Web MCNs’ Content Models Spell Changes Ahead for TV

Jeffrey Kaufman, SVP, digital video, Alloy Digital

Jeffrey Kaufman, SVP, digital video, Alloy Digital

By Fred Dawson
August 9, 2013 – As spending by big-name OTT players on original programming escalates there’s another story unfolding among less well-known suppliers of online content that may have even greater implications for the future of TV viewing, assuming these players can turn what they’ve accomplished into enduring money-making strategies.
While there’s nothing new about the outpouring of relatively low-budget edgy video targeted to various tastes and demographics on the Web, the past couple of years have produced a turnaround in the market with the emergence of an ecosystem of MCNs (multichannel networks) who are mustering producers, writers, directors and onscreen talent to build mass audiences and, in at least some cases, to make money. In the period since some well-publicized failures capped the first wave of original content production, this new generation of online programming, aided by the aggregation power of YouTube and the coming of age of a TV-detached generation, has become a force to be reckoned with.

“We’re seeing an explosive growth of online video consumption,” says Chris Williams, chief development officer at Maker Studios, which touts itself as the largest independent network of YouTube channels. Now registering over four billion views per month from over 260 million unique viewers worldwide, Maker is generating the types of content across multiple categories like comedy, life style, drama, music, gaming, fashion and much else that have contributed to a precipitous drop in young audiences for traditional TV programming.

But this is a watershed year for Maker Studios, Machinima and other ventures touting big numbers on YouTube. While it’s possible to make money on YouTube, the ad revenue split, typically siphoning 45 percent of the take, combined with CPMs in the low $20 range versus the low $30 range for TV and video advertising in some online video venues puts pressure on successful players to find better strategies.

With infusions of venture funding having helped them get to this point, they must take their brands beyond the multi-million-channel incubator into more exclusive environments where the revenue splits go away without losing their audiences. That’s a tall order, notes Ron Grant, a managing partner of Saddle River Group, which invests in and helps raise money for content developers.

“No one is making money,” says Grant, a former president and COO of AOL and Time Warner executive, speaking of single project as well as multichannel producers. “That doesn’t mean it’s not going to work. This is a very disruptive time. People on the content front are getting deficit financing through venture capital money and then aggregating channels to get scale. But they need to get to where they own and operate their stuff and have people representing their brands.”

But frequently the content providers are impeded in their efforts to expand content reach beyond the aggregators’ platforms by virtue of the rights they’ve had to give up early on. “It gets complicated,” Grant says.

Making it a little less so, YouTube recently relaxed its policy regarding alternative distribution for content it has funded by allowing developers to go elsewhere without waiting one year. But generally speaking contracts signed by content developers to be promoted on other aggregators’ sites can be onerous.

“Web deals typically involve huge winner-take-all contracts,” Grant says, contrasting these agreements on relatively small deals with the simple contracts that characterize much bigger deals in traditional TV. “It’s hard to negotiate deals with aggregators on the Web, especially if you’re really small. They want to take everything without sharing risk. There really needs to be more rational deal making in this space.”

Fortunately for many MCNs, venture money has been available over the past couple of years to get them where they can look at the next phase from a position of relative strength. Fullscreen, for example, another major force on YouTube, raised a reported $30 million in April. Maker Studios pulled in $36 million in December. Machinima, earlier in 2012, corralled $35 million.

And there have been some successful asset sales, including producer Phil DeFranco’s sale of his YouTube channels to Revision3, itself an acquisition of Discovery Communications. Another online player, AwesomenessTV, was recently purchased by DreamWorks Animation for $33 million.

But, of course, such funding brings with it a mandate to generate higher returns. Indeed, in terms of the credibility of the Internet content model as a potentially disruptive force in the $72-billion television advertising market, much is riding on the future viability of Maker Studios, Machinima and a handful of competitors who have leveraged YouTube to draw millions of viewers across hundreds and even thousands of channels. The question is whether they can break out of that crowded and high-revenue share environment to bring their audiences into their own branded Web spaces while finding other ways to monetize that content through alternative outlets.

“We’re expanding our distribution and reach,” Maker’s Williams says. “We’re building not only tools to support a new class of video creator worldwide; we’re also creating new opportunities for distribution. So beyond just YouTube we’ve developed our own owned-and-operated video distribution system and platform that will allow us to create an O&O Website along with distribution and communications to third parties outside YouTube.”

