In October 2011, YouTube’s CEO Salar Kamangar and the rest of the executive team announced a major initiative in which they would advance $100 million to content creators and invest another $200 million in promotional support. These creators ranged in fame from YouTube celebrities like Ray William Johnson and Phil DeFranco (via their respective studios) to stars like Shaquille O’Neal, Madonna, and Ashton Kutcher. The objective was to jumpstart content creation by a variety of people, particularly mainstream celebrities who would increase YouTube’s brand equity and credibility in the eyes of advertisers and other media properties who may put content on YouTube. About a couple months ago, Kamangar and his team decided that they would be doing another round of investing; however, only 30 to 40% of the original partners would be receiving funding. While this reduction in funding is indicative of what Kamangar has learned from the program’s first year, it is still a clear message from YouTube signaling its desire to become a venue for mainstream content and top-tier advertising partners, and ultimately a money-maker for Google. This strategy favors a long-term monetization model using advertising as the primary driver, a rather conventional model for media, as seen in radio, print, and television. Rather than renew any portion of the program, I firmly believe that Kamangar should have focused on supporting creators in a way that was aligned with Google and YouTube’s core competencies, which would lead to multiple, more immediate revenue streams – not just advertising – and a more defensible position going forward.
Investing in creators may build platform loyalty and credibility with brands
Kamangar and YouTube’s decision to invest in content creators is certainly logical. Intuitively, it should lead to higher quality content on the platform and more people watching for an even longer amount of time. These $5 million experiments (the amount of money advanced to each creator) would serve as individual proofs of concept for various types of content. The YouTube executive team would then know which content works best in terms of not only attracting viewers but also top advertisers. Despite choosing to renew only 30 to 40% of the original content creators in the program, Kamangar and YouTube’s remaining committed to this strategy would accomplish several objectives. First, investing in these creators requires them to create YouTube-specific content for a full year. This commitment from the creators is matched by YouTube’s commitment to provide capital for promoting the content. This symbiotic relationship is critical to forging loyalty to the YouTube platform, as this strategy inherently is focused on a long-term monetization model centered on advertising. When deciding which channels to renew, Kamangar and his team intentionally focused on “watch time,” an engagement metric – not financial performance – an admission that advertising, particularly from big brands, is still a work in progress.
This bet on rights-managed online content and video advertising is certainly a long-term play, and while I am rather skeptical of its being a massive revenue driver, it is difficult to argue with the fact that these trends are coming to fruition, albeit slowly. With regards to rights-managed online content, viewers are watching more of it than ever, leading to 17% year-over-year growth. Moreover, the market for video advertising (as measured by video ad view volume) is outstripping video viewing gains with 49% year-over-year growth (Exhibit 1). It does not appear that there will be a reversal in either of these trends any time soon, so Kamangar’s strategy may eventually pay off in the long run. While this model allows YouTube to place opportunistic bets on content creators, choosing whom to support and how to support them carries some negative externalities.
Investing in creators may have unintended consequences and may even be redundant
While backing content creators can be helpful for the various reasons mentioned above, there are some unintended consequences of this approach. First, the initial decision to hand-select certain creators is a signaling effect to all content producers, both mainstream and long tail. It indicates that these are the types of people, content, and organizations that are most likely to prove out the YouTube model. And while that may indeed be the case, it potentially stifles the creativity and motivation of people who normally would put content on YouTube. Furthermore, it may lead to conflicts of interest. YouTube is committed to promoting the content of these creators whom they have chosen, but what happens if numerous creators whom YouTube is not officially supporting become popular? How does YouTube balance its allegiances to the creators it has invested in with rising popularity of obscure creators? Choosing to invest in certain people implicitly carries this weight and puts Kamangar in a precarious situation. In addition to these challenges, YouTube networks have become fraught with controversy as of late. Toby Turner, a YouTube star, was recently fired from his own show, and Ray William Johnson, arguably the first “YouTuber” to make it big, recently had a very public falling out with his production company, Maker Studios. These controversies and generally “unsavory business practices” are not something with which YouTube should be associated for brand equity and reputation reasons. Moreover, essentially paying people to use the platform implicitly taints the purpose of Kamangar’s program from the outset.
While $300 million is not a significant amount of capital for YouTube and Google more broadly, it is worth examining whether this strategy was even necessary. Certainly the logic was to provide a proof of concept for creators of varying fame and advertisers, but it may have been redundant. Without investing any money, the power of the YouTube platform itself had already turned long tail content creators into veritable stars and mainstream content was already being uploaded. Ray William Johnson, a prominent YouTuber since 2007, is believed to be the first “YouTube millionaire,” and in June 2012, he signed with William Morris Endeavor, the largest talent agency in the world. Alex Day, a musician from the UK, created his YouTube account in 2006 and has had two UK Top 20 hits, including a Top 10 song which made him the first unsigned artist to have a song place in the Top 10 of the UK Singles Chart. These two creators are far from the exception, as 16 of the top 20 most subscribed video producers are not “mainstream” – only thelonelyisland and the three VEVO producers would be classified as mainstream. Well-known creators have had significant success as well, though. VEVO, a joint venture between Sony Music Entertainment, Universal Music Group, and Abu Dhabi Media, accounts for 18 of the top 100 most subscribed channels and 26 of the top 100 most viewed producers. So, if YouTube should not risk investing in creators and may unnecessarily be spending money, how should Kamangar proceed?
