Any reader of this blog for a period of time will know that I've been a fan of YouTube for years. Along with Greycroft, I was the first institutional investor in Maker Studios (sold to Disney for nearly $1 billion) and am still the largest investor in Mitu Network, the largest online video producer of Latino content. We have made five online video investments in total -- some we will talk about later this year.

The reasons I have been long on YouTube specifically are very simple:

  • YouTube now has more than 1 billion uniques/month. This is 14 percent of the world population and 33 percent of all people online.
  • A new generation of content producer and video style has emerged that is distinctly different from what you see on TV. Forty percent of all of YouTube is viewed on mobile devices, and of high-quality content I believe it is between 60-70 percent based on my insider data.
  • The stars of tomorrow are being built on these short-form formats. It's hard to understand this until you attend something like VidCon and watch youth interaction with their "stars." You have an "Elvis Presley-like moment" where you realize the next generation is already consuming different media than our tastes might appreciate.
  • If you want to build a large business in video you need to fish in a pond where the fish are. That is YouTube today.

The arguments from any detractors of building a business on YouTube are:

  • The CPMs are too low (less than $2 per thousand impressions for YouTube tonnage vs. $18-25 for many online media or $40+ for TV).
  • YouTube takes too high of a revenue split (45 percent vs. 30 percent that Apple and many other distribution companies take -- FWIW, YouTube argues this is because their costs are much higher since they host and stream the video).
  • You can't build a brand on YouTube.
  • Content is a "hits driven business," and therefore you can only invest in platforms not media.

I think most arguments miss the mark. The point isn't to "build a business on YouTube" but rather to use YouTube as a marketing platform to build a video business that works across many platforms. If all you ever do is create YouTube content then I agree, that's not a viable startup business. But if your goal is to develop an audience that can be monetized in other ways, I'll repeat my argument "you need to fish in the pond where the fish are."

I've given some specific advice on how to do this before. Notably I said:

  • You have to have owned and operated websites (O&O) to drive traffic to. You should be able to convert at least 5-15 percent of your audience
  • You have to have some of your own content formats and not just be an aggregator of talent.
  • You must invest in technology. If you're just a content company your advantages are too small to win on the web.
  • Your tech needs to add value to content producers, the audience and advertisers.
  • Best is if you have a combination of ad revenue, sponsorships and some forms of non ad revenue (subscriptions, merch, music sales, etc.).

But here is the most misunderstood fact about YouTube that I think most smart business people have missed in their rush to criticize revenue splits* or CPMs.

  • Almost every online business I know (eCommerce, online software, mobile games) invests heavily in "customer acquisition."
  • This includes investments often not properly measured (SEO, PR, Social) as well as costs that people measure more precisely (advertising, SEM, FB CPA/CPI ads).
  • Take for example, an eCommerce company. They might spend actively on SEM (Google AdWords) if they can prove that the CAC (customer acquisition cost) is lower than the LTV (lifetime value) of a customer and the payback is less than a given time period (say one year) or set number of purchases (1-3) until break-even. This kind of spend happens all day long inside startup companies, and 100 percent of the spend on attracting customers is a cost.
  • But think of this. If you're a video company your goal is to "acquire customers" to your website that you can eventually engage with and monetize. But you don't need to spend money on SEM. You can spend money building audiences on YouTube. And here's the thing ... YouTube PAYS YOU to develop these audiences.
  • If you think of it as a "YouTube business" you're doing it wrong. YouTube is a distribution and marketing channel like any other. It just happens to be large, dominant and willing to share revenue with you. And given that Facebook and Twitter currently pay you zero for content marketing and Google SEM charges you for customer acquisition -- what exactly are you bitching about? If you don't know what you're going to do to develop your audience beyond watching your videos on YouTube ... that's on you.
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This is why many traditional video producers (from cable TV, music videos, etc.) won't build large online video business: they lack the tech skills to engage, activate and retain online audiences cost effectively. Yet to develop audiences you also need to understand: compelling content, sound, special effects, etc which is why most online video startup digital media companies are in Los Angeles or New York and not Silicon Valley.

Only modern thinkers about the new nature of online video audiences will build big businesses online. I've written about that, too.

Summary: YouTube as a customer acquisition tool to building great online businesses is unrivaled today. YouTube as a platform in which to build your entire business is naive. Plan your business wisely.

*Post-script: I know that some people will point out that widely read presentation on YouTube on Sept 2013 criticizes YouTube for its revenue split. I think that is one of the most misunderstood points I've ever made.

I wasn't arguing that this meant not to build on YouTube OR that YouTube was wrong in it's view that it could charge 45 percent rev share. For me this was a simple market analysis / commentary. Nothing more. Nothing less. I believe that the high revenue share YouTube takes encourages platform competition. In a rush to improve margins, MCNs want to cut deals with other video networks which both reduces YouTube platform dependency and gives you deals with players eager to cut content deals on more attractive margins.

If YouTube had cut revenue share for large MCNs it would be harder for competitors to entice them. I think the market is playing out exactly how I expected and you'll see increased competition from Amazon, Facebook and Twitter in the years ahead and possibly Tumblr, Vimeo and Pinterest, too.

This article was originally published on Mark Suster's blog, Both Sides of the Table.  

Published on: Jan 21, 2015