Though the popular video-streaming website, YouTube, has notoriously been free, it has managed to be successful by selling advertising. In fact, it was YouTube that popularized pre-roll video advertising, so much so that some users have come to despise these ads.
That put YouTube in a conundrum: keep playing ads they know users don’t like or make users pay a fee and ditch the ads? This is a similar conundrum several social media platforms encounter. Well, YouTube decided to do both. The free, ad-ridden viewing ability still exists, however, YouTube has introduced a subscription service called Red, where users can pay a monthly fee of $10 to not only have an ad-free streaming experience, but also to download videos, access YouTube Music (another new service), access exclusive subscriber-only content such as original series and movies, and more. This puts the video giant in direct competition with existing services such as Hulu or Netflix for video and Spotify or Pandora for music. Chief Business Officer Robert Kyncl stated that advertisers need not worry because 99 percent of the content will remain free to view, and that ad revenue will continue to grow.
When YouTube was created in 2005, it was the first platform of its kind and remains the number one video platform globally, attracting more than 1 billion—yes, that’s with a B—users a month.
Brian Robbins worked in the traditional entertainment industry for decades, getting his start on the ABC sitcom Head of the Class. Since then, Brian has produced TV shows such as Smallville and One Tree Hill and directed several feature films catering to the teenage audience. But when he noticed the way his two teenage sons consumed media, he was convinced that the future of youth entertainment wasn’t in broadcast or cable TV but in short-film videos, particularly on YouTube.
In 2012 Robbins launched a YouTube channel called AwesomenessTV, geared toward teenagers and preteens and featuring thousands of two- to five-minute videos ranging from talk shows to mini-reality shows. Within months, AwesomenessTV was ranking among the top YouTube channels on a regular basis. Around the same time, Robbins started noticing that several new media companies in Los Angeles were accumulating billions of monthly views on YouTube began bundling existing channels together to create a multichannel network, or MCNs. Mons were attempting to solve a problem that plagued YouTube since the beginning — how to organize such a vast and chaotic programming environment in a way that makes sense for viewers, creators, and advertisers.
Multichannel networks combine small amounts of crafted premium content produced in-house with large amounts of less polished content acquired from decentralized amateurs. As the MCNs gather up channels, they form programming clusters based on popular topics, which they then sell to advertisers. This business model has proven to be a success when it comes to generating a huge audience, but it’s not quite there with the profits. However, that is predicted to change. Some of the top multichannel networks include Maker Studios (55,000 channels, 8.5 billion monthly video views), Fullscreen (50,000 channels, 3.5 billion monthly views), Machinima (12,000 channels, 3.1 billion monthly views) and AwesomenessTV (88,000 channels and 1 billion monthly views).
Six months after creating AwesomenessTV, Robbins posted an invitation to anyone interested in becoming the next big YouTube star. These hopefuls were encouraged to join AwesomenessTV as a member of what they dubbed the ATV Network. After thousands of inquiries within 24 hours, Robbins knew they had something good. In the months to come, AwesomenessTV blossomed into a teen entertainment factory, and within a year, venture capitalists were looking to invest. DreamWorks Animation bought AwesomenessTV in May 2013 for $33 million up front and $84 million in potential payouts in the future.
On the heels of the DreamWorks acquisition, other media companies with backgrounds in storytelling and talent management have been drifting toward YouTube to snatch up top MCNs. “There is a tremendous amount of activity,” says Gian LaVecchia, a managing partner at the global media-buying agency MEC. “At the macro level, it’s about these companies moving aggressively to reimagine how they connect with digital, mobile, and social audiences.” In March, Walt Disney acquired Marker Studios for an initial $500 million, plus a potential $450 million, depending on future performance. Warner Bros. invested $18 million in Machinima, which focuses on programming related to video game culture. Chernin Group and AT&T are closing in on Fullscreen. And Scripps Network Interactive led a $25 million investment round in Tastemade, an MCN specializing in food.
This rapid consolidation of YouTube programming has thrown everyone, especially small players, into a frenzy of excitement and uncertainty. Some people are afraid these big companies will squash the creativity of the community. But on the other hand, these investments are helping creators create more premium programming that will lead to more premium advertising, which will finally unlock YouTube’s full economic potential.
There are some people that will tell you YouTube in 2014 is comparable to cable television in the 1980s, when a handful of entrepreneurs conquered a new distribution landscape, giving rise to programming brands like MTV, CNN and ESPN. “We are the paradigm, we believe, of what media companies will look like in the future,” says Ynon Kreiz, CEO of Maker Studios. Says George Strompolos, CEO and founder of Fullscreen: “We want to be the next Viacom, the next Disney, the Next NBCUniversal. We feel like we’re on that path. We’re laying the foundation for what we believe will be a massively valuable and massively profitable media company.”
There has already been a change in viewing habits reflected by decreasing TV and box office numbers. Over the next few years we should begin to see a faster increase in premium video content on YouTube, which will lead to premium advertising opportunities. The net global advertising revenue for YouTube is continually growing, from $1.2 billion in 2012 to a projected $3.4 billion this year according to estimates from EMarketer. Though it will always be secondary to TV advertising, we should expect to see tremendous growth in online advertising, especially on YouTube.