One of my projects over the past few months has been working with the Internet and Interactive Entertainment research team at Jefferies & Co. on in-depth industry research. The latest report I helped write was on YouTube, and if you are in the content business, especially involved with a Multi-Channel Network (MCN) or thinking about investing in one, I would recommend a close read as it relates to MCN viability in building higher margin businesses.
One of my stock lines about the digital media industry in the aughts has been: media companies should have acted more like ad networks, and ad networks should have acted more like media companies. The short version of this is that both types of companies are in the business of aggregating audience attention against which they sell advertising. (I have a long version with “the math” if anyone wants to hear it.) To compete in a world where digital platforms claim outlandish reach figures, media companies needed a larger audience to sell to traditional brand advertisers (and video too, of course). At the same time, ad networks which usually had large reach needed greater control over content to sell to brand advertisers so as to boost pricing, margin, and prevent being squeezed out by programmatic as the world shifted in response to practically infinite inventory.
So following this strategy, media companies would use their valuable brand umbrella to sell media that wasn’t their own (like an ad network), managing margin and inventory risk against their own content creation. And ad networks would invest in owning content and building audience to manage inventory risk and drive CPM and margin upwards. Both parties could use whatever programmatic stuff they wanted, but in the high CPM brand/video world this would be more likely private exchange selling than it was buying inventory on shitty public exchanges or audience through nefarious development engines. I unsuccessfully pushed for building audience tools and owning content when I was still at Rhythm while watching the rise of the MCNs with more than a little interest. With the benefit of time spent not looking for some way to win (or survive), I’m pretty sure that the path from network to media company is difficult to impossible.
MCNs are not unlike online video ad networks themselves, but represent one evolutionary step toward a media company due to its talent relationships. An MCN will put together sales contracts to represent individual content creators. An MCN will provide technology support, usually in the form of marketing and analytics to drive audience. And maybe an MCN will bring content creators in as employees or fund and produce the content under its auspices. Their very existence owes somewhat to rules YouTube put in place for ad networks selling against content creator inventory in the first place. As a result, MCNs hold a closer relationship to the talent than a premium ad network does (see also Tremor, Yume, etc.) while aggregating similar volume and generating a similar gross margin to an ad network due to the “YouTube Tax” of roughly 45%.
The argument that MCNs can grow their margin completely rests on them acting more like media companies and finding higher CPM, higher margin distribution for their talent relationships. I love this idea because I wanted to do it, but now I’m hard pressed to think of any network over the years that has made that transition and also seen a significant exit. There are too many pressures in low-end, programmatic, ad tech, and there is too much competition in traditional media. Sometimes strategic ideas just don’t make sense given a time window, capital requirements, and return requirements. That Disney would pay $950 million for Maker to accelerate something they could have done themselves still baffles me. Disney could have had access to the same talent pipeline with a little work, and at some point the venture capital financing engine will get tired of funding MCN losses resulting in lower acquisition values.
There’s definitely a business for content creators on YouTube, although I think increasingly it means handing over monetization to YouTube and trusting in their sales team. In terms of the MCNs, the only company making a lot of money on YouTube is YouTube, and the smartest media company, in my opinion, has been Dreamworks who has made small, targeted investments in YouTube with a specific audience and content personality. I do keep discussing the idea of building YouTube without YouTube with those in the industry, but my fear is that we’d end up doing what YouTube has done: replace one media gatekeeper with another… meet the new boss, same as the old boss. It’s what Jonathan Zittrain, Woody Allen, and CBS have been trying to tell for so long.