Machinima, which has leveraged programming themed around video games to build an audience of 220 million users generating over two billion views monthly, has generated much buzz of late owing to perceptions that a reported $40-million annual revenue stream is not enough to keep it afloat without more investments and better positioning. The company, which has been producing scripted free YouTube programming such as Mortal Kombat: Legacy, Halo 4: Forward Unto Dawn and Battlestar Galactica: Blood and Chrome with over 7,500 content partners worldwide, now says it wants to raise $80 million to create a subscription on-demand network consisting of 44-minute episodes and other types of content not necessarily game related but designed to appeal to its core audience of male gamers.

Machinima CEO Allen DeBevoise told Reuters the company is starting to sign production deals and is in discussions with two Hollywood studios for possible backing and production support. One of its first deals for the new network strategy involves a commitment by Ridley Scott’s production company RSA to produce 12 short films that could become ongoing series. The question analysts are asking is whether Machinima’s target audience is large enough to support a Netflix-like network.

One company that stands out as a developer amassing a huge following for its YouTube channels while pursuing a successful diversification strategy is Alloy Digital, which began as a provider of content for young women and teenage girls within its own branded domain, expanded to ride the YouTube channel wave with a cluster of big hits, including the current channel leader SMOSH, and is developing content for myriad outlets, including commercial brands like Coca Cola.

“We have telemanagement, production, sales, marketing, content creation and distribution all under one roof [actually two roofs, counting new facilities in New York City] with a lot of different brands, a lot of different kinds of relationships, people we own, people we partner with, etc.,” says Jeffrey Kaufman, senior vice president of digital video at Alloy Digital.

With over 11.6 million people subscribing to SMOSH, an irreverent two-man comedy series, and a total of 18 million subscribers across all its YouTube channels, Alloy Digital boasts the highest number of subscribers though not viewers or views among the multichannel networks in that space. (With the exception of certain premium content, subscribing on YouTube simply means people are tuned in to new episodes of free content without having to dig for it on the YouTube site.)

Alloy recently acquired another YouTube network company, Digital Broadcasting Group, which followed a $30-million funding round led by ABS Partners. Along with adding many original content channels to its lineup, the deal brings Alloy the DBG CLiP syndicated video player and a suite of innovative pre-roll ad units.

With the DBG deal Alloy has leased a 30,000 square-foot space south of Times Square, complementing its Los Angeles facilities and expanding its production reach into the New York talent pool. As Kaufmann notes, with an emphasis on speed and creative fulfillment across myriad channels, this is a very different production environment from the high-cost operations of traditional Hollywood studios and TV networks.

“There’s an interesting dynamic on the Web, because you don’t necessarily get greater returns the more dollars you pour into a piece of production in that medium,” he says. “But you do have to get over the appropriate sorts of hurdles of what the quality needs to be – not necessarily the quality of how it’s produced, but the quality of what it is for a given audience.”

The key to growth and making money on the Web is to maintain a combination of discipline and flexibility, he adds. “You want to be nimble, and you want to create quickly. But you need to be disciplined enough to ask, is there going to be a return on what I’m creating? That means different things for different pieces of content. But you do always have to be asking yourself, why do I think people are going to launch this? How am I setting it up to succeed? How is what I get out of it going to exceed what I put into it?”

Like many digital production houses Alloy is finding direct funding from consumer brands for promotional projects extending beyond short-form advertising has become an important part of the revenue mix. For example, Alloy has created some of the videos for Coke’s new “The Ahh Effect” campaign, employing the creative talents of musician and video producer Kirk Hugo Schneider with distribution targeted through both Coke’s and Alloy’s distribution channels. “It’s kind of a different creator-first approach to coming up with the content as well as a different way to distribute it,” Kaufman says.

Tom Bannister, CEO, SMX

Tom Bannister, CEO, SMX

The shift to direct creative engagement with brands has been a boon to many boutique studios, including L.A.-based SMX, which has made development of video for the Web its primary focus. “We’ve seen brands go from wanting to work with program networks and studios to wanting to create content for YouTube and other outlets, and we’ve gone with that shift,” says SMX CEO Tom Bannister. “Specifically, we’re working with Samsung, which has been a great relationship for us.”

