Google Life After Youtube

Independence isn’t easy to achieve in the nascent world of digital distribution

YouTube runs the world’s most massive and diverse video bazaar, one that’s home to more than 1 million content creators.

But with more and more online distributors getting into the market, some of the company’s longest-standing content providers are getting restless, maintaining that the site exploits its pole position as the Internet’s No. 1 video destination to extract unfair revenue-sharing terms; that it provides poor marketing; and that it doesn’t effectively sell ads against professionally produced content.

The biggest bone of contention remains YouTube’s standard revenue-sharing deal. The website typically gives content suppliers 55% of ad dollars that run against their content, and keeps 45%. The risk for YouTube owner Google is that premium content providers — traditional media companies and pureplay digital studios — will shun YouTube or increasingly shift toward Internet distributors that furnish more generous splits.

YouTube’s critics point out that Apple offers a 70% cut for content sold through iTunes, with Hulu’s ad revenue share in the same ballpark. And while the sales paradigms aren’t the same — iTunes content isn’t ad-supported, and Hulu offers an array of business models — smaller players in the ad-supported space, like Yahoo and Dailymotion, are getting noticed. (Yahoo’s attempt to scale up by buying Dailymotion was thwarted by the French government.)

“If YouTube was a little more flexible, it could have a ton of TV content,” said an exec with a large cable programmer.

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Given YouTube’s revenue split, professional content creators and multichannel networks have come to realize they must work with multiple distributors — and cannot exclusively rely on YouTube for anything but the lowest-cost video-blogger-type material.

“We see YouTube as a great place to incubate content,” said George Strompolos, a former YouTube exec who went on to become founder and CEO of Fullscreen, which formed as a YouTube MCN in 2011. “But any media company that thinks that’s the be-all-and-end-all is very shortsighted.”

Fullscreen last month announced series A funding from Chernin Group, Comcast and ad agency WPP. With the investment, Strompolos plans to adopt a studio-like model to invest in original content for distribution on YouTube and elsewhere.

Machinima, one of the earliest YouTube MCNs specializing in vidgame-related animated content, also is branching out even as it says YouTube remains a key component of its direct-to-consumer strategy. “Machinima’s approach to delivering video to our audience is global and multiplatform,” chairman/CEO Allen DeBevoise said in a statement, citing as an example the company’s launch of an Xbox Live app in April.

Diversify or Die

YouTube itself says it encourages partners to distribute on multiple platforms, positing that healthier media partners will boost content and views on its own service, and for now, in general, it’s not budging on the rev-share numbers. The site is pinning future growth on content for younger, Web-savvy auds largely generated by the masses (read: produced for a fraction of Hollywood film or TV budgets).

Over the past two years, YouTube spent some $200 million funding more than 100 original channels to create exclusive content for the site. But now it has reversed course and is lifting exclusivity provisions for those partners.

There’s no universal YouTube backlash afoot, despite various objections as to how it does business. Many content creators and multichannel network operators that deal with the site believe that on balance, it’s a fantastic venue for turning clicks into cash, with unmatched scale of 1 billion users monthly, and growing. While they say there’s room for improvement in how YouTube monetizes and promotes content, media companies of all stripes continue to invest in developing programming for the platform.

“Our success on YouTube has been phenomenal,” said AwesomenessTV CEO Brian Robbins. “In a short period of time, we’ve been able to build an audience and a brand that I don’t think we could do on any other platform.”

Robbins sold his company, which produces youth-skewing content for YouTube that has generated more than 1 billion views, to DreamWorks Animation in May for a reported $33 million upfront, which could grow to $117 million, depending on how Awesomeness performs.

That said, Robbins and others, including Jim Louderback, CEO of online video network Revision3, now owned by Discovery Communications, emphasize that relying solely on one distribution partner is not a smart decision for any media company’s long-term business.

“We’ve never put all our eggs in the YouTube basket,” said Louderback, who’s company has its own website and mobile app. “There are great communities for watching video around the Web, and you have to understand the rules of the road.”

The loudest — and most barbed — gripes about YouTube recently have come from Jason Calacanis, Internet entrepreneur and CEO of Inside.com. His company received funding under YouTube’s original channels program and produced nine shows including animated program “Wellcast,” workout show “XHIT” and ultimate fighting tie-in “MMA Surge.”

After asking for a bigger cut from YouTube (which turned him down), Calacanis in early June ripped into the distrib in a blog post titled, “I ain’t gonna work on YouTube’s farm no more.” He complained that YouTube’s 45% take amounts to a “tax,” and that the site is set up to control advertising and viewer relationships, cutting out content creators.

Calacanis claimed he was voicing grievances many YouTube partners discuss in private. In an email to Variety, he said YouTube contacted him to thank him for the post, but added that he and the company are not having a dialogue concerning the actual issues.

In response to such criticism, YouTube says it fronts enormous infrastructure costs, including bandwidth, video hosting, video players, user analytics, ad serving, geo-blocking, content filtering and other services that power localized sites in 56 countries in 61 languages.

