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Hollywood's Big-Money YouTube Hit Factory


Hollywood's Big-Money YouTube Hit Factory

Photographs by Getty Images(4); YouTube(9)

When Brian Robbins first told people he was going full time into the YouTube (GOOG) business, his colleagues in Hollywood were incredulous. “My agent, my lawyer, my dad—people thought I was crazy,” he says. For decades, Robbins had worked in the traditional entertainment industry, first as a teenage actor starring in the ABC sitcom Head of the Class, then as a producer of TV shows about teenagers, such as Smallville and One Tree Hill, and finally as a director of feature films catering to teenagers, including Good Burger, Varsity Blues, and Norbit, a comedy starring Eddie Murphy in multiple roles, among them an obese woman. It was steady and lucrative work, if not always the most prestigious.

Watching the ways in which his two teenage sons consumed media, Robbins became convinced that the future of youth entertainment wasn’t in broadcast or cable TV but in short-form digital videos, particularly on YouTube. He thought big media companies had been slow to adapt, leaving a void that he could fill. And so, in 2012, the former teenage star set up a business to recruit, manage, and capitalize on the teenage stars of tomorrow.

Behind this week’s coverCover illustration by Kyle PlattsBehind this week’s cover

Robbins’s timing was good. After years of more or less passive support, YouTube was starting to take an active role in original programming, encouraging entrepreneurs, producers, and established TV stars to start channels, which on YouTube refers to a collection of videos hosted by an individual or by a creative team. It was even lending producers money and gave Robbins some. He set up an office and a production studio in West Los Angeles.

In June 2012, Robbins launched his YouTube channel, which he named AwesomenessTV. The channel was geared to teenagers and preteens and featured lots of two- to five-minute videos, which ranged from quickie talk shows about beauty tips to mini-reality shows about cheerleaders. Within months, AwesomenessTV was routinely ranking among YouTube’s top channels. “It happened very fast,” says Robbins.

What was also happening quickly, he noticed, was that several new media companies in Los Angeles were amassing billions of monthly video views on YouTube not only by creating material but also by bundling together existing channels into what the people were starting to call multichannel networks, or MCNs. Rather than create all the programming themselves, the MCNs were recruiting tens of thousands of independent YouTube creators, from the semiprominent to the obscure. Each of the MCNs offered a slightly different slate of services, but they generally promised aspiring YouTube talent that, for a cut of gross revenue (typically 30 percent), the MCN would get them more attention and make them more money. Sign up with us, kid, we’ll make you a star. “Nothing beats when a kid makes a sketch for us and he does a great job, and you say to him, ‘We think you’re really talented. Why don’t you write a movie?’ ” says Robbins.

The MCNs were attempting to solve a problem that had bedeviled YouTube throughout its short history—how to organize such a vast and chaotic programming environment in a way that makes sense for viewers, creators, and advertisers. In November 2012, six months or so after launching AwesomenessTV, Robbins and his colleagues posted an invitation on their channel. Anyone interested in becoming the next big YouTube phenom was encouraged to join AwesomenessTV as a member of what they dubbed the ATV Network. “I was sitting here thinking that the kids who are watching our content on the Awesomeness channel are the same kids who are uploading content to YouTube,” says Robbins. “So why not try and make them part of the Awesomeness community for real?”

The following morning, Robbins and his colleagues arrived at work expecting to find a few hundred requests to join. They found 4,500 instead. In the months to come, the numbers kept growing. Almost overnight, Robbins had transformed AwesomenessTV from a boutique YouTube production house into a teen entertainment factory. Within a year, he had venture capitalists visiting each week looking to invest, and in May 2013, Robbins announced he was selling AwesomenessTV to DreamWorks Animation (DWA), the publicly traded Hollywood studio, for $33 million upfront, plus $84 million in potential payouts down the road. AwesomenessTV now has 88,000 channels with 54 million YouTube subscribers, collectively generating 1 billion monthly video views. Nobody is second-guessing Robbins’s career move any longer.

On the heels of the DreamWorks acquisition, other media companies with backgrounds in storytelling and talent management have been piling into the YouTube ecosystem, hungry to devour everybody’s epic YouTube lunch. Robbins says his Hollywood experience will help him keep his edge. He knows how to spot young talent and how to navigate the many hazards of making entertainment. “Our big advantage is that everybody on our management side came from making content,” he says. “We didn’t come from tech.”
 
 
It’s perhaps inevitable that Hollywood eventually turned its tool kit to YouTube. The platform’s net global advertising revenue continues to grow, from $1.2 billion in 2012 to a projected $3.4 billion this year, according to estimates from EMarketer. Every month, 1 billion people around the planet go to YouTube, where they collectively consume some 6 billion hours of video. Every minute, 100 more hours of programming are added to the platform.

