These YouTube Stars Represent a Massive Media Shift

How long before advertisers commit?

Howard Hughes used to house some of his space-age airplanes in a hangar in an industrial area of Los Angeles. These days, a different kind of mad experimental genius can be found in Hughes’ old playground, which is now unofficially in Silicon Beach.

Inside are cutting-edge green-screen and motion-capture equipment, a mini theater, editing rooms loaded with monitors, lots of sleek nooks and catwalks, even a dance studio straight out of Saturday Night Fever. There’s a main studio marked by lighted signs warning “On Air”—ironic, since nothing produced here ever actually goes on air.

On a sunny April morning inside the new YouTube Space L.A., one finds a futuristic high school atop the remnants of an elaborate castle. A few weeks earlier, most of the 41,000-square-foot facility had been taken over by Freddiew, a YouTube creator working on Season 2 of Video Game High School (VGHS), a show about a future dominated by gaming culture. More recently, members of YouTube’s inaugural Creator Class collaborated on a group project set in medieval times.

The production of VGHS is a signature moment in YouTube’s progression. Creators Freddie Wong and Brandon Laatsch are true stars, as evidenced by their ability to raise $800,000 on Kickstarter from roughly 10,000 fans while creating a major role for sponsor Dodge Dart. You might not have any idea who Freddiew or Ray William Johnson or Daily Grace or Bethany Mota are, but your teenager probably does. And the way things are going, those teens are not likely to suddenly morph into devoted CBS viewers in another 10 years. Rather, they’re at the epicenter of a massive media shift.

The production facility and the training YouTube is providing are symbolic of where the company is trying to take its business—and the inherent growing pains. YouTube finds itself in the midst of adolescence, trying to figure out what it wants to be. But parent Google has a plan. It wants it to be a next-generation content platform, remaining neutral while also cultivating creativity and winning content, as well as generating a huge business.

If Freddiew represents the future of media, it sure doesn’t look like Warner Bros. or Condé Nast. The show’s home is Studio 3 in a scruffy warehouse down the street from a lighting wholesaler near downtown L.A. Wong, Laatsch and a handful of staff are trying to install a staircase so they no longer have to use a ladder to go upstairs to the bathroom. Their studio is a blend of backstage at a high school play and the workshop of a madman. There are props, costumes, random bits of plywood and lots of power tools.

Started in 2010, the Freddiew YouTube channel has generated 5.3 million subscribers and a whopping 826 million views. Back then, the pair of film school graduates ditched jobs working on straight-to-DVD releases to try their hand at special effects-filled action-movie spoofs like Cereal Killer (17 million views) and video game homages like Real Life Mario Kart! (21 million).

Behind the warehouse, Wong and Laatsch describe the state of their celebrity. “In certain circles it’s huge—in most of society, not so much,” says Wong. “We take a lot of pictures with fans, and when they walk away, their parents say, ‘Who was that?’”

“When we go to events like E3, it’s pretty difficult to get around,” adds Laatsch. “For the first time we felt tempted to wear disguises.”

And there are more Freddiews out there. On a weekly basis, Maker Studios’ Epic Rap Battles in History consistently commands somewhere between 20 million and 75 million views. Ryan Higa of the channel Nigahiga has generated a staggering 1.4 billion views to date and counts almost 8 million subscribers.

“I would rather walk through the mall with one of my friends who is an actor on an ABC Family show than walk through the mall with Ryan Higa,” says Chester See of YOMYOMF, one of 100 channels YouTube funded last year with a $100 million push. “Because he’ll be stopped every two minutes to take a photo, and there’ll be a mob at times.”

There’s more than a mob gathering at YouTube. The company recently announced it achieved 1 billion monthly users. Users are now watching 50 percent more videos than last year. Among channels that attract 100,000 subscribers, most do so in just three months. In 2010, the average path to 100,000 subscribers was 15 months.

Despite those impressive numbers, YouTube is seen by many as a video search engine, or the place they watch that Gangnam Style link their friend sent them. Subscribing to channels, watching YouTube videos as one’s core entertainment, is a ways off for mainstream consumers. But just wait, argues Robert Kyncl, vp, global head of content. “The younger generation’s consuming behavior is completely different,” he says.

And the media business is completely different, too. Kyncl likes to draw charts to illustrate his vision. In the past, he explains, most content creators were wholesalers who had to deal with all sorts of middlemen, distributors and retailers. Those players, from Comcast to Walmart, wielded tremendous power and kept the system closed.