YouTube should leverage core competencies and pursue other monetization strategies
Rather than placing bets on content creators, Kamangar and his team should take advantage of two attributes that are unique to YouTube, compared to the site’s competitors. First, venture capital (VC) funds and corporate media investment arms recognizes the power of YouTube and the future of content creation and dissemination, so there is no shortage of money flowing into this space. Second, YouTube should significantly leverage the Google product portfolio and its technological advantages to attract and monetize content creators.
Regarding the first factor, venture funds were backing YouTube producers even before YouTube itself was. In April 2011, Greycroft Partners and GRP Partners invested a total of $4 million in Maker Studios; in December 2012, media conglomerate Time Warner led a $36 million round of financing in Maker. Meanwhile, YouTube network Machinima has now raised nearly $50 million. While some of the capital comes from Google, it has also raised several million dollars from MK Capital and Redpoint Ventures, two VC funds, from as far back as November 2008. Lastly, Peter Chernin, the former COO of News Corp and CEO of The Chernin Group (TCG), recognizes the importance of YouTube, as his firm has invested $10 million in Base 79, a YouTube agency that previously raised traditional venture funding from MMC Ventures, and $3 million in MiTú, a Latino-focused YouTube network that was overlooked by YouTube’s funding program. Aside from funding, YouTube networks have also formed partnerships with mainstream media. For example, Fullscreen, which TCG incubated, has built a side business, Channel Plus, that works with NBC, Fox, and FremantleMedia, instructing them on how to distribute content on YouTube.
The Google platform is perhaps the most valuable asset that YouTube has at its disposal. If used well, it will lead to more immediate and significant monetization and defensibility against video competitors such as Facebook and Vimeo, which is specifically recognized for having higher quality content on average. YouTube needs to create stronger ties with the Google product portfolio, such as Google+ Hangouts, Wildfire (for social marketing analytics), and Google Wallet. For example, Google just made “it easier to share new public videos to Google+ after they are uploaded and by highlighting users’ public YouTube videos on their Google+ profiles.” Google Wallet could be used with YouTube’s new Merchandise Annotations program, an initiative that allows creators to annotate their videos to sell products to viewers, thereby allowing YouTube to capture an affiliate fee.
The ability to create phenomenal premium features for creators is one of YouTube and Google’s core competencies. Given the data at YouTube’s disposal, Kamangar should implement packages to upsell networks and individual content creators. These packages could include A / B testing, improved search engine optimization, better targeting of specific demographics (a feature that networks desperately want), and a dashboard with advanced analytics to help content creators make informed decisions about how to best acquire, engage, and retain viewers and appeal to advertisers. YouTube could also allow creators to pay for additional features for their viewers to enhance the viewing experience. Features such as improved sharing, voting, and a real-time chat room are a major advantage over traditional TV that will attract mainstream content creators. These features also increase the amount of data on YouTube’s audience and enable other types of advertising and sponsorships besides stale pre-roll videos.
If the goal is for YouTube to become a profit center, the 2nd strategy should be implemented
The strategy articulated above that involves multiple monetization paths and capturing value in the near-term is not without its pitfalls. Relying solely on other firms to invest in networks and content creators implicitly means YouTube will relinquish some control. Of course, Kamangar and his team will not be able to hand-select their preferred creators, thereby having less influence over picking the “winners.” However, there are potentially other consequences. For example, upselling networks and creators for premium features as described above fundamentally changes the value proposition to them and the YouTube experience, which may appear too data-driven or analytical for people in the creative industries. Moreover, the audience-facing features alter viewers’ respective experiences on the site and may detract from the simpler user interface that YouTube just rolled out. Proper positioning of such changes will be critical.
While these are considerations that Kamangar should take into account, I believe that the ultimate decision comes down to Google’s desire for YouTube to become a massive profit center. Spending $300 million and subsequently renewing a portion of this investment is logical for a long-term monetization play centered on advertising from top-tier brands. However, it makes little sense as a means of developing a proof of concept given the successes described and puts YouTube in a tough spot because of signaling issues and conflicts of interest. Kamangar’s central objective is to turn YouTube into a money-maker for Google. By leveraging the site’s momentum, as recognized by VC funds and media conglomerates, Kamangar will be able to monetize YouTube most effectively through a more robust feature set and analytics package for which studios and creators will pay and better synchronization between YouTube and other Google products, both of which will lead to more unique and immediate advertising opportunities.
**A modified version of this post was previously submitted for a course entitled, “Strategic Marketing in Creative Industries.”**