With summer TV ratings falling, the domestic movie box office down sharply, and upfront sales of TV advertising surprisingly weak, a slew of mergers, acquisitions, and investment has shaken the YouTube cosmos. Big media companies, which a few years ago were furiously filing copyright lawsuits against YouTube, are jostling for a piece of the action.

“There’s a tremendous amount of activity,” says Gian LaVecchia, a managing partner at the global media-buying agency MEC. “At a macro level, it’s about these companies moving aggressively to reimagine how they connect with digital, mobile, and social audiences.” Says David Hallerman, an analyst with EMarketer: “It’s a real awakening.” In March, Walt Disney (DIS) snapped up Maker Studios, one of the largest of the multichannel networks, for an initial $500 million, plus a potential $450 million, depending on future performance. Warner Bros. (TWX) led an $18 million round of investment in Machinima, which focuses on programming related to video game culture. Chernin Group and AT&T (T), according to multiple press accounts, are narrowing in on the purchase of a large multichannel network called Fullscreen. Scripps Networks Interactive (SNI), the owner of the Food Network, led a $25 million investment round in Tastemade, an MCN specializing in food. ProSiebenSat.1 Media (PSM:GR), a German media conglomerate, bought 20 percent of Collective Digital Studio. And several media companies, including Hearst and 21st Century Fox (FOX), are now said to be kicking the tires on StyleHaul, an MCN oriented around beauty and fashion content.

The rapid consolidation of YouTube programming has thrown the small players into a frenzy of excitement and apprehension. They’re concerned that the big companies will squash the community’s creative autonomy and turn its artists into creative serfs. The great hope, on the other hand, is that the newfound investment will free artists from the shaky economics of living video to video and allow them to focus on improving their craft. More premium programming will lead to more premium advertising, which will finally unlock YouTube’s full economic potential and make everybody embarrassingly rich.

Optimists will tell you that YouTube in 2014 is like cable television in the 1980s, when a few entrepreneurs conquered a new and slightly baffling distribution landscape, giving rise to programming brands such as MTV (VIAB), CNN, and ESPN, which decades later still throw off hefty annual profits for the companies with the foresight to acquire them. “If you look at the history of cable, it started as a rough-and-tumble, entrepreneurial business,” says Reza Izad, the chief executive officer of Collective Digital Studio. “Cable took 10 to 15 years to mature. This is happening a lot faster.”

“We are the paradigm, we believe, of what media companies will look like in the future,” says Ynon Kreiz, CEO of Maker Studios. Says George Strompolos, CEO and founder of Fullscreen: “We want to be the next Viacom, the next Disney, the next NBCUniversal. We feel like we’re on that path. We’re laying the foundation for what we believe will be a massively valuable and massively profitable media company.”
 
 
Google purchased YouTube for $1.7 billion in 2006 and at first focused on improving the site’s technology and fending off litigation from media companies, which were apoplectic about people using the platform to share copyrighted TV shows, movies, and songs without consent. At the time, Google took a laissez-faire approach to the programming side of the business. That turned out to be fortuitous. In the absence of a gatekeeper, a decentralized culture of homegrown talent took root on YouTube.

The early YouTube entertainers tended to be outsiders, opportunists, and jacks-of-all-trades. They wrote, shot, edited, starred in, and marketed their own videos. Budgets were thin, and so were production values. A bedroom was a typical set, and often the show was one person with a big personality talking smack about sports, clothing, or video games into a laptop camera. Teenage audiences loved them. It was an intimate medium on which young fans and the creators they adored could easily socialize.

In 2007, YouTube made a revenue-sharing program available to the most popular video creators. Once a creator signed, Google would load up the channel with advertising, take a 45 percent cut of the resulting revenue, and hand over the rest. For many YouTube creators, the money was an incentive to keep going but wasn’t enough to live on. They still had to hustle.

So they did. All the interaction with fans, it turned out, made it easy for the early stars to sell things on their channels directly to YouTube viewers, including T-shirts, mugs, music albums, and DVDs. Soon, creators realized they could also use their channels to promote other people’s products in exchange for flat fees, which were significantly more than what they were earning from Google. In this way, native advertising—Internetspeak for paid placement—was born on YouTube.

Many of YouTube’s leading entertainers found juggling the growing business and creative demands to be overwhelming. In New York and Los Angeles, a handful of entrepreneurs—many of whom were former Hollywood agents or producers looking to go digital—rushed in. For a cut of a creator’s gross revenue, they took over the business side of the operations, setting up ad sales teams, marketing services, and merchandising divisions. “There are some larger media companies that look at companies like us and our contemporaries as pure farm systems,” says Fullscreen’s Strompolos. “I think that’s an oversimplification. You can’t just take someone who is working on YouTube and plop them into a 22-minute sitcom. That’s a disservice to a creator.”