A stable source of business has been especially important over the past few years of upheaval in the digital content space, Bannister notes. “Every year at South by Southwest it’s a different bunch of people we have to get to know and deal with,” he says.

Even now, with a growing cast of players, from CE manufacturers to the likes of Netflix, in the market for original content, Web content production remains a low-margin treacherous business. Nonetheless, SMX and other small studios are making it possible for things to happen which would otherwise be impossible from a cost and development perspective. Critically, as Bannister notes, people can develop and try things without losing huge sums of money on failed ideas, even if it’s a hassle for SMX.

“You’re always to a degree chasing the money,” he says. “We were chasing Google trying to get Google money when that was happening. Now it’s Netflix, MCNs, TiVo, Xbox. Sometimes it involves co-payments from our side, as was the case with Break Media. We co-financed an action series with them, which they eventually placed with a YouTube channel called Hard Coded.”

The key to success is having the Hollywood street smarts and connections to draw in good talent, sometimes well known, sometimes not, and to know how to get things done at minimal costs. “It’s about knowing the reality of what you can and can’t do on a budget with specific resources,” Bannister says. “Having spent five or six years producing in L.A. we’re very aware of what resources you can bring to bear for what kinds of price points. Those really impact what you put on the table when you go into pitch someone, the ideas you develop.”

“To a degree we’re working with those networks on things that are very experimental,” he adds. “We’re really just putting out shows and testing them. Often, the amount of time and energy it takes to do it is not worth the amount you’re paid to do it. But, in a sense, the reason for doing it is to try to have a platform to experiment to try different things each week. Maybe they work and maybe they don’t, but gradually you help build an entertainment brand that hopefully will be recognizable down the road to a bunch of teenagers.”

While there’s plenty of episodic long-form professional video populating the original production arena, especially with the likes of Netflix, Hulu, Amazon and Microsoft who are bankrolling big-budget TV-like series, much of what promises to be the reshaping of the TV viewing experience, assuming the MCNs grow and prosper, has to do with the growing popularity of short-form content where interactivity and socialization are integral to the viewing experience, notes Rob Barnett, founder and CEO of My Damn Channel, one of the pioneers in short-form professionally produced online entertainment.

“You have a lot of majors out there for the first time ever funding original online content,” Barnett says. “If you look at those shows and you pick maybe one of them out like House of Cards with Kevin Spacey, you can say that’s a television show. It’s created in a new way on a new platform, but it’s television-like programming. Everything we do at My Damn Channel is speaking in a new language, and it doesn’t necessarily live in the part of your brain that’s called television. It lives in the part of your brain that’s called ‘New.’

“There’s a different language and there’s a different feel to the content that’s created by people who are really native to original online video,” he continues. “Success is gauged more importantly not in the number of people who may or may not have seen new digital content. True success is gauged by the number of people who are truly interactive with that content.”

The role of the on-screen talent is changing as well, Barnett adds. “There’s a new demand not just on the audience to interact but on the talent,” he says. “You now can’t just be a creator of the great three-minute or 22-minute piece of video. You have to figure out, unless you’re maybe the upper echelon of movie star, how to have a direct relationship that’s real with your audience. That’s a whole new reality. You’re not allowed to sleep anymore.”

Maker Studios’ Williams echoes these points. “Our biggest show, as an example, a show called Epic Rap Battles of History – it’s actually the biggest show in the world online – typically does about 30 million video views per episode,” Williams says. “It generates a massive amount of engagement.”

While the viewing numbers are important, the gauge of success is how much interactive engagement each show generates, he says. “There’s a very simple four-word phrase at the end of every episode – and this is just one of myriad examples – where they go, ‘Who won, who’s next?’ This inspires the audience to comment on the video. So each video on average has generated 400,000 comments.

“When you think about what a comment is, a like or a favorite, it’s a mechanism by which to share that video,” he adds. “So that creates plurality, engagement. Shareable is what drives viral success of audiences online. YouTube has proved to be the most effective platform at doing that, which is why they account for 50 percent of all video views.”

With the movement of online video content into the viewing stream on connected TVs, this approach to programming is now becoming a part of the TV viewing experience. The market’s adjustments to the way these audiences are used to being entertained will likely impact everything from channelization to scheduling to the substance of TV content and advertising across all networks.