When you ask the average net citizen what they think will happen to YouTube in the next couple of years, the response is optimistic. And why wouldn't it be?

At face value, the YouTube ecosphere—with its growing sectors of talent managers, brokers, production companies, advertising agencies and marketers, tool and analytics developers—is the new, digital Hollywood with a tech startup feel, and it can only get better from here.

When you ask the industry insiders and business executives who’ve set up shop in this new YouTube economy the same question, you get a more pragmatic, if not a tad pessimistic, prediction.

YouTube-centric CEOs and digital leaders peered into the crystal ball of the immediate future at this year’s unofficial YouTubers' conference VidCon in Anaheim, California and what they saw—or think they saw—involved peril and even bankruptcy. YouTube has massive potential to revolutionize the entertainment industry and redefine storytelling, but in order to do that, the industry has to first start making money. This can happen by either YouTube charging less money for its services and the arrival of a competitor, or big brands injecting capital.

If neither of these happens soon, much of "new Hollywood" could go out of business. And maybe that's not such a bad thing.

Trouble In MCN Land

Multichannel networks, or MCNs, are a weird hybrid of production studio, ad network and talent management that operate independently from Google while existing mostly on YouTube. They've managed to raise large amounts of capital from investors like Google and Time Warner, but quite a few are still struggling to make a profit. Although technically "new Hollywood," MCNs are rather reliant on traditional business models and do very "old Hollywood"-like things like having contract disputes with talent or asking teenagers to sign four-year contracts. One MCN is currently being sued by both a former top talent and a former CEO for two entirely different reasons.

Scandals aside, the current MCN business model that's reliant on ad revenue is, well, “screwed” and “unsustainable”—especially the MCNs that have hundreds or thousands of channels. These words were spoken by three different business executives: entrepreneur Mark Suster (one of the first investors in the MCN Maker Studios) in his keynote, Jim Louderback the CEO of the rare profitable MCN Revision3 in his talk as well as a later interview, and entrepreneur Jason Calacanis in his closing keynote.

First-time VidCon attendee Peter Bray, the director of digital at the global ad agency Saatchi & Saatchi, predicts the “MCNs that don’t appear to be making money” will “be swallowed” in a impending period of “aggregation,” among themselves and by traditional media companies. In some ways, this is already happening: Discovery Networks purchased Revision3 in March, and then shortly thereafter acquired the portfolio of Revision3’s top talent Philip DeFranco. Just last week, Maker Studios announced it would be purchasing the professional video platform Blip. 

Mike Bienstock of Semaphore, the business management and tax company that helped broker the deal between DeFranco, Discovery and Revision3, believes the deal he worked on will serve as a “template for future deals” for other YouTube celebrities reaching that “crossroad.”

YouTube’s Unfairness Will Drive Businesses Into Competitors' Arms

This unsustainable economy driving consolidation is “do no evil” Google’s fault, say the business executives. The search giant takes 45% of all revenue from YouTube ad sales. Google has every right to take a portion to maintain all its services but critics say 45% is too high given how little they actually make on YouTube.

Through the Partner Program, YouTubers make on average $3-$5 per thousand views, a figure known as CPM or cost per thousand. But if that creator is also part of an MCN (which many are), then that YouTuber also gives the MCN on average about 30% of their earnings. The pie is small to begin with, but a small pie cut into little pieces leaves no one satisfied. 

Saatchi & Saatchi's Bray, as a newcomer to the industry, described the way “the dollars are being distributed” on YouTube as “simply unfair” when you compare them to the music industry. Yuri Baranovsky, the founder of the award-winning HLG Studios and veteran of the industry, took it up a notch when he wrote in an email the “Partner Program needs some serious revamping” because “right now, it feels an awful lot like a filmmaking sweatshop where quality is traded for sheer quantity at low, low prices.” Baranovsky continued:

Yes, some creators are making millions, but those are the exceptions—for the most part, I think many are forced to spew out weekly content (quality be damned) for an entire year while barely getting enough money to survive. That's not sustainable nor does it create very good art.

YouTube is able to get away with this high percentage, argue critics, because it currently has no strong competitors. 

Entrepreneur Calacanis’ closing keynote on the last day of VidCon was all about rallying YouTubers to petition YouTube to give them “a better deal"—that is, take a smaller share of ad revenue. Calacanis even suggested getting off the platform and cozying up to competitors in the meantime until their demands are met. Ray William Johnson—YouTube’s first millionaire and the top talent suing Maker Studios—has already done this by joining the video site Blip, as has iJustine with her fitness tech show on AOL. Both made the move this spring. Maker Studio's interest in Blip also shows the MCN's desire to get off the YouTube platform.   

Maker Studio's investor Suster described the way YouTube deals with MCNs as “ignoring” them in his keynote, a big mistake considering there’s “so much pressure in this business to pop up elsewhere” on competitor platforms, or on their own.  

