On YouTube and communism

On a recent podcast focused on IP rights valuation, we discussed the opportunities and risks of looking at YouTube channels as an investable asset. One of the participants of the conversation joked that investing in this subsegment is akin to digging for oil in a communist country — you may find a well, but quickly see it confiscated by the government.

We understand the metaphor and the implied concern: it may seem as if things are out of one’s control given YouTube’s scale, power, and ability to change its algorithm, pricing or other policies on a whim. However, as with all segments of the entertainment industry that initially appear to be challenged based on common perceptions, opportunities emerge when digging a layer deeper. We believe the following reasons substantiate selective investment in this field:

1) Valuation matters. Acquisitions of channels frequently happen at 3–6x cash flow. Loans are made at 50–90% LTVs. A diversified portfolio at these levels should amply compensate for the aforementioned risks

2) The decision to invest in or lend against rights to any video content should simply be based on a track record of recurring monetization and consistent or growing audiences. We believe the fact that YouTube happens to be the current mechanism for such monetization and audience development should be a secondary consideration, not the primary one

3) YouTube’s competitors are salivating at the opportunity to poach YouTube’s channel partners. If the content and its audiences are proven, a rightsholder can substitute the distribution platform. Music investors may remember Pandora being positioned as the future of music IP monetization at its peak in 2013–2014. While that platform’s usage fizzled out, the value of music IP certainly didn’t

4) Unlike many other services in the digital economy, Google/YouTube is not under-earning or subsidizing its channel partners. In fact, one can argue YouTube’s 45% take rate is too high relative to some other content distribution platforms. This supports a view that current levels of monetization are not a “fluke”

5) Within an ocean of low-budget, long-tail content are islands of studio-grade quality, evergreen and hyper-targeted subject matter expertise, and talent with audiences exponentially larger than those of traditional Hollywood

6) We’ve seen several cycles of YouTube’s algorithm changing, evolving, and making mistakes. One would be foolish to stay complacent, but, similar to any other dynamic industry, masters of their craft can prove their ability to adapt and stay ahead of the curve. Having knowledgeable operating partners around the table is paramount to any investment in the YouTube channel ecosystem