Sunday, May 23, 2010

Economics of YouTube Musicians

I have been spending some time watching Youtube recently and was amazed by the talents of all these YouTube Musicians all over the world.

Check out Sungha Jung

And Singapore's own YouTube Sensation

The analyst in me started wondering about the business economics of these musicians. So here I will simply share some random thoughts on how things can work.

First, as pointed out by Mary Meeker and her famous Price to Eyeballs, the no. of hits should have some value. Btw this is a crazy idea in finance and still draws laughter to this day. I guess Meeker's greatest mistake is to attribute the price of a stock directly to eyeballs, which grossly overstates the true profits that millions of hits actually generates.

It is surely quite a tough job to determine the true profits from millions of hits.  But it's been 10 years now and we have a history of stuff to help us. Also, I will stop short at revenue and not profits, which  requires another few levels of analysis. For a start, let's look at some online businesses out there:

Online social games: Zygna, revenue paying users: 5-10%
2nd Life: Revenue paying users 5% or less
Facebook: Revenue paying users probably 2% or less
Blog clicks: 8percentpa, monetize clicks 1% of all page views
Less than successful targeting online: e.g. selling Amazon books on personal websites, less than 1% of all page views

So with these historical no.s, we can roughly say that maybe 1% of the eyeballs, or hits can be converted to money. Obviously the kick comes from the per user revenue, or just to throw in a technical term: the ARPU or average revenue per unit/user. The ARPU varies widely depending on the nature of the online business. For Zygna, this is pretty high, at $4-5 or even more . For Blog clicks, unfortunately, it's more like 10c or less.

Back to YouTube Musicians, so a million hits converts to perhaps 10,000 potential revenue paying users and then if we put ARPU at $1, that's $10,000. That's the theoretical value of a Youtube Channel with a million hits.

In reality, we need some form of infrastructure to realize this $10,000. Specifically for YouTube Musicians would be distribution: like iTunes to sell the music via downloads, or record labels to sign them up, make albums and sell CDs through music stores like HMV, sponsors, experienced artists to help them (like with joint live performances), capable producers, good agents etc. And depending on many other factors, the realized value can be much greater (or smaller) than the theoretical value.

Now you might be thinking, this isn't all that attractive right? Even if we scale up the value by 10x, a million hit channel can only generate $100,000. That cannot even buy the cheapest HDB flat. I guess there are two points pertaining to this.

1. In the world of internet, the scale needs to be in 10-100 million or more

Sungha Jung has over 130mn hits for all his performances, going by my simple calculations above, his channel's theoretical value is $1.3mn, and in reality he has probably monetized even more. He succeeded with help for famous guitarists all over the world, supportive parents, perhaps generous sponsors and producers etc.

When we look at some old world artists with just one hit song, like Lisa Loeb with "Stay" or Berlin with "Take My Breath Away", CD sales are formidable at just a few millions, that is bcos the no.s left out people who listen half-heartedly and decided not to buy. Whereas the internet captures all these no.s as hits. To put it another way, if "Stay" started out as an internet song, it could have generated 100mn hits.

2. Longevity issue

A channel that can generate $10,000 in revenue one off might not be any good. But a channel that can generate $10,000 annually for say 10 years is something. Singapore's GDP per capita is $40,000. One channel that can year in year out gives $10,000 is worth a lot. But needless to stay, that can only be achieved with constant maintenance and updates. This in itself is a lot of hardwork.

Most musicians, if you ask me, don't really survive 10 to 20 years. Think of all the hits in the 80s and 90s, and where are the singers? Tiffany, Debbie Gibson, NKOTB, Jewel, Boyz To Men, Michael Learns to Rock, Cranberries etc. Well one might argue they made enough, called it a day. Or they might have drifted into oblivion against their will. Actually the pace of human civilization is so fast that most careers don't last that long as well. Guess that's why a lot of people in their 40s and 50s struggle with jobs and competition from the younger generations.

Back to YouTube Musicians, longevity is an issue, there is no two way about it. It would be quite a feat to last even just 10 years.


To sum it all up, let's try to think about how to then maximize the full value of a popular channel.

I guess one logical answer would be tremendous hardwork and then promotional work in the first two years. This would include quick updates of new videos, selling via iTunes, finding sponsors and producers etc. This would then be accompanied by live performances, appearances in media, shows etc. Hopefully, with these, the revenue scaling really does go from $10k to $100k for a million hit channel. Of course, the better leverage factor would be generating more hits ie from million channel become 5 mn channel. This would in turn translate into more revenue down the road.

As the years progress, things will definitely slow down, so the focus might be on recycling the songs for other uses: awareness videos, commercials etc. And perhaps selling distribution rights but retaining a very small revenue share.

Thus the maximum absolute dollar value extracted could probably be somewhere between $300-400k. Well good enough to get a 3-4 room HDB in the suburbs, I guess.

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