Seven Risk Factors In YouTube's Network Strategy

How quickly YouTube has gone from undesirable to the belle of the ball remains one of the year’s stories.  With the success of Machinima – which raised a mammoth $35 million round by many including Google – it was a matter of time before money poured into the sector from institutional and strategic investors via content networks aggregating audiences across existing YouTube channels.  Maker Studios is raising $40 million from Time Warner.  Not to be outdone, Fullscreen is courting Bertelsmann.  Before it’s said and done, I expect a lot more activity: investment, consolidation and acquisition.

I’ve long been bullish on YouTube, arguing in 2006 that it wasn’t such a bad business (a few days before Google’s $1.65 billion acquisition).  Then in 2008 I wondered why investors were backing Facebook funds when a YouTube fund seemed more logical.  Before long I ranked YouTube as the greatest U.S.-based digital media acquisition ever.  It’s clear that YouTube will only grow in power, but that doesn’t mean that it doesn’t come with risks or challenges. 

I’ve long argued that YouTube was the best advertising platform in the world, because it sits at the intersection of content and video, both central to the $500 billion global advertising industry. But its network strategy has at least seven risk factors to consider:

1)     YouTube isn’t Switzerland. YouTube belongs to Google, whose text ads proved to be the greatest advertisement product ever and arguably one of the best businesses ever.  What Google giveth, Google taketh away.  The same applies to YouTube, which has proven to be the one of the only games that matter in online video.

2)     What’s a house like that doing around a backyard like this? When you build your house on someone else’s backyard, it doesn’t usually end well.  Just ask Zynga.  True, Zynga found a bunch of suckers to unload the stock to in its IPO, but Zynga was able to do so by leveraging amazing financials and seemingly high margins. 

3)     Can you count? The numbers simply don’t add up.  YouTube content networks that aggregate YouTube channel audiences can’t claim to have high margins.  We get courted by content networks and media companies looking to roll up YouTube audiences, we run the numbers -- and the proposition isn’t obvious for them or us.  But, fueled by investor money, everyone overlooks the fundamentals and assumes “this time it will be different.”  Or, “we’ll find a sucker to unload this.”  It’s worth noting that some networks like the Collective have begun diversifying away from YouTube, in the Collective’s case through its Metacafe acquisition.

4)     Conflict of interest, part one.  Before long, it makes sense for the content network to shift away from third-party channels to create its own content.  This puts the content network at odds with the channels, which is what happens with ad rep firms.

5)     Random walk down Content Avenue. The kind of content that becomes popular on YouTube is very random.  Thankfully YouTube provides creators with a plethora of analytics, but that’s great only in hindsight.

6)     No real path to liquidity. Many of the would-be buyers of the YouTube content networks are invariably YouTube (or Google’s) competitors.  Say Facebook decides to get into content, or Yahoo wants more reach for its advertisers, or Microsoft think it wants a piece of the action – what then?  Of course, you can argue that media companies may prove to be the likeliest of buyers, but with Disney, Comcast (NBC) and News Corp (FOX) backing YouTube competitor Hulu, that seems unlikely.  Thankfully, we have Viacom.  Oh, wait.  There’s that lawsuit.  Alright, Time Warner?  Yep, that’s why Time Warner is looking at investing in Maker Studios.  So it should be smooth sailing and a clear road ahead, right?

7)     Conflict of interest, part two. It’s not just that at the micro level, content networks will invariably compete with the channels they aggregate; at the macro level, it’s naïve to think that Google/YouTube will never compete head-on with the networks.

 

YouTube has a growing financial incentive to promote its channels at the expense of third-party content.  Over time, YouTube will have a financial incentive to leverage the data and insight it has gained to create the content most likely to woo advertisers and audiences alike, retain intellectual property and boost its margins.

To conclude, up until recently, investors felt that any investment strategy based on online video would prevail thanks to the sector’s rapid growth rate.  Today, it’s clear this didn’t happen.  Similarly, just because YouTube is growing rapidly, it doesn’t mean any YouTube strategy will prevail, either.  The devil’s always in the details, and with YouTube in particular it’s unclear whether the devil you know is better than the devil you don’t.

 

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5 comments about "Seven Risk Factors In YouTube's Network Strategy".
  1. Paula Lynn from Who Else Unlimited , November 27, 2012 at 12:57 p.m.
    You help to make very complicated issues get to a comprehensible level.
  2. Ashkan Karbasfrooshan from watchmojo.com , November 27, 2012 at 1:08 p.m.
    Why thank you Paula, now if only my wife, friends and family would agree, too ;)
  3. Jeff Koenig from digiriot, INC , November 29, 2012 at 1:44 a.m.
    Excellent article, Ash. I agree with all points, though I hedge that by saying I believe the business models for YouTube Networks are still in that whole "this is a new model and still actively evolving" phase (albeit the tail end of that period of accelerated pivoting and development). It will be interesting to see how the model changes over time (and I may just be playing around with some refinements to it myself). The current strategic model for Networks on YT is to aggregate audience first, talent second, content libraries third, and IP last. They're thinking like ad networks, and pulling together the biggest audiences they can, rather than thinking like studios, and focusing on IP with an eye on diversified long term monetization streams beyond ad rev share. It makes sense in the current ecosystem, as much of the past/present video content on YouTube will have little library value in the years to come. As the content on YouTube matures and gains value, future Networks may be a little more insured against their reliance on YouTube's reach and audience.
  4. Ashkan Karbasfrooshan from watchmojo.com , December 1, 2012 at 7:12 p.m.
    Jeff - great observations and insights.
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