YouTube is the largest video distribution platform but maintains a revenue split that provides low margins for multi-channel networks (MCNs) and content creators. However, YouTube's scale and market power make it very difficult to compete with. Rather than seeing YouTube as the entire business, MCNs should focus on driving superfans to higher-margin owned and operated channels, produce some independent content, and build direct customer relationships. The future of online video is promising as it allows for low-cost testing and global distribution, but MCNs must offer technology support, production capabilities, and develop non-advertising revenue streams to achieve sustainable margins beyond being mere aggregators. Amazon poses a serious competitive threat to YouTube due to its existing
2. Background
2
2x Entrepreneur
(sold 2nd
to Salesforce.com)
Partner, Upfront Ventures
(large LA-based VC fund)
First investor in Maker Studios
(along with Greycroft)
Lead investor in Epoxy.TV
Looking for more investments
in video
Blog: BothSidesoftheTable
Video: http://www.youtube.com/show/thisweekinventurecapital
3. I’ll cover 5 topics
3
Why the Haters are wrong about YouTube
Why YouTube is wrong about the Haters
Why video is the future of the Internet
(& why most investors don’t yet understand this)
What’s an MCN to do?
Future of Video?
4. There has been a recent chorus of “can
you really build a business on YouTube?”
Jason Calacanis has written a few very articulate posts. But many are saying it private & in the press.4
5. The core of the problem starts with the
revenue share YouTube takes
MCN = multi-channel network, the term given to the group of large YouTube networks aggregating content5
MCN – 55% YouTube – 45%
Mobile App Developers – 70% Apple – 30%
Vs.
6. And much of the MCN talent takes 70%+
6
MCN – 55% YouTube – 45%
MCN –
30%
Talent – 70+%
7. So when you really look at it, MCN margin
looks like “ad networks” with very similar
properties
Ad networks typically have 15-17.5% margins on the ads they broker7
YouTube – 45%
MCN –
16.5%
Talent –38.5%
8. But MCNs have enormous scale & assets.
The best can break out if they:
8
Produce content (not just aggregate)
Build direct customer relationships
Develop O&O business
Have business models that aren’t only ad-
based
O&O = owned & operated aka your own websites or mobile apps.
9. You don’t “build a YouTube business.” YouTube is
a video distributor. People who make products
always have clashed with distributors / channel
partners.
9
July 29, 2013
13. Walmart is a powerhouse that can
command margins.
Source: statistic brain (http://www.statisticbrain.com/wal-mart-company-statistics/)13
$34
Billion
Sales / Month
4,253
Locations
1,000,000
Customers / Week
19
World Rank if a Country
8%
% of All US $ Spent
14. YouTube is a Powerhouse, too.
14
1 billion monthly uniques (40% of global online
pop)
6 billion hours per month
> 150 videos watched / year for every human
15. YouTube has 63% market share in total
videos watched (units) per month
15 Source: Nielsen Top Online Destination Video Sites Data, September 2012
16. YouTube has 4x the uniques of its nearest
competitor in the US
16 Source: Nielsen Top Online Destination Video Sites Data, September 2012
17. 17
4 billion
video
views /
month
260 million
subscribers
80%
audience
13-34
40%
mobile
30
engineers
50%
internationa
l
18. 18
1. Sell at Walmart: build scale &
brand awareness.
2. Fulfill at local retailers or your
own shop :
Serve more loyal / ardent customers
Better selection
Niche products
Much higher margins
20. YouTube is simply the top end of your profit
funnel
ARPU = Average revenue per user20
YouTube
Affiliates
O&O
Mobile Apps
Registered
Customers
Loyal /passionate
customers
Higher ARPU
Higher margins
With less volume
21. 21
The Name of the Game is
“Margin Expansion”
You can’t be stuck in
a 16.5% world
22. 1. Drive most ardent fans to highest margin
channels. Advertisers will covet these
viewers.
