youtube_chair_pdI’ve been thinking about a recent post from Jason Calacanis, which he titled “I ain’t gonna work on YouTube’s farm no more.” In it, he made a case for turning down channel funding from YouTube. He was referring to a program, put in place last year by YouTube, which has given over $200 million to “creators” in order to bring original and exclusive content to YouTube. These creators were mostly high-profile or hard core YouTubers, both companies and individuals.

The majority of them were given $1 million to $5 million as an upfront payment against advertising revenue so the creators could jumpstart their programming efforts. If a company received a percentage (let’s say 45 percent) of the advertising revenue, they really didn’t see anything until they recouped their initial grant. There was a very competitive process where people pitched channel ideas and programming lineups. It wasn’t given out randomly.  

Like Jason, I’m a big fan of YouTube and wish it were more proactive. It’d be great if it were to act like there was an immediate competitive threat and lower its revenue split before Facebook, Twitter, Yahoo, or some other direct threat steps up.

As a business, though, it won’t, until it has to.

That’s because YouTube is more of a carrier like Comcast than a TV Network like ABC. It’s a delivery system with an interface and guides — the rest is opportunity for us. That’s why companies like ZEFR have stepped in to help Identify and monetize premium content while directing traffic and views for creators through its ever-growing monthly view funnel. [Disclosure: I was on the board of directors of ZEFR from when it was five people until recently.]

Although there are many bloodied soldiers, aka creators, who have tried and failed, I believe the YouTube channel funding program will go down as a pivotal moment in the creation of the next generation of media companies. While I agree with Jason that a YouTube-only strategy could be a disaster for most companies, there’s a big difference between a YouTube-only strategy and a YouTube-first strategy.

Because YouTube’s channel funding programming provides opportunities to develop valuable assets.

Subscribers

The funding, if spent wisely, is free marketing for a channel. Though the majority of the funding goes toward program creation, a portion goes to marketing and operations. Assume I offered you $1 million to produce and promote your shows. You only have to pay me back if advertisers buy ads. You keep the other revenue streams like brand integrations and commerce. You own the Intellectual Property 100 percent (see below).

Whether you pay me back or not, for every 100 views, assume one person subscribes to your channel. You now have $1 million to create and promote shows that will get you viewers, some of which turn into subscribers. Assume you only got 10 million views out of all that programming. Shucks. You only got 100,000 subscribers from it and you can’t build a business off of it. Too bad!

But that $1 million got you 100,000 subscribers you didn’t have yesterday, and it can jumpstart new programming efforts where you can better guarantee a minimum audience for advertisers. You couldn’t do that before.

“But I don’t really own my subscribers: YouTube does,” you might say.

Yes, but the same argument goes for Twitter and Facebook. In fact, those in the traditional media business such as Fox or Bravo don’t own their subscribers on Comcast any more than on YouTube. At least on YouTube, creators can upload a video and send a message to their subscribers about new content even when they’re not watching your channel. You have to be watching the TV network on cable or on one of their sister networks to see a message from them.

Community

It’s not just subscribers. Think about the community being built. YouTube called it “Generation C” — the Connected Generation — at its NewFronts presentation this year. It’s very powerful. The next generation is engaging with the content, both the creators and the viewers. It’s not just about comments, and it’s going to change the media business forever.

AwesomenessTV does this really well. They have more than 100,000 creators uploading content into its network. Whether a creator gets one view or 1 billion views, each is an active member of the community. They engage with both AwesomenessTV’s creators and subscribers and are creating a connection that goes well beyond YouTube. It just has a long way to go (as does everyone) to optimize that connection off YouTube. But it’ll get there.

This is just the beginning of monetizing this community. We’re already seeing a parallel in social media. Actors and creators that can mobilize large numbers of fans and followers from social media to the opening weekend of their movie or the premier of an episode of a new show are more valuable to studios. They are getting higher fees and back end participation.

As actors and creators become their own media companies who can mobilize their YouTube community, they too will see the value on and off YouTube.

Intellectual property and the multi-platform network

YouTube’s channel funding programming provides an opportunity to develop new show formats. And while it takes its pound of flesh on the ad revenue share, YouTube doesn’t own the Intellectual Property the channel creates with the funding. Assume for a minute that YouTube funds a specific show for a channel. It gets wildly popular.

“So what? I just have to give YouTube the money back before I see a dime.”

Maybe, but beyond the subscribes you just bought with YouTube’s money, you can do a deal with Fox, Bravo, or anyone for new episodes of that same, now popular, show and you don’t have to share a dollar with YouTube. You can reach out and mobilize your subscriber base and find ways to move their attention to the new episodes off YouTube.

I call companies that program on and off YouTube “Multi-Platform Networks.” YouTube, cable networks, broadcast, NetFlix, Yahoo, AOL…This is the bet. It’s not about a YouTube-only strategy. It’s a YouTube-first Strategy.

DanceOn does this really well. They created a format called Dance Showdown, funded by YouTube. The first “season,” it received 10 million views. The second season, it received over 25 million. Now they have interest from off YouTube networks, including major cable networks, to take the show to primetime.

Machinima, YouTube’s first Multi-Channel Network (MCN) has already evolved into this model. These companies are leveraging the momentum of YouTube to drive high-value programming deals off YouTube. Awesomeness did this so well they got acquired by Dreamworks Animation. I heard that AwesomenessTV recently licensed a show to a major cable network for way more than the cost of producing the show. That’s unheard of in the media business. Shows are usually “deficit financed” meaning they lose money on the first airing of the show with long-term plans of profit.

YouTube channel funding program makes all this possible. Yes, YouTube takes a big 45 percent revenue split and its damn near impossible to recoup. But it forgives the debt over time so it’s not like you have to personally guarantee it. It just wants to recoup on advertising. People are complaining about the revenue split with YouTube but they’re not computing the value of the farm system that YouTube brings to the media ecosystem. Give away the small dollars, and keep the big dollars. It’s a fair trade if done correctly.

Many say, “YouTube will fight back, if you do that.” I think the opposite. YouTube will love that you’re doing this, because it validates YouTube as a video platform. It’s the Arctic Monkeys moment on MySpace or the Arab Spring for Twitter (yes…Arab Spring is a bigger deal). It legitimizes YouTube as a Platform that’s not just about cat videos.

I’m sure YouTube’s spending could have been better optimized. I’m sure it could take a more content owner/advertiser friendly development approach than an engineering-first mentality. But I’ve been an Internet startup entrepreneur since 1994 and an investor since…well very recently. I love that YouTube is still breaking eggs, moving fast, and keeping its culture intact. It’s hard to do that when Madison Avenue and Wall Street are watching.

If YouTube offers me millions, I’ll find good use for it. I promise.