

Editor's note: Read Jason's followup to this piece, 'A YouTube Creators' Bill of Rights,' here.



Summary: I spent the last year as a funded YouTube partner and was one of the top ~10% of content creators who had their deals renewed in ‘cycle two’ -- and I turned down their money.



In this editorial I explain:



a) Why YouTube is an amazing platform

b) The five reasons I turned down YouTube’s funding

c) Why content owners investing solely in YouTube are investing in their own demise

d) How you can outgame YouTube and suck massive value from the ecosystem

e) Exactly how Twitter, Hulu, MSN, Yahoo and Facebook -- or a next-gen YouTube -- could each take on YouTube





Background

=================

Just over a year ago, YouTube asked me to pitch them on making shows that would take their service from a UGC (user generated content) juggernaut to a more advertiser-friendly platform.



They needed better-looking content, produced regularly, to get the big advertisers.



Also, to be frank, they needed reliable and appropriate content. Much of YouTube is comedy, and a lot of it isn’t exactly ‘sponsor friendly’ (see Shane Dawson).



They needed folks with experience in this space, so they reached out to people like me who had a track record in web content.



The deal was simple (according to public reports): we give you seven figures to make great shows, we sell the ads, we promote your content and then we split the revenue.



Great deal! What could go wrong, right?



[ Note: I’m not allowed, due to my agreement with YouTube, to tell you our exact split. However, I’ve spoken to over two dozen other funded content partners, and they told me their split was 45% to YouTube and 55% to the content creator. Again, I can’t tell you mine, but a smart person might conclude they gave everyone the same deal. ]



We built nine shows, three of which became a HUGE success:



‘Wellcast’

http://youtube.com/watchwellcast



‘XHIT’

http://youtube.com/xhit



‘MMA Surge’

http://youtube.com/mmasurge



Not quite TV quality, but niche enough to get loyal audiences (there’s 50 things you need to do to succeed, but niche is a big part of that).



These three shows grew 5x-20x in minutes-watched-per-week since January 1 of this year. ‘XHIT’ grew from zero minutes to 1.2M minutes in just nine months. XHIT exploded: http://jc.is/xhitminutes.



We figured out the YouTube ecosystem thanks to their playbook and studying what other folks were doing. There are maybe 50 principles that any YouTube content creator should be aware of and understand:



I. People subscribe to people -- not brands -- on YouTube. So much so that the name of the game on YouTube is to do spinouts. Have Robin Williams on ‘Happy Days’ as Mork, then spin out 'Mork From Ork' if he’s likeable



II. Anything funny or juvenile (e.g., Google 'milk prank')



III. Do anything a 10-to-15-year-old would show a friend



IV. Music, action sports or dance



V. Unbelieveable/that’s incredible type stuff; VI. traffic recirculation (aka collaborations between channels);



VII. Audience engagement in comments.



I could go on and on (in another email).



Building audience on YouTube takes about a year (or two) to figure out, so YouTube’s investment strategy was brilliant: “Here’s a year's runway; by then you’ll have figured it out or you won’t.”



Despite all that growth, however, in May, I turned down YouTube’s offer for additional funding. Additionally, we’re exploring the notion of divesting ourselves of our YouTube channels.



That’s right, with 20m-30m views a month, over 1m subscribers across our channels and funding from YouTube, I’m moving on.





a) Why YouTube is an amazing platform

=================

Before I explain why YouTube-as-a-business is a bum deal for content creators, I want to take a moment to tell you the best things about YouTube:



1. Free, global, HD video hosting

2. 1b+ users a month

3. Amazing tools and features added consistently*

4. Amazing analytics

5. It’s part of the largest advertising network in the world (Google)

6. An amazing staff of intelligent, hard-working and driven executives. These are just wicked smart folks (which is no surprise considering that Google’s absurd war chest of cash allows them to outbid anyone in the world for talent -- and that they do this all the time.)



[ * Most, but not all, of these features are in the content creator’s best interest. More on that later. ]



As a content creator, you have to have some presence on YouTube, as they account for the majority of all video minutes watched on the internet (especially if you don’t count subscription services like Netflix).



In fact, at the root of the issues content creators face with YouTube is the lack of a viable competitor to their near monopoly on web video.



That all being said, it’s a horrible *business* deal for content creators to invest in YouTube, funded by the company or otherwise.



Sure, YouTube is amazing for marketers, individuals and companies seeking to reach a large audience. But as a business proposition, it is a trap.





b) The five reasons I turned down YouTube’s funding

==================

When I turned down YouTube’s funding they were absolutely shocked. I don’t think anyone has done so to date.



The five reasons I decided against taking money from YouTube:



1. The absurd 45% YouTube tax

2. A lack of marketing support

3. No direct sales force at YouTube

3. $0.20 to $0.30 on the production dollar in support (according to sources)

5. Trust



With relation to the YouTube tax, I’ve seen this playbook before.



I was a partner with Google 10 years ago when my company, Weblogs Inc., was featured around their *IPO* as a small publisher growing in partnership with Google.



Here’s a link to the case study: http://jc.is/weblogsgoogle



With YouTube, as with their AdSense product, Google is trying to insert itself between publishers and advertisers and extract a massive tax.



In the case of YouTube, it’s a 45% tax (again, according to the two dozen partners I asked -- not from my contract with them, the details of which I’m keeping private.)



Successful media businesses today have margins in the 20% to 50% range--if they hit profitability. That means if you give a partner 45% off the top, you have no chance of breaking even. In fact, this absurd revenue is so bad that people have made amazingly clever strategies to skirt them, like VICE producing the Snoop Lion documentary and Grace Helbig becoming the face of Lowe’s Hardware. A full 100% of that money goes to the content creator -- boxing out YouTube. More on this later.