When ReadWrite reached out to YouTube to comment on the issues MCNs and folks like Calacanis are having with YouTube's high cut, the company didn't even address it. Clearly, what happens to MCNs is none of YouTube's concern. A YouTube spokesperson had this to say when asked for comment: 

Creators are connecting with audiences and advertisers with one billion engaged fans and growing their businesses online successfully at a rapid rate. We're committed to our creators and have invested hundreds of millions of dollars in fast, simple streaming of content to a global audience.

The Big Brands Will Save, If Not Liberate, The Creators

The bright spot in the emerging YouTube economy is the arrival of big brands and their large amounts of cash, which they will then put into the industry either through advertising or brand deals with YouTubers and MCNs.

Saatchi & Saatchi's Bray, who was surprised he was the only person from a large ad agency in attendance at VidCon, described his role at the conference as “a sponge,” and hopes that once more brands and ad agencies get on YouTube they “don’t ruin it” by "disrupting" the "conversation, connection" the YouTuber has with their fans by force an old business model harness on the space.  Bray was genuinely impressed with the fandom and community he saw, calling the YouTube ecosphere “incredibly leading edge,” “authentic” and reminding him “of 1995, when the Internet was just starting to gain momentum.” However unstable the current ecosystem is regarding MCNs and unfair revenue splits, Bray feels it’s best to work within the system.

Attendees at the Orabrush booth. Attendees at the Orabrush booth.

Others disagree, to an extent.

“From a brand standpoint, I’ve tried so many times to work with a network [MCN], and I can’t ever get anything done” said Jeffrey Harmon, the head of marketing at Orabrush, the first company to do all their advertising through YouTube. “I just go straight to the talent—that’s why we come here, we’re friends with YouTubers, and YouTubers are like, ‘oh, I understand this network wants to charge you lots of money but I really like Orabrush so I will just do it anyway’,” added Harmon. Why should a small business like his go through a middle-man, Harmon reasons.  

Ricky Butler, president of the brand integration and content strategy company Plaid Social Labs, has a list of “hundreds” of YouTubers he works with personally in the event they change contracts or move to a different MCN (or if MCNs disappear altogether due to lack of profitability). Butler’s vision of the future includes YouTubers “in the position where they can host their own ads and instead of being exclusive with one network, they’re going to give networks options to advertise on their channels. That’s how it is every else online.” Basically, YouTubers in complete control over their ad choices and brand deals. 

Some Stability In Tools And Big Data

Another bright spot in this otherwise ailing digital economy are the analytics and YouTube tool companies that show no signs of hemorrhaging money or scandal. Dane Golden, an independent marketing analyst for hey.com, believes YouTube’s future will be “founded on big data and audience engagement tools” and “any company that is doing this for a business should be tracking analytics on several different levels.” Golden went on to cite the management tool ZEFR, along with MCNs Maker Studios and Fullscreen, as great examples of companies in the YouTube-sphere using big data right.

Fullscreen was actually mentioned by Revision3's Louderback too, as “doing the smart thing on the MCN side where they bring brands in and provide services for large companies to help them get the most out of YouTube.” Fullscreen’s success as an MCN by diversifying in this way, and providing services to brands with its tools is not particularly sustainable either, however.

“In the early days of Facebook and Twitter you had all these social media consultants who would come in and help you tweet and help you Facebook, but now all those companies have moved this in-house and the same thing will happen to YouTube,” predicted Louderback. “Fullscreen is doing a great job of filling that void” said Louderback, but what will happen to Fullscreen once brands no longer need help in the YouTube space? 

The Future For New Hollywood Is Frighteningly Unclear 

In order to stabilize the current YouTube economy either Google reduces the size of their ad revenue portion or brands start baking larger pies (i.e., spending more money in the space). Both are tall orders: Google reducing its fees seems unlikely considering they don't view MCNs lack of profitability as their problem, but waiting for that big-brand money pie to bake may take years. Until that cash infusion happens, the consolidation of the space will continue, to what some business executives describe as a detriment to YouTubers.

The worst case scenario, of the old Hollywood portions of this new industry (aka MCNs) going out of business,  might be best option for YouTubers as it would provide them the most freedom and a realization of the indie dream... but this too is unlikely given the rising trend in consolidation and business executives desire to make money on every frontier. YouTubers being the masters of their fame and fans is what puts the "new" in "new Hollywood" but it's the "Hollywood" (the managers, agents and executives) that give the industry its validity, its appeal to big money. Or is it?  

As Saatchi & Saatchi's Bray noted, the real power here may lie in the strength and size of the fans and individual stars.  The true monetary potential of New Hollywood may lie in the shedding of its MCNs. 

Note: The name of ZEFR Software has been corrected.

YouTube sign image by Eric Fleischauer. Orabrush image by Fruzsina Eördögh.