Economics Explains Why YouTube Networks Exist [GUEST POST]

I just realized that most of you YouTubers signed to a “network” don’t even know what the fuck a network is and how it works. This is my attempt at educating you.

This post is going to assume you know what CPM is (hopefully).

network-1

First, let’s start with the basics of YouTube.

In 2012, YouTube served 48 billion videos. YouTube runs ads off of these videos. This is the “supply,” or as they call it in the advertising world, “inventory.” Think of YouTube as the wholesaler of the ad inventory.

Then there are advertisers who spend money. These are people like Pepsi, GM, McDonald’s. This is the “demand.”

A typical scenario goes like this:

An advertiser comes in and says to YouTube, “I want to buy 1 billion views for 10 million dollars.”
“YES!” says YouTube. “Deal!” (That’s $10 CPM)

A deal like this is good for YouTube because they just sold 1 billion of their inventory. But in a way, it’s bad because they just sold it to the advertiser at wholesale price. The $10 CPM might not be as high as they could have gotten.

Somebody might want to pay $11 CPM for the same inventory, but YouTube can’t find out because they are limited by the number of salespeople they have and other constraints.

Queue … the networks.

Networks act like resellers.

They say to YouTube, “Release these channels’ inventory to me. I can help you sell the inventory at a premium price. And we can split the profits.” Then these networks have their salespeople contact brands and sells the ads at a premium.

YouTube wants to make money. It’ll never say no to such a deal. In other words, networks make the market more efficient.

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The consequences:

Networks, in aggregate, make higher revenues for its creators (or they are a network that doesn’t provide value-add via CPM). It doesn’t necessarily mean that all individual channels will make higher revenues – there will be some channels that fall through the crack.

The reason? Just like YouTube, networks can’t always be 100% efficient either.

What this means is that you as a content creator sometimes may get higher revenues sticking with YouTube, while some of you will earn more by being tied to a network doing a rev-share deal.

Small networks or big networks

My theory is that smaller networks may not even add to your CPM bottom line at all if they can’t afford a strong sales team. They may even earn you a lower CPM than YouTube would have given you. You, of course, have to balance that with the services that they provide and see if those services are worth paying for; for example, smaller networks may give you the personalized attention that you need. On the other hand, bigger networks run more like a college campus, where services are self-serve or sometimes DIY.

About the author: Jimmy Chen is a YouTube Manager at Venture Chimp, a talent management firm run by nerds. Contact him: jimmy[at]venturechimp.com

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  • http://mediakix.com Evan

    Pretty basic overview. I think it would be helpful to go into more details about what for example a channel can expect to make as standard part of the YT partner program, basics of how a deal is structured when a creator joins a network, etc.

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