Sure, it can *feel* like you’re making money, but when you look across the landscape of YouTube businesses -- and I won’t call anyone out here -- it’s very, very clear they are losing millions and millions of dollars a year.



YouTube doesn’t have to worry because they simply lop off 45% of the revenue from the top for providing video hosting. Hosting for them is, essentially, free since they have a huge -- and growing -- network of fiber (see ‘Google's Fiber Takeover Plan Expands: Will Kill Cable & Carriers’: http://goo.gl/RMyoh).



Since YouTube doesn’t have to create any content, just aggregate it, they don’t need to worry about the individual profitability of any one brand.



Things can be dying and soaring and going sideways throughout their ecosystem, but as long as they have a ton of traffic and control the relationships with advertisers, they win.



YouTube also lacks a direct sales force, instead letting some secret ad reps from Google sell all of Google’s products in one big black box.



I believe this is a strategy to distance publishers from marketers, putting the publishers under complete control of YouTube.





c) Why content owners investing solely in YouTube are investing in their own demise

================

YouTube has made a big deal about celebrating their awesome stars, and they should. It’s amazing that personalities like Jenna Marbles, iJustine and countless others have gotten to hundreds of thousands--even millions--of subscribers.



People have become YouTube famous and gotten onto TV even. They’re making a living and a great one at that at the top of the pyramid.



However, what folks must realize is that their subscribers are NOT their subscribers. They’re YouTube’s users. Content creators don’t have the email addresses of their individuals, just the ability -- for now -- to get on their YouTube home page.



That control has lead YouTube celebs to start investing heavily in things like Instagram, Twitter and destination sites, in an attempt to win back control of their fans. More on this later.



Of course, YouTube additionally keeps changing their design, and not necessarily to help publishers. YouTube executives speak often of their main motivator: ‘to increase the session length at YouTube.’



YouTube controls the user base AND the advertising relationship.



What I tell young publishers is they need to focus on -- and own -- three things:



1. The relationship with consumers

2. The relationship with content creators

3. The relationship with advertisers



YouTube controls consumers and advertisers already, and they are using special events like ‘YouTube Comedy Week’ to control #2.



If you’re building a publishing company on YouTube, you now have no control over advertising and consumers, and you’re going to lose your talent next.



Think about it. If you’re Maker Studios -- which lost their #1 star Ray William Johnson back in October -- you now have YouTube inviting your talent to their upfronts and featuring them in massive special event promotions (like the ‘Comedy Week’ thing).



Do you not see what they’re doing?



YouTube is absolutely going to disintermediate the MCN (multichannel networks) in the next year or two. You can see it starting already. I mean, why would YouTube let other publishers control the top talent ultimately?



YouTube needs to fight against the large voting blocks like Machinima and Maker Studios, because if 10 of those folks got together and built a competitor it would be a major blow to YouTube. They could start sending 2% of their users off of YouTube a week -- and weeks go by quickly I’ve learned.



In summary, if you are a content company trying to build a ‘YouTube business,’ you are investing in your own demise. You must stop and think, ‘How can I reduce my YouTube footprint to 1/3rd of my mix of revenue and views?’



Every time you invest $1 in YouTube, you’re building their power base and leverage over you. How can you invest that $0.66 of that dollar in an asset you control? At least then you might have a fighting chance over Goliath.



In a way, YouTube is the Sebastian Shaw of the ecosystem, absorbing all your power and talent and using it for their prime directive: maintain the 45% tax through control of talent, advertisers and user behavior.



OK, I’ve got two more sections to go, and this email is already at 1,500 words!



I’m going to finish these two in the next 48 hours (with your help!):



d) How you can outgame YouTube and suck massive value from the ecosystem



e) Exactly how Twitter, Hulu, MSN, Yahoo and Facebook -- or a next-gen YouTube -- could each take on YouTube



Please send me your thoughts ( jason@inside.com ), especially if you’re part of the YouTube ecosystem. What did I get right, what did I get wrong, and what do you think is the right way to approach YouTube. If you don’t want your content attributed, say ‘not for attribution’ at the top of the email.



Bottom line: someone needs to create a viable alternative to YouTube, even if it’s the top 100 channels on YouTube getting together and creating their own product that lets content creators *own* the *relationship* with their users and advertisers.



all the best, @jason



PS - Someone asked, ‘Jason, why are you writing this?’ Very simple:

1. It’s the topic everyone is talking about. I like to write about the things folks are talking about at the cocktail party but not in the trades.

2. I think the founders and startups who read my emails need to understand why they shouldn’t build businesses with massive dependencies -- like I did with Google Search and I’m NOT going to do with YouTube (see, I ‘can be taught!’).

3. Hey, maybe me writing this will create some discussion at YouTube about them changing their approach.

4. Perhaps me writing this will shake some trees and get two or three big competitors to email me and say, ‘JCal, can we talk about your ideas?’

5. Maybe some wicked smart entrepreneur will come to me and say, ‘Hey Jcal, can you back me to make a YouTube competitor based on my ideas that were inspired by your piece?



PPS - We started a coworking space in Los Angeles called LAUNCH Cowork. We’re giving heavily discounted desks to starts in the ‘women with an idea’ or ‘dude with angel funding’ range: $50-$350 a month (yeah, gonna lose money on this, but I’ll make it back on angel investing. Apply here: http://festival.launch.co/cowork/apply.html



PPPS - The LAUNCH Education & Kids conference on June 26-27 is now sold out. There is a waiting list, and we always have some last-minute openings: www.launchedu.co



