YouTube competition 3

If there could be said to be a poster boy for YouTube, it may well be Freddie Wong. Known online as FreddieW, the 29-year-old is the creator of “Video Game High School,” a comedic sci-fi series featured on billboards and in TV, print and online ads, as part of YouTube’s fall 2014 promo campaign. Some parts of the “VGHS” three-season run were shot at YouTube’s own massive production facility in Los Angeles, with Wong the first creator to utilize the space. But when the time came for Wong’s digital studio, RocketJump, to shoot his next project, he says YouTube didn’t exactly jump at the idea.

“We said, ‘Here’s the show we want to do, and here is the budget we need,’ ” he says. “And they hemmed and hawed, and said, ‘Sure, do it for more minutes and for less money.’ ”

Unsatisfied with YouTube’s offer, RocketJump and Lionsgate Television steered the project to Hulu, where the untitled eight-episode series will be available exclusively. “Hulu understood how much content costs,” says Wong. “By remaining defensive, YouTube is losing various aspects of video — longform, for example — to other companies.”

Justin Metz for Variety

Hulu is not the only company complicating life for YouTube these days. It’s bad enough that social-media giants like Facebook, Twitter and Snapchat have upped efforts to bring video to their services — and plan to more aggressively compete with YouTube for advertising dollars. But there are also upstarts like Vessel and IAC-owned Vimeo, which, like Hulu, are signing deals with some of YouTube’s homegrown talent, and promising creators bigger bucks for their work in exchange for exclusive rights.

While YouTube’s topline metrics don’t currently indicate any deviation from the growth that fueled its incredible scale — from time spent viewing to total hours uploaded — the competitive landscape is changing. “There’s a critical mass of threats that represent real challenges to YouTube’s complete dominance for the first time,” says Peter Csathy, CEO of investment and consulting firm Manatt Digital Media.

Indeed, some disgruntled partners aren’t convinced the No. 1 vidsite will be able to fully retain its share of eyeballs moving forward. A top exec at one large multichannel network puts it more bluntly. “YouTube has positioned itself to potentially blow the biggest halftime lead in the history of sports,” he says.

Jamie Byrne, YouTube’s director of content commercialization, sees the threats facing the company quite differently. He maintains that new entrants and distribution models for Internet video are a healthy — and necessary — part of the sector’s maturation, as ad dollars flow from TV to the Internet. “We need a robust video market,” he says. “That means lots of creators, lots of advertisers … and it also means there will be other distribution options for creators.”

YouTube recently marked two milestones: The startup’s founders registered the YouTube.com domain name Feb. 14, 2005, just months before going live in May of that year. But perhaps of more significance than the company’s 10th birthday to CEO Susan Wojcicki, who took the job in February 2014, is that she’s arguably facing a more challenging environment than the one she encountered when she became topper.

The longtime Google ad guru (she joined in 1999 as employee No. 16) has launched several marketing campaigns centered around popular YouTube talent in an appeal to Madison Avenue, consumers and the site’s community of content producers. Under her watch, the company has made numerous improvements to its platform for creators, and also initiated a sales program, Google Preferred, to hawk premium-priced ads for the top 5% most-popular channels in categories like music, beauty, food and entertainment. YouTube also rolled out a secure app for kids, looking to juice viewership among the 5-and-under set.

The company is already a multibillion-dollar advertising juggernaut, although its profits may be negligible — or nonexistent. Last year, the service pulled in about $4 billion of revenue, up from $3 billion in 2013, according to a Wall Street Journal report citing anonymous sources. However, YouTube basically broke even, after accounting for content and infrastructure costs. Google does not disclose financial details for YouTube, but says payments to content partners increased 50% in 2014, year over year, a pace it claims it has maintained for the past three years. And, Google says, revenue for the top 100 channels in the Google Preferred ad program climbed more than 70% last year.

But YouTube’s growth trajectory could be thrown off by Facebook and other aggressive new players in the video space. Facebook is coming on strong in video. At the end of 2014, the world’s biggest social-media company delivered an average of 3 billion views per day of video uploaded to the social site — up from 1 billion daily over the course of the summer. It’s worth noting that Facebook counts a view as any autoplay video that is visible for at least three seconds, whether users click on it or not. Still, 3 billion is a very big daily number.

“We are seeing really good fraction in all categories,” says Fidji Simo, Facebook’s director of product for video, including sports highlights and TV-show clips shared by media companies.

With 1.39 billion users worldwide at the end of last year, Facebook also is courting celebrities like Shakira, Beyonce and Justin Bieber to post videos directly to fans. And it is exploring the possibility of adding more premium video to the service, akin to its deal with the NFL to deliver videoclips sponsored by Verizon Wireless: For this year’s Academy Awards, it cut a deal with ABC to live-stream the “Oscars Backstage” video feed directly on Facebook.

