For much of 2013 I watched the press write articles about how the YouTube “MCNs” (multi-channel networks) were doomed and tried to square that with the data I was watching at the one I invested in, Maker Studios, who has had one hell of a year.

Maker announced it has raised $62 million this year, acquired an amazing off-YouTube distribution network and grown its business in monetary terms by almost 300% year-over-year off of an already large base.

Along with Greycroft Partners we were the first investors in Maker Studios 3 years ago when the company had no revenue and limited infrastructure. With so much misinformation about YouTube networks in the press over the past 6 months I thought I’d use this opportunity to tell you about what my belief was about that market 3 years ago, how that has evolved and why I believe online video is set to continue to revolutionize the video industry at a more rapid pace than even the past three years.

So can you successfully build a YouTube network?

Most startups I know that work in the Apple iOS ecosystem complain because Apple takes a 30% slice of their revenue and yet I often point out that 30% has for years been a common revenue share for one who provides “distribution.”

YouTube takes 45%.

YouTube hates this comparison and claims they provide so much more to their ecosystem than Apple does to its iOS ecosystem. I agree with YouTube (that they provide more (hosting, ad sales, etc.) but not that this justifies taking a 45% revenue share. If YouTube really cares about dominating the future of Internet video it should take less because at 45% it will only encourage video producers to seek alternate distribution and will make it easier for competitors to emerge.

If you want to be a YouTube MCN producer the problem is compounded by the fact that of course the talent needs to make money as well.

Industry averages for talent revenue shares are about 70% with top talent making even more.

This revenue share comes after the YouTube split. Of course it’s a competitive market so MCNs competing for top talent not only compete on rev share to talent but also to services that they provide talent.

This is why the smartest analysts thinking about the MCN space have often compared the MCNs to “ad networks” which are the middlemen who sit between advertisers and publishers and often take a 15–17.5% margin.

And this about where the YouTube haters stop their argument: That YouTube networks are sandwiched in between 2 powerful & competing forces and that it’s hard to build a business this way.

If you think of yourself as a middleman I agree with you — this is a crappy business. But the best MCNs are so much more.

If you’re thinking about building an online video network today you need to think about:

Producing your own content (not just aggregating)

Building direct customer relationships with viewers (who want to tune into your channels)

Developing O&O (owned & operated) businesses (outside of YouTube)

Having business models that aren’t only ad-based

I will talk about these strategies in my next blog post.

For starters I’d like to tell you what I tell every startup that wants to “build a YouTube business.”

Don’t.

There is no such thing as a YouTube MCN. It’s a made-up term and not even a good one at that. YouTube is a video distributor, not your end business goal.

So you don’t “build a YouTube business” you “build a video business and distribute your videos on YouTube.”

You need to think like a producer of any kind and think about distribution more broadly. It’s why I like to simplify and talk about candy bars.

8% of every dollar spent in America is spent at Walmart — astounding, I know. They have more than 4,000 locations and sell more than $34 billion / month. In fact, if Walmart were a country it would be the 19th largest in the world.

So imagine what it’s like to be a supplier to Walmart. You don’t exactly get to make the margin you might like but as a candy bar supplier you need to be there to build awareness of your product with consumers if you want to be a large, mass-market product.

Your goal at Walmart ought to be to build customer awareness and ultimately persuade a sub-segment of the Walmart shopper to come buy your candy bars at specialty shops or at your companies website directly, where you’ll make much better margin.

Newsflash — you’ll never have as many customers as Walmart because they sell every kind of product but there are many other retailers who distribute candy bars as well. Selling at smaller retailers will net you fewer customers and higher margins.

So you don’t “build a Walmart candy bar business” — you distribute products there — and at margins lower than you’d like.

And by the way, if you don’t manufacture any of your candy bars yourself you are merely a middleman packaging up somebody else’s product and taking a vig on helping get customer distribution. Sound interesting? Meh.

Ok. Back to video. Newsflash:

YouTube is the Walmart of video. It is where the world shops when they want to consume online video. So while we might find 45% distribution fee excessive it has clearly earned the right (for now) to charge the margin it wants to get.

Just how dominant is YouTube in online video?

So as video content producers we need to understand that if we want to build mass-market video brands we need to distribute via YouTube.

For year’s I’ve been telling this to the niche video producers who clung to distributing only via their websites (O&O). Their logic was, “I can make $25 CPMs on my website while on YouTube I can only get $2 CPMs,” which basically meant I should shut up.

Except for 2 things: 1. YouTube has infinitely more customers than their websites & 2. It is the world’s best customer acquisition for video consumers to get them to come to your O&O where you can make your $25 CPMs.

This is always how we saw Maker Studios. YouTube is our best, but not only, distribution source.

Maker is now a powerhouse in its own right. We have a large engineering staff led by the insanely talented Ryan Lissack (who was my co-founder at Koral and with whom I worked for many years before persuading him to leave SF for LA.)

It’s what the industry has never understood about us. Yes, we understand that it’s all about providing high-quality content. But we’re a technology company that produces great video not the other way around. By being a great tech company that provides video we have the assets to:

Capture customer information and use this to build direct relationships

Distribute content off of YouTube with more control over the video player, making higher margins for our talent and for ourselves

Provide tools for creators that help them build viewership (the average Maker video producer is getting multi-100% increases in viewership in the first year of working with us)

Give access to music that is legal, avoiding lawsuits and ensuring revenue isn’t captured by other IP owners

Offer tools to allow content producers to build their own websites & mobile apps

So now you know a large reason Maker recently acquired Blip, which not only had great off YouTube videos & traffic but also had killer technology assets and a great tech team.

Expect to hear a lot more about Maker technology in the next 18 months.

And if you want to know more about the technology argument of why people like Maker are succeeding over traditional content produers you can read this short post or watch the video interview linked there where I talked a lot about this strategy.

So for those building networks on YouTube I encourage you to think about them as important distribution, not the end game. YouTube is the top end of your customer funnel.

But you can’t be stuck in a 16.5% margin world and build an amazing & valuable business.

In my next post I’ll cover why online video is such an exciting opportunity for company building right now and how we think about building businesses with appropriate margins nearing 50–60%. I’ll cover why most VCs have stayed away from online video networks and why I believe they’re missing an important growth trend that looks more like a scalable tech business than the “hits driven” business they all fear.

And in the post after that I’ll talk about where I see YouTube’s own vulnerabilities from competition (Amazon, Facebook & Twitter) and how I think the future of online video may unfold.

The next post in this series is How to Build an Online Video Business and Avoid Platform Dependence.

And if you have a bit of extra time and want more insight than I can share in a blog post you might consider watching this video interview I did with Jon Miller on the future of online video. It’s a year old and predicts much of what happened over the past year.