smartphone and SmartTV app that can feature curated content, so content gathering becomes a sane endeavor. We finally have the technology! My blog: SandBox TOP100, http://sandboxletsplay.com is phase one. Phase two: the structure. Would love to chat about it.

    My first stab at curated content: http://bit.ly/185DU1C.

  • http://bothsidesofthetable.com msuster

    don’t know it well enough to comment

  • http://bothsidesofthetable.com msuster

    thanks, reece. that’s the subject of my next post. But you already know that since you were live at my keynote!

  • http://bothsidesofthetable.com msuster

    I believe there will always be a market for high-end content but I don’t think the budgets of most TV or film are sustainable in the future.

  • http://bothsidesofthetable.com msuster

    thanks, jose. I think you’ll see the quality continue to increase over time.

  • http://bothsidesofthetable.com msuster

    thanks. the way you articulate it here is exactly how I think. “a great catalyst to build customer awareness and ultimately persuade a sub-segment of those users to digital properties that you can better engage and monetize in your funnel.”

  • http://bothsidesofthetable.com msuster

    higher-end content should be able to monetize better per hour of video but lower customer base. higher-end stuff makes it easier to have alternate billing models like subscriptions. see lynda.com.

  • http://bothsidesofthetable.com msuster

    yes. you need to train them that they don’t need to go to Walmart. Smaller section of user base but most valuable.

  • http://bothsidesofthetable.com msuster

    I hope soon. Thanks.

  • http://bothsidesofthetable.com msuster

    Most of the MCNs started with direct and are building tools for programmatic.

  • reachue

    Great post. Wonder what Jason Calacanis has to say about all this since he made those great points in his Keynote at Vidcon. One of his main points was that YouTube needs to help content creators create a sustainable business or else.

  • Reachli

    Fantastic post and break down of youtube and it’s distribution dominance.

  • Sofia Fenichell

    Thanks for replying and taking time to write such a thoughtful post. Agree with you. Subscriptions are good. But there is a vast market for premium content that is advertising based and instead of having an audience of 1bn, has 100m. Not sure I understand the relevance of Lynda. Was thinking more content like Vevo music videos, Mario Batalli, Colllege Humour and even Maker studio and many MCNS fit in this category. Many demographics are still vastly underserved by Youtube – people who just want the ‘good stuff’ and don’t know what to look for. They are missing a huge opportunity to improve their life, expand their minds or simply just have a giggle. Cooking, fashion, beauty, intellectual, how-to’s, and targeted comedy all fit this bill without having to appeal to a narrow silo. If you take gaming and music out of Youtube, the wheels fall off. So whilst I have often used the Walmart/Youtube analogy myself, the truth is that Walmart is a much stronger service structurally because it truly serves the needs of a more balanced demographic and broader interest groups. If Youtube were to truly focus on being Walmart, then it would be worth even more. Btw, the Yahoo Screen App provides a good example of the Whole Foods execution but not sure how its going to do in the market for other reasons.

  • Michael Anderson

    As a small gaming-specific MCN starting out, where is the best place to look for VCs/investors familiar and excited about this market? We are having a hard time in Nashville.

    We started out a cloud utility for backing up game content, but have pivoted to focusing on video packaged with the gaming content (game saves, etc.). This combination of content enables a unique experiences for gamers they can’t find solely on YouTube channels.

    Hoping a combination of our own content plus attracting our first few producers will help us get kickstarted but it would be nice to find some investment partners soon. (As a reference, we are GameWisp.com)

  • http://christianbusch.blogspot.com christianbusch

    Hi Mark,

    good summary of the key facts and % in the MCN ecosystem. Where I think it gets interesting and also extremely competitive is when Maker et al start hailing “off youtube” as the holy grail; there are thousands of blogs, content sites and traditional publishers who are already quite big off youtube and that are all getting into video (Conde Nast is just one example).
    So far, the only major Youtube channel that has made a great leap off of Youtube is Smosh; it remains to be seen how successful Youtubers can become off of Youtube where they need to compete for audience with all the existing subject matter experts/ bloggers/ sites.

  • http://www.pointsandfigures.com/ pointsnfigures

    thinking about this in terms of a few businesses. summing up, reminds me of Peter Sellers line in Being There: “I like to watch.”

  • Michael Anderson

    It seems like using YouTube as the top of the funnel should create a lot of entry points. We are planning on using the various producers of content as entry points to our site and offering a value add through additional content that can only be attached / downloaded on our site. This should theoretically help us funnel people toward the premium content that should be the lifeblood of model.

    It is interesting if you look at providers like RoosterTeeth whose videos started as only on their own site, then they have slowly grown to other types of media and other channels. I think we will see a lot more of those type of transitions as this space grows.

  • Marc Pariser

    Mark,
    Excellent post. It might be useful in future posts to provide a larger context for this discussion by presenting what the costs of distribution have been in the traditional media businesses (tv/syndication). Apple turns out to be cheaper, and YouTube more expensive, but these numbers have relevance even though online distribution and content creation is a very different game than traditional media for a variety of reasons. …and I agree with you about the great opportunities that exist in this new frontier.

  • http://wilsoncleveland.com/ Wilson Cleveland

    I think Maker has a real opportunity to become the first major MCN to succeed both on and off YouTube. I’ll be interested to see the degree to which Maker artists and content are able to expand their audience demographically and what that discovery process will look like. Bad Lip Reading and Epic Rap Battles are two of my favorite YouTube channels but unless you’re somewhat of a YouTube native you likely don’t know those shows exist.

  • http://influads.com/ damiansen

    Wanna guess what will be the share between direct and programmatic when that change stabilizes?

    Do you believe in the “everything will be programmatic” POV or is advertising still human like many other industries will always be?

  • Matthew Paul Stanton

    Really enjoyed this article, thank you … TasteMade is another company that started on YouTube and is expanding well beyond the platform. Businesses are missing out if they do not see the tremendous opportunities laying in front of them through online video distribution.

  • http://www.jasonnation.com jasoncalacanis

    I think Mark and I agree and have a similar data set drawing us to conclude why @youtube is a suckers game (on its own).

  • Red Edges (Alan Peters)

    Love this post.

    Small detail: Ad networks are more like 30% gross margin in my experience.

    I’m a fan of the model of having O&Os in the mix with not just MCN but a variety of either distrubution, marketplace or platform-cenric businesses. I think the advantage MCN have is that an O&O media property is more likely to be in their DNA.

  • richardfrias

    A couple thoughts here: 1) YouTube is too big of a platform to cater to a select few more prominent partners. Digital studios have come and gone since YouTube’s inception. If a company chooses to do business on YouTube, then it is that company’s obligation to make a business for itself on YouTube – it’s not YouTube’s responsibility to meet your bottom line. 2) Scaling YouTube means very little if the content is not of a certain quality. Advertisers would rather buy print ads than advertise against most YouTube videos regardless if “it is what the kids are in to”.

  • matt heiman

    Very good commentary. Basically, the term MCN is too broad. We, at Diagonal View have been called an MCN out of convenience. But an MCP- “Producer” would be more accurate. Similar to Alloy Digital.
    Owning content = stable margins, stable content base and the ability to grow content asset value. MCNs= declining gross margins, high churn, little/no interest in growing content asset value. But, if they can offer more stickiness, MCNs may avoid being “Googled”- ie: in 2-years, what will they offer that YouTube can’t?