“YouTube has created an ecosystem that allows our partners to focus on what they do best — creating great content,” Robert Kyncl, YouTube’s head of content and business operations, said in a prepared statement. Kyncl said that partner revenue is up 60% over the previous year, and that the video advertising marketplace is still growing rapidly. “We’re working hard to bring more media dollars to our creators,” he said.

Industry execs say YouTube’s claims of high infrastructure costs as a justification for the revenue split don’t hold water. Because of its enormous scale, they say, YouTube should be able to deliver content more efficiently than anybody else.

In 2013, YouTube is expected rake in $5 billion, representing nearly 11% of Google’s total revenue, according to estimates by RBC Capital Markets analyst Mark Mahaney. Google does not disclose operating costs or other financial metrics for YouTube, nor does it get into specifics over what it pays out to content partners except to say that “thousands of channels are making six figures a year.”

Split Personality

Some of YouTube’s premium content partners do enjoy better than the standard split, getting to keep up to 65% of ad revenue. According to sources, those include Sony Pictures Television’s Crackle and Vevo, the latter the music-video joint venture majority owned by Sony Music Entertainment and Universal Music Group.

Even with the better terms, Vevo — YouTube’s top content partner — wants to control its own destiny and build its brand outside of YouTube as well, while continuing to harness the site’s tremendous audience. “We never want to move off YouTube. But we want it to be a balanced part of our mix,” said topper Rio Caraeff, in an interview prior to Google’s announcement earlier this month that it has taken a 7% stake in Vevo. The investment could be worth $40 million to $50 million, according to Billboard.

Vevo generates about 4 billion views monthly via its 15,000 YouTube channels, but increasingly more of its videos are watched on other distribution platforms, including Vevo’s mobile app. Up to 35% of Vevo’s North American views now occur apart from YouTube, according to Caraeff. “YouTube is one spoke on our wheel,” he said.

Meanwhile, disputes between content owners and distributors over financial terms are endemic to the media biz: Witness the public feuds between pay TV operators and programmers over licensing fees, which have resulted in dozens of channel blackouts over the past several years.

YouTube’s cut is simply the price of admission to the world’s biggest video platform, said Peter Csathy, CEO of Manatt Digital Media Ventures, which advises and invests in media companies. “It’s up to the content creator whether to accept those terms or not,” he said. “We are all grownups and make our own decisions.”

A range of players like AOL, Yahoo and Blip are positioned to woo higher-end content producers, touting sales forces that can go after better ad deals than YouTube, which sells ad impressions across the entire site rather than for particular content. Indeed, Hulu last month struck a deal with Fox Broadcasting to carry dramatic series produced by Wigs, a digital studio launched by director-producers Jon Avnet, Rodrigo Garcia and Jake Avnet that was among YouTube’s original channel partners.

Other industry execs note that YouTube is rare among big Internet companies in even offering an ad split with content providers. “The difference between YouTube and Facebook is, YouTube actually pays you,” said Collective Digital Studio CEO Reza Izad, who also is a partner in management firm the Collective.

Still, for YouTube MCNs, the onus for marketing and selling advertising for Internet video is on the content creators. That doesn’t bother Reza, whose CDS runs about 150 channels, including comedy programmer Annoying Orange and Lucas Cruikshank’s Fred Figglehorn. Together, those 150 channels deliver more than 250 million monthly views on YouTube and Collective’s own video site, Metacafe. “I don’t think Google is in the content-marketing business,” Reza said.

Ynon Kreiz, executive chairman of Maker Studios, an MCN that has more than 20,000 channels on YouTube, with 225 million subscribers, noted that the YouTube model is still in its infancy. “People are still trying to figure out the right commercial model and find the right equilibrium,” he said.

Kiliaen Van Rensselaer, Fox’s senior veep of multiplatform programming, believes YouTube’s original channels strategy worked as a “stimulus package” that encouraged experimentation and resulted in content that wouldn’t have been produced otherwise. “Smart people are thinking of YouTube as a marketing vehicle to build a community and an audience,” he said. “But if you’re trying to monetize content only on YouTube, it’s not going to work.”

Brand Builder

For Robbins, AwesomenessTV will continue to treat YouTube as the “first window” for content distribution. The video site offers an unprecedented platform for bootstrapping a new media company, he argued.

“We spent $5 million to build this business in a year. What did Oprah spend?” Robbins said, alluding to Winfrey’s OWN cable channel, in which partner Discovery Communications has invested more than $400 million.

AwesomenessTV’s secondary windows will include feature-film releases and distribution to TV networks; Robbins cited a half-hour show for Nickelodeon based on AwesomenessTV’s videos that debuted July 1.

“The long-term goal is to build audience and own eyeballs over time,” he said. On YouTube, “it might take a little time for ad revenue to catch up. But an eyeball is an eyeball is an eyeball — no matter where it is, on TV or online.”Related Stories: Special Report on Google

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