Robbins with AwesomenessTV talents Cameron Dallas and Lia Marie JohnsonPhotograph by Nathanael Turner for Bloomberg BusinessweekRobbins with AwesomenessTV talents Cameron Dallas and Lia Marie Johnson

Often these early YouTube talent networks would also set up production studios in L.A. to help their clients improve the quality of videos and to foster more collaboration among their various artists. To take advantage of the soundstages, many YouTube creators who had previously worked out of their homes in, say, North Carolina or Idaho, packed up and moved to L.A.—pulling them closer into Hollywood’s orbit.

By June 2012, when Robbins launched AwesomenessTV, a handful of companies in and around Los Angeles were pioneering a business model in which they used automated systems on the Web to sign up and manage thousands of independent YouTube creators. The trend was similar to what Huffington Post and BuzzFeed do in digital news—combining small amounts of crafted premium content produced in-house with large volumes of unpolished content produced for minimal compensation by decentralized amateurs.

Aggregated, the smaller channels can create a big audience, and the MCNs developed tools and services to help their video makers grow bigger. Kreiz of Maker Studios says his team has developed 40 “levers” it can pull on the YouTube platform to optimize an artist’s reach and value. For example, he says, Maker has a proprietary tool that looks at variables such as geography, target audience, and number of subscribers to a channel to determine the optimal time to upload a new video. “It can be vastly different if you’re in gaming vs. in fashion,” says Kreiz. “One could be Sunday morning, the other could be Wednesday afternoon. We can automate that and adapt it in real time based on all these various attributes.”

As the MCNs pulled together the video makers, they formed programming clusters organized around certain topics such as video games and music, which they then sold to advertisers hoping to reach some subset of the young American populace no longer glued to TVs.

The model has proven it can generate huge audiences, but not yet huge profits. AwesomenessTV’s 1 billion monthly video views put it in the big leagues of multichannel networks that include Maker Studios (55,000 channels, 8.5 billion monthly video views), Fullscreen (50,000 channels, 3.5 billion monthly views), and Machinima (12,000 channels, 3.1 billion monthly views). “It’s only been a few short years that the industry has been in play,” says Kreiz. “It’s obvious that the monetization and the economics have been lagging behind the size. But it’s definitely moving at a very fast pace.”

Maker Studios’ Kreiz (right) with rapper and videographer Timothy DeLaGhettoPhotograph by Nathanael Turner for Bloomberg BusinessweekMaker Studios’ Kreiz (right) with rapper and videographer Timothy DeLaGhetto

The belief at MCNs is that as more brands understand how young people consume content, ad budgets will shift from TV to digital-video advertising. That migration has yet to take place. In 2013 the TV ad market in the U.S. hit $66.6 billion, according to EMarketer, vs. $4.2 billion in digital-video ads. Not only does TV remain a bigger market, but it also continues to add more dollars year-over-year. From 2011 to 2013, TV advertising grew by almost $6 billion, compared with a $2.2 billion increase in digital-video advertising, according to EMarketer estimates. “Digital video remains a supplement to TV,” says analyst Hallerman. “That part is not shifting.”

Robbins says AwesomenessTV became profitable last year, though he won’t say how much it made. Advertising rates on YouTube, he concedes, have remained low. He says AwesomenessTV’s business model doesn’t rely heavily on preroll advertising, the TV-like spots supplied by Google that run before a video starts. Instead, the business makes the bulk of its money working directly with brands to create original programming and sponsorship opportunities and by extending its artists’ ideas beyond YouTube into venues such as live concerts, TV shows, and movies.

AwesomenessTV recently teamed up with Content & Co., an L.A. business that helps advertisers find and develop opportunities on YouTube, to make a show for Subway. They created an original Web series, Summer With Cimorelli. The show stars the six singing Cimorelli sisters, an a cappella act with a rabid teenage fan base. Behind the camera, Douglas Lieblein, a TV veteran who previously served as the co-executive producer for Disney Channel’s Hannah Montana, wrote and ran the series. The sisters dine on Subway subs during the program. And over the summer, Subway ran traditional TV ads starring the singers.

“What we created with Summer With Cimorelli is a template that worked great for everybody involved,” says Content & Co. CEO Stuart McLean. “Our belief is that partnering YouTube talent with top Hollywood talent is the Holy Grail.”

Just as traditional media figures like Donald Trump, Martha Stewart, and Paula Deen use their media exposure to create much more lucrative product licensing deals, YouTube entertainers are doing the same. Robbins says it won’t be long before AwesomenessTV’s nascent consumer-products division makes more money than any other part of the company.