Note: O&O still has some distribution costs associated with marketing, bandwidth & storage22
YouTube – 45%
MCN –
16.5%
Talent –38.5%
Affiliate – 30%MCN – 31.5%
O&O –
15%
MCN – 46.5%
60%
20%
20%
Operating Margins % Traffic
23. 2. Must produce content & have some
formats that are talent independent.
Note: This is not saying you shouldn’t be “talent friends” just that you should also consider formats that are less dependent on talent.23
YouTube – 45%
MCN –
16.5%
Talent –38.5% 50%
30%
20%
Operating Margins % Traffic
Aggregated
Channels – 35.75%
Non-Talent Formats
– 45%
Talent –
19.25%
Talent
–10%
25. Your business business should be able to
achieve average profit margins of 50-60%.
25
Distribution
– 20%
MCN – 60%
Talent –
20%
Sustainable Operating Margins
Transmedia
Licensing / gaming deals
Internationalization
Then layer on even more revenue:
27. 5 Topics
27
Why the Haters are wrong about YouTube
Why YouTube is wrong about the Haters
Why video is the future of the Internet
(& why most investors don’t yet understand this)
What’s an MCN to do?
Future of Video?
28. 28
YouTube’s strategy seems to be
ignore the MCNs
(who have no alternatives)
YouTube maintaining split is possible
due to incredible market power;
however, it is unwise
Or persuade us how valuable they
are by providing us all this great,
free technology
29. 29
You can whack us but it just
makes us pop up elsewhere faster
It’s a classic “Innovator’s
Dilemma” situation
30. 30
And anyway if YouTube
wants a sustainable
ecosystem it needs
profitable partners
31. YouTube unquestionably provides value for
producers, much not fully appreciated.
CDN = Content distribution network. It moves content to the edges of the Internet to make it faster to consume.31
Storage
The YouTube Stack
Hosting
CDN
Tools (ie annotations)
Ad Sales
Audience Development
Infrastructure
32. 32
The strongest competition for
YouTube isn’t going to come from
the most likely sources:
Yahoo!, Microsoft, Facebook,
Twitter
Or even
Hulu, Netflix, HBO
33. The biggest threat is Amazon, the real
online “Walmart” who prices to win.
I reckon Amazon is the most serious threat to YouTube and that few people perceive this today.33
Storage
The YouTube
Stack
Hosting
CDN
Tools (ie annotations)
Ad Sales
Audience Development
Storage
Amazon Strong
Market Position
Hosting
CDN
Ad Sales
Could launch easily & aggressively
given consumer relationships
Dominates
34. 34
Amazon thrives on
“disruptive technology” -
Lower prices, lower margin,
win market share
YouTube could choose to stave
off competition by emulating
Amazon (AWS) now &
take a long view
35. Amazon is a powerhouse and has already
built streaming infrastructure.
Note: Nobody ever asked Amazon to cut AWS prices. They did it to engender loyalty & to keep out new competitors.
35
> 30
Million
Estimated Kindle Fire Users
$5.25
Billion
Sales / Month
219
Million
Active Users
> 35x
Price Cuts in AWS
$140
Billion
Mkt Cap
37. 5 Topics
37
Why the Haters are wrong about YouTube
Why YouTube is wrong about the Haters
Why video is the future of the Internet
(& why most investors don’t yet understand this)
What’s an MCN to do?
Future of Video?