The Internet has opened things up, connecting creators directly with consumers. Shelf space is unlimited. Creators now have to act as retailers—doing their own marketing, programming, promotion and so on.

That has led to two new realities for YouTube creators. They are on their own, and there’s a ton of competition out there. “The skill of breaking out of the clutter is increasingly more important,” says Kyncl. “He who creates demand, takes the profit. And we are a platform for next generation of retailers.”

A platform that is just like cable, says Steven Kydd, co-founder of Tastemade, which fashions itself as something of a next-gen Food Network. The startup, backed by $5 million in venture capital from Redpoint Ventures as well as YouTube, has built three gorgeous kitchen sets in the old Toms Shoes factory in nearby Santa Monica.

There, creators like Australian chef Rob Nixon (361,216 subscribers, 78 million views) host live events and generally work to take their content to the next level, using equipment furnished by sponsor KitchenAid. “We see this as history repeating itself,” says Kydd, who earlier helped found Demand Media. “Twenty years ago, we saw all these cable brands being built, and talent was discovered who became household names,” he says. “And we see this amazing opportunity to only do this on digital platforms and do it globally.”

Besides creating owned-and-operated content, Tastemade also represents and nurtures lots of other cooking talent on YouTube, like Nixon. “We think Google is pretty good at distribution and monetization. We think we should focus on curating the best talent,” says Kydd.

Tastemade exemplifies the direction in which YouTube believes content is headed. Awesomeness TV is another. Founder Brian Robbins, a former actor, has produced hits like The Amanda Show and Smallville. He’s now programming a host of short-form series aimed at tweens and teens (including talk shows like IMO) and has eight scripted series in the works.

“I remember last year at the upfront, they were promising advertisers they were selling us on 17 million views for the year,” says Robbins. “We’re gonna be at 100 million views by the time May 1 comes around, and that won’t even be a year.

“I think there’s going to be some big winners in this space,” he adds.

According to YouTube, 25 of the funded channels command 2 million views per week, and 70 claim over 100,000 subscribers (29 million subscribers collectively).

Yet there is plenty of grumbling about the funded channels strategy. If you’re just a platform, why pour money into 100 channels? And why promise that you’ll promote a bunch of channels with $200 million in marketing? Why open a production studio that creators can use for free?

“I think they just wanted to start something in Hollywood, get people aware they were serious and get people in the ad world to pay attention,” says one Hollywood producer.

“What they did was bring more money into the space than anybody had ever seen,” says John McCarus, svp, group director of brand content at Digitas. “That brought an awful lot of excitement and hype around the channel commitment and helped advertisers get over quality concerns.”

That hasn’t stopped creators from complaining. Hank Green, co-founder of VlogBrothers, recently posted a missive on Tumblr called “Lessons Learned From YouTube’s $300M Hole.” Green argued that YouTube handed some creators $5 million dollar checks to improve their viewership ad return, but it didn’t work. “One of the things that was learned is that you can’t make content for the Internet the same way,” says Green. “Even if you get the same ad rate, you can’t get the same ad density as TV.”

“What we did last year was make half of our bet with YouTube natives [and] retailers, and half with wholesalers,” says Kyncl. “Just like in any portfolio game, you have winners and losers. You saw some people who were wholesalers who adapted to the retail environment. It helped us articulate our platform strategy. Before that, I think we were wondering: Are we a TV network? A channel? Who are we? We firmly decided, we’re a platform.”

A platform that keeps half the ad revenue. That, coupled with low ad rates and the fact that many creators also employ third-party sales networks, has some creatives worried.

“Rolling up views was supposed to roll up rates. That didn’t seem to really happen,” says YOMYOMF’s See.

“YouTube is essential if you’re in the video space, but you get hit a lot of ways,” adds another programmer.

That might explain why many creators, including Freddiew, are trying to direct users to their own sites while cutting their own ad deals. One major digital content producer that maintains a huge YouTube presence declines to even bother selling ads on the channel, opting to avoid lining YouTube’s pockets.

Then there’s the way YouTube approached the marketplace last year. “They asked for like $17 million of upfront commitment from brands,” recalls Ritu Trivedi, svp, digital strategy and partnerships at MediaVest. “I don’t think that’s worked out that well for them. They are definitely pivoting.”

Pivoting away from the likes of Deepak Chopra, Shaquille O’Neal, Madonna and Tony Hawk as the faces of new channels, it seems. But according to sources, as recently as last year, YouTube was still courting traditional media, looking to ink a programming deal with a major news network. Then YouTube backed out, apparently saying it wanted to focus on the under-30 crowd.