“Like any media business, it doesn’t work with one revenue stream,” he says. “If the movie business were only based on theatrical box-office [revenue], there would be no movies made. I always laugh when people say the economics don’t make sense. The economic part of the ecosystem is accelerating.”

Last year, YouTube opened a 41,000-square-foot studio in Los Angeles on the site of the former Howard Hughes airport. The facilities include soundstages, green rooms, editing suites, a coffee bar, post-production equipment, a screening theater, and a set made to look like a neighborhood bar. Everything is sleek and immaculate—and totally free for YouTube creators no matter which MCN represents them. Members of the AwesomenessTV diaspora routinely drop in to use the facilities, which are much more extensive than anything at AwesomenessTV headquarters.

The result is a warm, collegial setting in which YouTube talent is treated with reverence. They’re invited to attend regular musical performances, instructional seminars, happy hours, comedy nights, and movie screenings. YouTube also offers so-called residencies to artists or companies eager to immerse themselves in the community. Amateurs are welcome. So are pros. Currently, one of the official artists in residence is Rupert Murdoch’s new ESPN competitor, Fox Sports 1. Another is Oprah Winfrey’s OWN network.

On a recent morning, established media emissaries were working alongside bearded and bespectacled YouTube natives. A dude with a mohawk fiddled with his phone in front of a green screen. A young lady sat on the floor shaping mounds of cotton into puffy white clouds. A woman with washboard abs did calisthenics in front of a camera. A rock band shot a music video. YouTube operates similarly lavish, gratis studios for creators in London and Tokyo. Later this year it’s opening a free studio in New York.

Robert Kyncl, YouTube’s head of content and business operations, says the rise of the multichannel networks has been good for everybody. They’re creating value, he argues, by focusing on a range of services, such as talent management and series development, which are outside YouTube’s purview. “A lot of things are still being figured out,” Kyncl says. “It opens up opportunities for entrepreneurs to follow various theses.”

Freddie Wong, a YouTube creator known for his scripted sci-fi comedy series Video Game High School, hopes Hollywood will inject some long-term investment into a world in which many entertainers still scramble to survive. The historically thin margins, he says, have discouraged ambitious storytelling. “In general, a lot of content creators find that their success is unable to support any sort of organization of scale,” says Wong. “It’s pretty difficult to support even three or four employees.”

In April, Wong and his production company, RocketJump, formed a partnership with Lionsgate (LGF), the entertainment company behind television shows such as Mad Men and feature films like The Hunger Games. “The Lionsgate deal came at an opportune time,” Wong says. “It allows us to get our projects financed and create long-form content without needing to be reliant on brand deals or crowdsourcing for external financing.”

Wong has some concerns about the Hollywood sharks circling the YouTube talent pool. He expects to see clashes in the years to come on YouTube between art and commerce. “If you follow the history of Hollywood movies, there’s always been that struggle,” says Wong.

Robbins, for one, says he’s up for the challenge of simultaneously managing the careers of 88,000 or so would-be stars. “I was once that 18-year-old knucklehead who was on TV,” he says. “It’s easy for me to relate. The kids that work here are always like, this one didn’t show up, or this one is complaining.” Robbins adds, “I’m like, ‘Just stop. Try making an Eddie Murphy movie. That’s hard.’ ”
 
 
Hank Green, a 34-year-old entrepreneur with a boyish face who rose to prominence making geeky science videos on YouTube, gazes across the stage at Jeffrey Katzenberg, a powerful media executive who rose to prominence making big Hollywood movies. Recently, Katzenberg has been delving heartily into Green’s territory, investing in companies that work on YouTube. “Should I be terrified of you?” asks Green. “My company’s budget is not very big. I have, like, 20 employees, and we’re trying to make it work. And you, obviously, if you wanted to, could be like …” Green leans into the microphones and makes a loud splattering noise like what a steamroller driving over a watermelon would make.

The crowd laughs, and Katzenberg smiles. It’s a Thursday morning in June, the first day of VidCon, the annual gathering in Southern California of digital-video entrepreneurs, YouTube stars, and the many screaming teenage girls who love them. A large crowd has piled into the Anaheim Convention Center to watch Green, the co-creator of the conference, interview Katzenberg, the chief executive of DreamWorks Animation.

Katzenberg assures Green there’s no need to be scared. DreamWorks—the studio behind animated franchises such as Shrek, Madagascar, and Kung Fu Panda—has landed on Planet YouTube with a healthy respect for the native culture. His growing investment there, Katzenberg says, is entirely “in service of everything that is great and unique and singular about what I believe will be the biggest, most valuable media platform in the world, which is YouTube.”

“I still feel like this platform is in its infancy,” he adds. “I want to be a part of this as it grows.”

For more video, go to: Businessweek.com/epicmealtime

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Gillette is a staff writer for Bloomberg Businessweek in New York.

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