38. Many VCs are convinced that video is a
“hits driven” business given historical model
38
High budgets due to scarcity of
time slots
Large marketing budget
required to build audience
No customer relationship, no
customer interaction
Thus hits driven business, with
large failure rate
Production Distribution
Maximize value of limited “slots”
+ 8 minutes of ads
No ability to run iterative process
Substitute TV stations for movie
theaters & same scarcity exists
8:00 – 8:30 PM
8:30 – 9:00 PM
Time
Slots
39. But online is a totally new game. Much
more programmable & predictable
39
Production Distribution
99%
Traditional TV =
$100,000 / minute
YouTube Video =
$1,000 / minute
∞
With unlimited
distribution you can
test content cheaply
Content can be
evergreen,
repackaged,
repurposed
Audiences become
global (ie Gangnam
Style)
40. 40
For the first time in history content
producers can build direct
relationships with their customers
Content businesses feel more like
Gilt Groupe than traditional TV
41. High costs, “star” founders & high failure rates41
Ironically consumer Internet
increasingly becoming a
hits driven business with its
own set of stars
42. Video Category HH:MM YoY Change
Traditional TV 5:11 1%
Time-Shifted TV (DVR, VOD) 0:26 10%
DVD / Blu-Ray 0:12 -3%
Online Video 0:16 54%
Mobile Video 0:11 9%
People are consuming > 6 hours of video a
day. That won’t change. The future of the
Internet will be video.
Sources: iab/GfK MultiMedia Mentor April 2013, Video from Nielsen Cross Platform June 2013.
42
Average Daily Media Usage
(HH:MM)
6:04 6:16
0:55 1:05
0:48 0:48
2:25 2:33
43. Consumers are obviously increasing video created
& shared. Tolerance for “less produced” video
increases with youth
Sources: YouTube, NPD In-Stat Research Report 2012, Onavo 7/2013
43
44. 5 Topics
44
Why the Haters are wrong about YouTube
Why YouTube is wrong about the Haters
Why video is the future of the Internet
(& why most investors don’t yet understand this)
What’s an MCN to do?
Future of Video?
45. 1. Technology is critical. You will not win
online without it. Either invest millions like
Maker, FullScreen, TasteMade or …
45
Use “tools companies” that are emerging
46. Important tech components
(examples)
46
Analytics & conversion tracking to understand what’s
working and guide production & audience development
A/B testing everything & every platform: content drop-off
rates, link text, thumbnail images, influencers
Audience development tools to build fans, followers &
influencers. Gather email addresses, mobile phone
numbers, “likes,” twitter followers.
Asset management to tag video and repurpose for future
distribution
Content management systems to build out O&O and
mobile businesses
O&O = owned & operated aka your own websites or mobile apps.
47. 47
Epoxy.TV helps with audience development
of individuals who watch a video
will watch at least one additional
video
48%
Creators
YouTubers, Brands, Agencies,
Networks
Epoxy drives follow-on views,
organic growth and audience
engagement
Viewers
Watch, share and engage with content on
preferred platforms and devices
view rates of shares with Epoxy
links are over two times the
view rate of sharing with a
YouTube link
2x view ratefor Epoxy follow-on viewers, on
average, over 4 videos are watched at
a time
4x exposure
48. 2. Production – Online media companies must have
production as well as packaging / programming
48
MCN: 10-30%Talent: 70-90%
These margins aren’t sustainable media company
margins, they are “talent agency” margins
Without some production you’re just a middle man,
which often get squeezed.
49. 3. Build Direct Customer Relationships – it is the
currency of online power
49
Cookies
(for targeting)
Email Addresses
Social Follows
Social Integrations
Mobile
Application /
Push Notification
Easier to get
More valuable
50. 4. Globalize – no physical distribution limitations so
online video businesses can be truly global.
Source: YouTube stats, 201350
YouTube Traffic
The best MCNs will
build truly global
operations
51. 5. Create non-ad revenue streams such as
licensing, gaming & transmedia packaging
Statistic Brain Star Wars Total Franchise Revenue51
70% of Star Wars Franchise
Revenue outside of movie sales
Many recent examples of
licensing successes
52. 5 Topics
52
Why the Haters are wrong about YouTube
Why YouTube is wrong about the Haters
Why video is the future of the Internet
(& why most investors don’t yet understand this)
What’s an MCN to do?
The Future of Video
53. The Future of Video
53
Lower quality
Non-linear storylines
Think video games
Mobile
Templatized
Personalized
Who the F knows, but some thoughts …