Ad agencies are taking notice of social networks’ stepped-up focus on video, seeing a huge opportunity to exploit their users’ sharing of creatively produced marketing content. “Compared to YouTube, Facebook has a beautiful read on what people like,” says Brent Smart, CEO of Saatchi & Saatchi NY. “And it’s much easier to share video on Facebook.”

Meanwhile, in January, Twitter rolled out the ability to capture, edit and share mobile users’ videoclips of up to 30 seconds, expanding beyond its looping, 6-second Vine service. The company already has dozens of media partners tweeting video-enabled ads through the Twitter Amplify program.

And Snapchat, the ephemeral-messaging service that has an estimated 100 million-plus active users who are mostly millennials, debuted in January a video and news service, Discover, with more than a dozen media partners — including CNN, ESPN, Food Network and Vice — to share daily updates that remain available for 24 hours. In late January, Snapchat bowed its first scripted series: a shortform AT&T-sponsored show called “SnapperHero,” produced by Fullscreen with YouTube and Vine stars (including RocketJump’s Wong) whose fans interactively design their favorites’ superheroes.

Notably, however, unlike YouTube, none of the ad-supported social services has shown any ongoing ability to significantly monetize video content.

That means for media and entertainment companies, YouTube stands alone as a source of revenue, if not yet prof-it, among open Internet video platforms. Facebook and the others are considered to be merely promotional vehicles. But that could change down the road, says Keith Hindle, CEO of digital and branded entertainment for FremantleMedia Worldwide, which touts itself as the largest provider of professional content on YouTube, with 9 billion views of content globally last year from its TV shows, including “American Idol.”

“YouTube is an incredibly important platform,” Hindle says. “You get frustrated with them from time to time — with the terms they have, it makes it hard to justify higher content costs. But it adds up if you have significant scale, as we do.”

Could Facebook, Twitter or someone else provide a more generous split to content creators than YouTube? Per the well-publicized terms of YouTube’s standard revenue-sharing agreement, content owners typically receive 55% of ad money. Vessel is already offering a 70% ad split to creators, while Vimeo pledges to pay 90% of transaction fees back to partners. Bigger YouTube competitors like Facebook could move to a 70-30 model to attract creators. But that might be a difficult maneuver for large, publicly held companies that historically haven’t paid a dime for the content that flows across their platforms.

To Hindle, competition is a good thing for creators and for YouTube as well. “It’s going to help (YouTube) look at different ways of helping content partners,” he says.

YouTube is certainly not in danger of becoming marginalized anytime soon. It’s effectively the second-largest search engine in the world after Google itself. An entire generation of viewers has grown up believing that “Internet video” is synonymous with YouTube, and it’s their default destination to find music, viral hits, comedy sketches, how-to tutorials — pretty much everything.

“If you’re in digital video and you’re not on YouTube, it’s like saying, ‘I’m building a website, but I don’t want to be in Google search,’ ” says Kathleen Grace, chief creative officer of New Form Digital Studios. The L.A.-based startup, which focuses on producing scripted entertainment, is backed by Discovery Communications, Ron Howard, Brian Grazer and other Hollywood execs.

Meanwhile, there’s a separate set of rivals using a subscription business model that aims to lure top talent and producers, skimming the cream off the top of the massive base of more than 1 million YouTube creators who make money on the site.

Exhibit A is Vessel, the startup formed in mid-2013 by two former Hulu execs, founding CEO Jason Kilar and chief technical officer Richard Tom. The pitch to consumers: For $2.99 per month, Vessel provides exclusive access to a selection of digital video content at least three days before it’s available on YouTube (or any other free service). The tantalizing proposition for creatives on YouTube is that they could make up to 25 times as much money by granting Vessel first-run rights to their material, and sharing in subscriber fees, according to Kilar.

“The free, ad-supported business is going to grow over time, simply because of the rapid growth in smartphones, which are wonderful screens to watch video on,” Kilar says. That, he posits, will fuel subscription-based services like Vessel, which has attracted more than two dozen YouTube stars and other media partners to date, such as Machinima, Dance-On, Tastemade and Legendary Pictures’ Nerdist Industries; digital stars Shane Dawson and Connor Franta; and companies including A+E Networks and Warner Music Group.

And Vessel isn’t alone. Other companies that have inked deals with YouTubers, Viners and other digital talent for paid-distribution windows include Vimeo, Hulu and AwesomenessTV.

Moreover, there’s yet another class of YouTube rivals, represented by companies looking to license or fund content for reasons unrelated directly to selling ads or subscriptions. Samsung Electronics, for example, last fall launched Milk Video: a proprietary shortform mobile vid service available only on its Galaxy smartphones and tablets. The consumer electronics firm has deals for more than 70 channels of video content, some of it exclusive, with entertainment companies and other content owners.