“It will be interesting to see how YouTube evolves,” says Joe Medved, partner at SoftBank Capital. “As every new platform evolves, it always goes to traditional publishers first, then the natives. You clearly have to invest time in this new medium to succeed.”

That’s reflected in that $100 million second round of funding. According to sources, it’s a relatively short list of channels—among them, YOMYOMF, Awesomeness TV, The Fine Bros., Nerdist, DanceOn and Shut Up! Cartoons. Rather than emphasizing brands buying channels, YouTube is putting the spotlight on brands producing content.

For example, Capital One recently enlisted a trio of YouTubers to produce 16 original videos during the NCAA men’s basketball tournament, ranging from trick shots to dance sequences, and interviews with the likes of Charles Barkley, generating 5 million views.

“We supported it with a media buy,” says Patrick McLean, vp, digital brand strategy at Capital One. “And there was a heavy organic component to the views.”

Another example: Procter & Gamble and Saatchi & Saatchi tapped YouTube beauty vloggers EleventhGorgeous to create a custom video promoting several new CoverGirl products available at Walmart, resulting in 3.1 million video and print impressions.

It might be that advertising simply materializes differently on YouTube. "People like Phil Defranco and other big YouTube personalities are much more like radio stars, like Howard Stern or Don Imus, than they are like TV stars," says Larry Tanz, CEO of Vuguru. "Their content is very "them." And advertising may have to unfold like it did for guys like Stern, with smaller brands that take a leap of faith and build over time."

"I don't think you'll see the NewFront dollars come from TV budgets," adds Jordan Levin, president at Alloy Digital.

But when it comes to creating must-buy content, the Web may not be there yet, anyhow. “We are not at the point where we buy shows as part of NewFronts,” said Adam Kasper, chief media officer, Havas Media, N.A. “That makes it tough to pull dollars out of TV.”

That points to another challenge. The House of Cards factor. Many 40-year-old media executives have no idea who Freddiew is, or what Awesomeness TV is. But the buzz of Hollywood and Madison Avenue this year has been the Netflix original House of Cards, YouTube has nothing like that. Might they have been better off funding 10 channels and try to come up with their own breakout hit?

“That’s not that easy,” says Robbins. “Every studio in Hollywood tries to do that."

“Netflix concentrates its bets,” says Kyncl. “We distribute our bets quite a lot. We don’t have standard hits, but we do have things like Harlem Shake, and they seem to happen very frequently.” 

Regarding the split with creators, Kyncl says, “I’ve thought a lot about this,” acknowledging that content producers take home 70 percent of revenue from iTunes. But commerce is a different beast altogether. “In an ad-supported business, there is a much different cost structure. The delivery costs are much bigger,” he says. “When I look at it, cable pays out equal or even smaller. The counter to that is, ‘They pay out a lot more money.’ We’ll get there. Our utmost interest is in content creators doing well. If they do well, we do well. If they don’t, we feel it.”

Which is why YouTube has invested in the production studio and the classes. Adweek sat down with three members of the inaugural training class: John Elerick, Wendy Nguyen and Taryn Southern. Each was thrilled to be included but lamented at not having enough time to take full advantage of the opportunity (Elerick and Southern have full-time jobs).

Nguyen and her boyfriend/collaborator gravitated to the space’s green-screen rooms and high-end cameras, looking to up her production values. Elerick and Southern latched onto YouTube’s product and data teams. Among the learnings: Don’t disappoint users by putting a #gangnamstyle hashtag on your video unless you are really going to feature the song, link to playlists rather than single videos, and produce more videos more consistently to nab more subscribers.

(YouTube looked to learn as well, and Southern suggested it build more generic sets, like bars and restaurants. For a topical comedian, the castle set holds less value.)

Each of the budding stars spoke about how competitive YouTube has become. “There is so much content,” notes Southern. “We’re self-financing. We’re competing with premium channels that have gotten funded with millions of dollars. I don’t fault YouTube for it, but it is getting harder for the independent guy to get seen amidst professionals churning out content every single day.”

“It would be a lot easier if content was more promoted,” adds Elerick. “I was at one time in the top 500—now I’m not in the top 1,000. YouTube has changed a lot. It’s way different—the algorithm, the amount of steps you need to get to your subscription channels. It has made things a lot more difficult.”

YouTube’s veterans, official “residents” at the YouTube Space, are in a different place. Shooting VGHS2 was “a very good experience,” says Wong. “What it enabled us to do was change around the equation. Instead of paying some dude a location fee because he owns a building, now we can put it into production. It becomes a giant step up.”

The same could be said for YouTube.