November 2012 I wrote about a relatively new form of business - multichannel networks (MCNs). Back then (in the old days?), many entrepreneurs were flocking to invest in these MCNs - new ventures that offered services to online filmmakers in return for a share of the advertising revenue that was expected to flow from YouTube's changing business model.
As I wrote in 2012, YouTube was "moving toward niche channels that aim to deliver targeted content to identifiable audiences that visit the same niche channels over and over again."
And, as Variety explained on November 21st, 2012: "[m]ultichannel networks [were designed to] provide the production, marketing and technology infrastructure that allows [non-studio filmmakers] to focus on the creative in exchange for a cut of the revenues generated by everything from advertising to merchandising."
The revenue models differed slightly from one MCN to another, but basically (as Andrew Wallenstein writing in Variety observed): "It's not terribly different an arrangement from the classic Hollywood studio-talent relationship, though YouTube creators tend to hold onto ownership of their intellectual property (deal terms can vary).""
Now, just nine months later, comes word that the some early investors in MCNs are getting restive.
In an August 29th, 2013 post to readwrite.com, Fruzsina Eördögh lays out why some in the MCN world are saying the YouTube business model - that model many observers believed would be the key to unlocking the riches of advertising on YouTube for small filmmakers - is “screwed.”
Citing numerous speakers at the recently concluded VidCon (August 1-3. 2013), Fruzsina Eördögh reports in readwrite.com that many MCN's (even "the MCNs that have hundreds or thousands of channels") are struggling to turn a profit in an "unsustainable economy."
One (popular if pessimistic) view has many of the current MCNs being absorbed. For example, at VidCon Fruzsina Eördögh interviewed Peter Bray, the director of digital at the global ad agency Saatchi & Saatchi, who predicted that many MCNs "will “be swallowed” in a impending period of “aggregation,” among themselves and by traditional media companies."
Why are experts like Peter Bray predicting a round of consolidation (or collapse?)?
Why are many MCNs struggling to turn a profit... even as some MCNs are succeeding in connecting advertisers with millions of users?
After all, the June 2013 comscore numbers show users consuming ever-increasing amounts of online motion picture content: "Americans viewed a record 20 billion video ads in June , with Google Sites ranking #1 with 3.3 billion ad impressions."
What's gone wrong?
It seems that the numbers support what many MCNs are saying: They're upholding their end of the bargain - creating content that gets millions of views.
But, as many MCN investors are just now finding out, insufficient revenue is flowing back to them from “do no evil” Google.
As Fruzsina Eördögh reports: "The search giant takes 45% of all revenue from YouTube ad sales."
And, with the costs of operating an MCN, the amount being returned to MCNs and filmmakers just isn't sufficient.
Here's what some observers who are critical of Google are saying:
Yuri Baranovsky, a founder of HLG Studios wrote in an email to Fruzsina Eördögh that the “Partner Program needs some serious revamping” because “right now, it feels an awful lot like a filmmaking sweatshop where quality is traded for sheer quantity at low, low prices.”
Baranovsky continued: "Yes, some creators are making millions, but those are the exceptions — for the most part, I think many are forced to spew out weekly content (quality be damned) for an entire year while barely getting enough money to survive. That's not sustainable nor does it create very good art."
While Google clearly doesn't owe any filmmaker a living, Yuri Baranovsky wasn't alone in questioning the share of revenue that makes its way back to the MCNs from Google's YouTube:
Outspoken YouTube critic Jason Calacanis’ closing VidCon keynote was "all about rallying YouTubers to petition YouTube to give them “a better deal" — that is, take a smaller share of ad revenue."
So several leaders and many others in the MCN world are clamoring for a better deal from Google...
Is everyone who has gone into business with an eye toward making money from ads on YouTube suffering?
Well... Google isn't hurting.
Google's latest total reported ad revenue is up 15% year-on-year, with income from operations hovering around 25%. Even though only a fraction of that total number comes from YouTube ads, there's the distinct possibility that Google will be breaking the $50 billion mark in total ad revenue in 2013.
And the current system seems to be working for advertisers too...
For example, advertisers seem to be happily rushing into the online ad space - slapping ads on YouTube videos at an astounding rate. And increasingly those ads are made for mobile devices: On June 5th, 2013 Bloomberg.com reported that YouTube had "tripled advertising sales on mobile devices in the past six months... contributing as much as an estimated $350 million to revenue at the video-sharing website."
So Google and advertisers seem to be happy with the current system.
And Google and the advertisers aren't the only companies with robust business models built around online video.
According to Fruzsina Eördögh another "bright spot in this otherwise ailing digital economy are the analytics and YouTube tool companies that show no signs of hemorrhaging money."
Many companies that are analyzing data about YouTube users - and helping brands and others to implement strategies based on that information - are apparently currently doing very well.
Dane Golden, an independent marketing analyst for hey.com, believes YouTube’s future will be “founded on big data and audience engagement tools” and “any company that is doing this for a business should be tracking analytics on several different levels.” Golden went on to cite the management tool ZEFR [used by movie studios and other major brands who advertise on YouTube], along with MCNs Maker Studios and Fullscreen, as great examples of companies in the YouTube-sphere using big data right."
So that's where investors should be looking? Companies that are harnessing Big Data to help advertisers reach engaged consumers?
Not so fast... Even this segment may not be sustainable. According to Revision3's Jim Louderback, brands may soon learn how to do the YouTube analytics work themselves: “In the early days of Facebook and Twitter you had all these social media consultants who would come in and help you tweet and help you Facebook, but now all those companies have moved this in-house and the same thing will happen to YouTube."
UPDATE September 16th, 2013 Has the media been wrong about MCNs?
UPDATE: September 29th, 2013 In a speech at TheGrill media conference in Beverly Hills that was covered by pandodaily, Maker Studios’ CEO Ynon Kreiz gave an upbeat report about his company. Kreiz said that Maker is the largest network on YouTube, with more than 260 million subscribers around the world across 60,000 channels. According to Kreiz, Maker currently generates 4 billion monthly video views – double its volume from a year ago - and Maker expects to exceed 5 billion monthly views by the end of 2013. But is Maker profitable? Kreiz didn't (wouldn't?) say. But he did say that Maker will grow its revenue 300 percent in 2013 - after growing revenue 300 percent in 2012. And, as to whether the 45% that YouTube takes from ad sales before sharing with Maker and the filmmakers is sustainable, here's what Kreiz had to say: "We would like YouTube to take 0 percent and they would probably like to take 99 percent. But this is the current market environment. When 45 percent was established, there were certain economics to running a player that have since changed. But there are multiple monetization products that we use. Advertising is one, but brand integrations and others are also part of our business." So the bottom line is that Maker isn't relying only on revenue from YouTube and, as Michael Carney writing in pandodaily observes: "Until we see profitability figures, it will be hard to say definitively that Maker Studios has broken out and found a scalable, sustainable business model. But at a time when the walls seem to be closing in on many of its competitors, the company at least seems to be headed in the right direction."