New Form Digital is among those looking to take talent from YouTube to other, more profitable platforms. In January, the upstart studio announced a deal with Vimeo to sell four scripted series from YouTube creators exclusively on Vimeo’s on-demand service.

These other platforms are showing the chinks in YouTube’s armor, says Grace, who previously was head of creative development for YouTube Space LA. “YouTube is a great place to build your audience,” she notes, “but it’s hard to make money on ads alone. Vimeo has a specialized audience, like cable TV.”

To respond to the incursions onto the turf YouTube has largely controlled for years, Byrne says the company will continue to invest in marketing its talent, as well as in tools for creators, such as the Content ID copyright system, which lets them know when other creatives are using their material, and will keep pursuing premium ad rates for the best content.

Courtney Holt, chief strategy officer of major multichannel network Maker Studios, says his company is seeing YouTube’s efforts to create premium advertising inventory pay off. “In the last six months, I have not heard the ‘quality’ question about our content,” he says. “Marketers are paying more attention to us.”

At the same time, Maker has struck a deal with Vimeo to help some of the smaller YouTube video creators cash in on their work. Under the in-kind agreement, which continues throughout the year, a portion of Maker’s network of 55,000 creators will gain access to tools for distributing content on Vimeo’s VOD platform, and Vimeo will fund and distribute in exclusive windows on Vimeo-on-Demand original content from a select group of Maker creatives.

YouTube, too, is plowing bucks back into its most popular talent — a bid to keep its top creators from jumping to Vessel, Vimeo or others. With the YouTube Originals initiative, the Google subsidiary is paying its biggest stars to produce family and comedy programming, whether scripted or unscripted. That content is slated to debut in exclusive windows by the end of 2015.

The approach is different from its $200 million original-channels strategy that kicked off in 2012, the company notes. That previous effort included a mix of traditional media entities, production firms and native YouTubers, whereas the current push is focused squarely on the last group. YouTube has not revealed whom it’s working with or how much it’s spending, but budgets are said to be $2 million or more per series, according to industry sources.

In some cases, Byrne says, YouTube will pair creators with “top industry experts,” meaning Hollywood producers and other execs, to shepherd projects along. And, he says, the company will help license the content for a secondary window. “YouTube Originals is important because we want our creators to realize their ambitions,” Byrne says.

On a separate track, YouTube is exploring the prospect of launching its own subscription VOD service, modeled on YouTube Music Key. Launched last fall in a closed beta test, Music Key provides unlimited, ad-free access to musicvideos and some 30 million songs on Google Play Music, for a six-month introductory price of $7.99 per month.

An exec at one YouTube partner says reps from the vidsite reached out late last year about an SVOD licensing deal. But the offer came with a warning: If the partner didn’t agree to the terms of the subscription service, it would be excluded from any future ad revenue — a tactic YouTube has used in dealing with independent music companies that refused to get onboard with Music Key. YouTube declined to comment on its SVOD plans.

Other YouTube content partners think a subscription plan could be a smart move. Keith Richman, president of Defy Media — a major producer of content for 12- to 34-year-old audiences, and whose roster features comedy duo Smosh — says Google should be considering all possible ways to facilitate moneymaking options for talent.

“Anything YouTube does to create new monetization, we would benefit from,” he says. “If you look at the bigger picture, with Google Play, they are also in position to have the best credit-card opportunity to get someone to pay for something.”

In the grand scheme of things, some industry-watchers think it’s wrong to characterize the new players in the online video space as a pack of rabid rivals looking to eat YouTube’s lunch.

The surge in Internet video consumption overall will primarily cut into the TV business, which has seen a steady decline in ratings, according to Allison Stern, VP of marketing for Tubular Labs, an online-video measurement startup.

“It’s not that YouTube is under attack,” she says. “It’s TV and traditional distribution that are in danger of eroding. In terms of online video, the pie is growing.”

However the larger trends play out, content creators and their representatives see a more competitive Internet-video landscape as beneficial.

“YouTube’s in a great position, because it provides both reach and monetization,” says George Strompolos, founder and CEO of Fullscreen, a multichannel network that delivers 5 billion views per month. “But other solutions will emerge, and savvy creators will find a way to build their audiences there.”

Agency reps, too, see a growing Internet tide that will lift all ships. CAA, which once worked exclusively with YouTube for online talent, now deals with about 20 different video platforms. “It would be naive to say YouTube will be the only player standing tall,” says David Freeman, co-head of the agency’s digital content packaging group. But, he adds: “I don’t think YouTube is in jeopardy.”

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