Defy Is Done – What does this mean for MCN’s?

How did a business with two of the biggest YouTube channels, generating more than a hundred million views a month (Smosh + Screen Junkies) go out of business?

Where did things go wrong?

The role of MCN’s within the YouTube ecosystem has diminished, and many of them have disappeared altogether. Maker Studios, which was acquired by Disney for nearly a billion dollars has been shuttered. AwesomenessTV was sold for a fraction of its peak valuation and far less than the amount of money they raised.

While I’m not privy to the specifics of what happened at Defy, there are a few key factors that I think have contributed to MCN’s diminished role today.

LACK OF COMPETITIVE MOAT

MCN’s didn’t really have a huge competitive moat. At the end of the day MCN’s are basically ad networks rolled up into a central CMS. This allows the MCN’s to sell ads directly across channels. The issue here is that you can buy ads direct from YouTube in upfronts, and/or on auction. So, what’s the incentive to buy from a third party when you can go straight to the source for the same inventory? The reality is few MCN’s were able to sell their ad inventory to brands directly.

In a previous blog post, one talent manager was candid in saying that MCN’s didn’t really sell much ad inventory directly.

They rarely sell media, and there’s really no reason for a buyer to buy media from an MCN. Why should they when they can buy from Google directly. 

I feel like the MCNs are delivering value to a very, very small number of people in their network. And it doesn’t justify their business model. It would be a lot more honest if MCNs just called themselves what they were, which is a sales agency. The fact that MCNs have contracts that auto-renew without notifying the creative party is an indication of their awareness that they’re not delivering on their promise to creators.

In addition to selling ad inventory across channels most MCN’s also sold brand integrations within influencer content. The challenge here is that, for the most part, talent wasn’t exclusive to MCN’s on the branded content side of the business. Most top tier YouTube talent had managers, agents, and/or were signed with agencies (ie WME, UTA, or CAA) and countless others managed deals themselves.

OVERHEAD

A lot of MCN’s raised a lot of money. Awesomeness raised $162.5 million, Maker raised $65 million… the list goes on.

Although these companies were referred to as MCN’s in the marketplace many of them were expanding to countless other businesses and took on massive overhead in the process. Fullscreen launched a short-lived OTT platform. Awesomeness diversified beyond YouTube and expanded into music, movies, and even book publishing – they spread themselves very thin trying to do a lot of things that never panned out.

In addition to expanding beyond their core competency numerous MCN’s invested in signing the ‘top tier’ YouTube talent in upfront deals, which were not cheap. Then to recoup costs these MCN’s had to hire teams of sales people to sell brand deals for that talent (which oftentimes never came to fruition).

According to one talent manager the only reason top YouTubers join MCN’s is “because of minimum guarantee deals. That’s it… it’s free money. The MCN’s guarantees that the creator will make X amount in integration deals over the course of the term. And, if the MCN doesn’t deliver that amount in brand deals, then the MCN writes a check.”

Doling out ‘free money’ to talent that does nothing in return is hardly a sustainable business model.

RESENTMENT

Over the years there has been a lot of public backlash against MCN’s and this could not have helped when MCN’s go to sign on new creators. Also, smaller creators who were handing over a percentage of their revenue to MCN’s often felt taken advantage of. As a result, this new generation of creators seems far more cautious when it comes to joining MCN’s and are increasingly choosing to go it alone.

YouTube drama is commonplace these days, but in the early days of YouTube it was rare for YouTubers to air their grievances to the public. That all changed when in 2012 Ray William Johnson slammed Maker Studios claiming they were withholding money from him and holding his adsense account hostage. The drama went on for months between he and then Maker CEO Danny Diamond. Just over a year later when Maker was sold to Disney Danny ended up suing Disney as well as his former business partners. The whole ordeal painted MCN’s in a negative light and MCN’s were always looked at much more skeptically.

In the early days joining an MCN was a badge of having ‘made it’ in the YouTube world. Initially MCN’s where small and catered to the top talent. Over time this exclusivity gave way for a desire to scale and it was a landgrab to acquire talent. As a result you saw companies like Maker have 500 employees, but tens of thousands of channels, Awesomeness averaged 200+ channels for every employee. As a result, talent was largely left underserviced and many felt taken advantage of.

In one interview with an MCN executive, he confirmed that many YouTubers who joined MCN’s felt underwhelmed by their services, stating that:

“You see that same kind of conversations happening around MCNs. You have creators who say, “Hey, I’m giving you anywhere from 0-30% of my ad revenue, are you giving me that value in return?” A lot of creators don’t feel like they’re getting that value in return.”

As a result of so many creators complaining about wanting to get out of their MCN contracts YouTube rolled out a policy in 2013 making it much easier for YouTube Creators to get out of their MCN contracts.

To be clear, I’m not saying that all MCN’s don’t have viable business or that they’re all ripping off their talent. There are a lot of smart, talented, and moral people within the space. However, it does seem as though the heyday of MCN’s is largely passed.

So what does this mean for MCN’s?

As I outlined in a previous post, I think if MCN’s are to survive – the ones that will thrive and be successful are those that cater to specific niches and can actually sign enough of a small group of talent to own key verticals as well as properly service their talent.