Sector
TechnologySocial Media
Background
Aaron DeBevoise is the CEO of Spotter. We cover YouTube's evolution, why it nailed monetization in a way competitors didn't, and how Spotter helps the world's most influential creators.
Cover
Date
October 12, 2022
Episode Number
78
Key Learnings & Lessons for Investors
- Invest in the Infrastructure of Thriving Ecosystems: YouTube's thriving creator ecosystem offers a substantial opportunity for businesses like Spotter, which support and amplify the success of creators. As YouTube's monetization model matures and becomes more lucrative for creators, there's increasing value in the businesses that operate within this ecosystem, providing tools, capital, and expertise.
- Consistency is Key for Sustainable Growth: The predictability and consistency of YouTube's revenue-sharing model have enabled creators to focus on content creation without the uncertainties that come with platforms like TikTok or Snapchat. For businesses like Spotter, operating within such a consistent environment allows for more predictable growth and strategy planning.
- Data-Driven Decision Making in New Asset Classes: Spotter's success in financing YouTube creators lies in its ability to harness vast amounts of data to predict patterns and forecast revenues. Drawing parallels to film and music financing, but on a much larger data scale, Spotter's methodology underscores the importance of rigorous data analysis when venturing into new, non-traditional asset classes.
- Diversification and Portfolio Play in Digital Assets: Spotter's model emphasizes the safety in diversification. Just as individual movie financing is riskier than slate financings, investing in individual YouTube creators poses greater risk than investing in a diverse portfolio. The company's focus on a portfolio approach—deploying across multiple YouTube channels—reduces exposure to the volatility of individual creators and maximizes potential returns.
- Recognizing Under-Optimized Value in Established Systems: Spotter's ability to recognize and leverage the under-optimized value in YouTube's advertising auction system underscores a critical lesson for investors: there are often overlooked opportunities in established systems. By ensuring advertisers get premium placement on high-engagement content, Spotter can extract significantly higher revenues from the same system that others use.
- Significance of Data and Specialized Knowledge: Spotter's success is rooted in a decade's worth of data accumulation on viewership and monetization, which aids in predictive analytics. This extensive data repository grants them a competitive edge, allowing for accurate pricing and enhanced confidence in their investments. By continuously financing more content, they refine their predictive model. Furthermore, their commitment to nurturing creators, manifested through their "knowledge engine," grants them a unique position in the market. Spotter's expertise extends to actionable insights for creators, such as video thumbnails' optimal design and content timing.
- Adaptive Strategy and Growth Vision: Spotter's adaptability to changing trends is evident in their shift towards television devices and long-form content. They observed YouTube's transition from dominant mobile viewership to increased TV-based consumption and adapted their content strategies accordingly.
Key Takeaways & Business Model
- Spotter's Role in the Creator Economy: Spotter is a pivotal player in the rapidly expanding creator economy. They provide both capital and expertise to some of the world's most notable creators, such as MrBeast. Their involvement provides a unique lens into the intricacies of YouTube and its creator platform.
- Evolution and Scale of YouTube: YouTube, with its 2 billion monthly users, has evolved from a platform for random video uploads to a sophisticated content recommendation system. This transition from a search engine to a recommendation engine has been instrumental in YouTube's growth. The platform now supports around 2 million professional creators, who collectively earn about $15 billion annually, with YouTube retaining 45% and creators receiving 55% of the revenue.
- Spotter's Opportunity in YouTube's Revenue Model: Spotter operates within YouTube's unique monetization ecosystem. The platform's ad auction model, inherited from Google, allows even small and medium-sized businesses to advertise, leading to a distributed and diversified revenue base. YouTube's commitment to sharing 55% of this revenue with creators ensures a steady influx of content. With the creator's income soaring from $7 billion to $15 billion in two years, platforms like Spotter, which support these creators, have a ripe market to tap into.
- Spotter's Advantage Amidst Platform Variability: While YouTube has established a predictable and sizable revenue stream for creators, other platforms like Snapchat and TikTok have more gated or inconsistent monetization methods. Spotter's focus on YouTube creators provides them with a more reliable and sizable target audience, given the platform's established revenue-sharing model.
- Spotter's Innovative Financing Model for Creators: Spotter licenses the back catalog of content creators on YouTube, securing a portion of the revenue stream from those past videos. This model differs from traditional equity or loan structures, offering creators immediate liquidity without relinquishing control or taking on debt. With more than $600 million already deployed in just two years, the firm aims to reach $1 billion by the end of Q1 2023, reflecting the substantial growth and confidence in the YouTube ecosystem. Instead of providing loans or equity investments, they license the back catalog of content, essentially purchasing the cash flow from previous content. This approach requires a pool of debt capital, which is separate from equity used for operational costs.
- Spotter's Capital Empowers Creator Expansion: The financing provided by Spotter enables creators to reinvest in their business, from hiring essential staff like editors to broadening production capabilities. This reinvestment accelerates growth, leading to subsequent, larger deals with the same creators. For instance, a creator who initially secures $4 million might secure a deal four times larger within just eight months due to business expansion.
- Ad Optimization for Premium Content: Spotter has identified an opportunity in YouTube's advertising auction system to guarantee advertisers placement on highly-engaging content, like that of notable creator MrBeast. This ensures that ads are more effective and have higher engagement, leading to potentially 50% to 200% higher revenue from those ad units. The optimization strategy is centered around high engagement content which garners a more predictable viewer behavior and, therefore, a more effective ad placement.
Transcript
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