YouTube 3.0: Are They Paying Enough? (From the Magazine)

At 26, Lindsey Stirling is already a seasoned YouTube veteran -- a Los Angeles-based artist who has blazed a career path through the platform, garnering more than 3 million subscribers whose views generate enough steady advertising revenue to pay her bills.

Stirling’s story has been told numerous times -- landed a spot on “America’s Got Talent” in 2010, made it to the quarterfinals only to be drummed off because judges felt she lacked star quality, picked herself back up and turned to YouTube, where fans ultimately judged her differently.

That was then. Today, Stirling and YouTube have found themselves at the threshold of a new age -- one that presents both with challenges as they mutually rely on each other to achieve their respective ambitions: Stirling as a mainstream artist -- and not just a YouTube artist -- and YouTube as the world’s most important platform for all video content, not just user-generated videos.

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Like Stirling, YouTube has gone through several phases during its brief existence. When it launched eight years ago, the focus was on building audience and scale. When YouTube celebrated its fifth anniversary in 2010, the platform embarked on its second phase -- a search for premium content, from both professional filmmakers and a burgeoning class of pro-am content creators like Stirling, whose videos make up in loyal fans what they lack in lavish budgets and special effects.

Now comes the third, and arguably most critical, phase for YouTube: Making money. To be sure, YouTube has generated billions of dollars in advertising revenue. In 2013 alone, according to estimates from Barclays Bank, YouTube is expected to ring up $3.6 billion in revenue for parent company Google, which bought the online video company in 2006 for what then seemed like a princely sum of $1.7 billion. Barclays projects that YouTube’s revenue will grow 20% in 2014 to $4.3 billion. Because Google isn’t required to report YouTube’s financials, few outside the Silicon Valley technology company know exactly how much advertising YouTube generates and whether it’s profitable.

Nevertheless, YouTube is laser-focused on making its platform pay off, for both itself and content creators like Stirling. Its ability to do so also will affect the fortunes of a growing class of companies that form a so-called “YouTube economy.” These include startups that provide YouTube-specific tools and services: Zefr, Audiam, AdRev, Maker Studios, Fullscreen, BigFrame and Rumblefish, to name a few.

The irony is that the more successful YouTube becomes, the more others expect from it. In the early years after the company introduced its Partner Program in 2007, allowing its more popular content creators to share in the ad revenue generated from their videos, getting a check for any amount from YouTube was a giddy novelty. In some ways, it still is -- no other major social media platform pays users for the content they post.

But with livelihoods, careers and business plans dependent on YouTube, its content partners are demanding more: a greater share of the revenue, a bigger say in the design of the site, more traffic directed at their videos and richer fan data, including subscriber emails, among other things. As a result, YouTube’s ability to balance its own needs with the many and varied interests of creators who upload more than 100 hours of video to its platform every minute could very well determine how smoothly this next phase of monetization goes.

“I could definitely live comfortably off of the money I get from YouTube, if that’s all I wanted to do,” Stirling says. “But I want to do more. I want to be a top touring artist, as well as a YouTube artist. But touring is expensive, and YouTube money alone can’t pay for that.”

The Hand That Feeds

In June, Los Angeles entrepreneur Jason Calacanis blasted out an email titled “I ain’t gonna work on YouTube’s farm no more.”

His provocative premise: “If you are a content company trying to build a ‘YouTube business,’ you are investing in your own demise.” Calacanis argued that YouTube’s take of the ad money -- at approximately 45% -- is too high, and that YouTube needs to do a better job of connecting content creators with their audience.

In a second email a week later titled “A YouTube Creators’ Bill of Rights,” he demanded, among other things, that YouTube lower its take from 45% to 30% to be more in line with iTunes and Google Play, that viewers have the option to share their email addresses with creators and that creators design and customize 80% of their channel pages.

While not everyone agreed with Calacanis, his rant echoed similar complaints within the YouTube community, sparking a debate about how the platform could do a better job of helping its creators make more money.

The most popular rallying cry among YouTube critics centers on the split that the company offers to more than 1 million content creators who are in its Partner Program, which is open only to the platform’s more prolific and popular video contributors. According to Calacanis and others, program members receive 55% of the ad revenue generated by their videos, with YouTube keeping the remainder. YouTube declined to verify the split, citing confidential contract terms.

Whether a 45% take is reasonable depends on how one views YouTube -- as a social network or content distributor. Compared with Twitter, Pinterest and Facebook, which don’t share any ad revenue with their users, YouTube’s split is generous, says Steve Raymond, chief executive of BigFrame, a boutique YouTube talent agency and multichannel network. But when compared with digital content distributors like iTunes, Google Play or Xbox Live, all of which take 30%, YouTube’s 45% looks relatively high, Raymond says.

The pressure to get YouTube to provide a more generous share also comes from the ad rates that creators earn from the platform. At around $2.50 per thousand views, many individual creators complain it’s not enough to earn a living. To generate the amount of income equivalent to federal minimum wage, a YouTube creator’s videos would need to garner at least 500,000 views a month, or roughly 6 million per year.

YouTube declined to respond directly to Calacanis’ arguments, but in interviews with Billboard, senior executives addressed several of his points, including the revenue split.

“When I think of what YouTube is offering, it’s expensive to do what we do,” YouTube director of content partnerships Chris Maxcy says, adding that the platform spends hundreds of millions of dollars a year developing and maintaining its streaming infrastructure and ­supporting an ad sales force that’s largely absent in a pure download business.

“It’s also hard to compare YouTube with download stores, because we’re often paying multiple parties -- creators, publishers, labels and other rights holders -- whereas download models pay only the publisher,” Maxcy says. “When you add all that up, we clearly pay out to rights holders the majority of what we bring in.”

Ironically, this tension is good news for YouTube, because it signals a turning point in the video giant’s tumultuous relationship with the entertainment industry, where monetization has replaced copyright as the No. 1 issue.

“YouTube is the new Comcast,” says Mark Suster, managing partner at Upfront Ventures and an investor in Maker Studios, whose 60,000 YouTube channels generate about 4 billion views a month. Suster, referring to the recent showdown between the cable company and CBS over carriage fees, believes that a similar dynamic is happening with YouTube and its creators. The showdown earlier this year between YouTube and Vevo is an example. The two privately negotiated a confidential revenue split, with YouTube parent Google investing between $40 million and $50 million for a stake in Vevo.

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