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OCT
24
12 MOS

Maker Studios Lawsuit: Inside the War for YouTube's Top Studio

Danny Zappin, a failed actor and jailed drug dealer, co-founded Maker with a simple goal: to become the United Artists of the digital era. But as it became L.A.'s hottest young company and hit 4 billion views a month, Zappin lost control of the $100 million-a-year business to the moneymen he helped recruit. So he sued.

Danny Zappin Horizontal - H 2013
Christopher Patey
Danny Zappin

They're the type of numbers that make Hollywood execs wake up in a cold sweat. While AMC congratulated itself when its Breaking Bad finale on Sept. 29 lured 10.3 million viewers, a few months earlier, Maker Studios' Epic Rap Battles of History YouTube station ended its second season with Rasputin vs. Stalin, a 3½-minute spoof in which unknown actors played the Russian historical figures in a ridiculous hip-hop face-off. Unlike Breaking Bad, which cost millions of dollars to produce, this Rap Battles installment cost just $110,000 to make and nearly nothing to market. Since premiering in April, it has been viewed 28 million times, following in the footsteps of Steve Jobs vs. Bill Gates (62 million views) and Mr. T vs. Mr. Rogers (49 million).

And Rasputin vs. Stalin is just one of about 10,000 videos uploaded to YouTube each day by Maker Studios from its 71,000-square-foot campus in Culver City. The videos, produced by a roster of 50,000 individual creators, are sold to advertisers and distributed via YouTube's most-subscribed channels, which together generate more than 4 billion monthly video views. A self-proclaimed digital version of United Artists, which was founded nearly a century ago by Hollywood's top talent intent on controlling their own interests, Maker today boasts a roster of online superstars including PewDiePie, Toby Turner and Shay Carl, whose not-quite household names leave anyone over the age of 35 scratching their heads and many under that age in their thrall.

PHOTOS: Top Grads of YouTube U

The money, however, is the big question. Although Maker has enjoyed investments from top venture capitalists, media companies and such Hollywood luminaries as Robert Downey Jr. and Avatar producer Jon Landau, it is far from making Hollywood money. Breaking Bad commanded $400,000 for a 30-second commercial during its finale. Maker Studios' take from YouTube for Rasputin vs. Stalin? A fraction of that amount. Or, really, a fraction of a fraction of that amount.

But the economics are changing, of course, and therein lies the tension at the heart of one of the most closely watched lawsuits in both Silicon Valley and Hollywood. Its players and possible outcome will speak volumes about the value of content -- and who should control it.

The origin of one of Hollywood's hottest young companies can be traced back a decade to a federal penitentiary in Lompoc, Calif. It was there that Danny Zappin bided his time drawing portraits of other inmates and thinking about where things went wrong. In his 20s, he moved from New York to Los Angeles to be an actor, but after unsuccessfully confronting Hollywood's "gatekeepers" -- his word to describe the agents, producers and casting directors who keep the wannabes from working -- Zappin needed money. So he smuggled Ecstasy, got caught and was sentenced to two years in prison.

When he was released to home confinement in late 2004, Zappin had nothing but time on his hands. Surfing the web, he happened upon YouTube, the then-months-old video-sharing platform that later would be acquired by Google for $1.65 billion. Exploring the site, he encountered actors and creators who were doing online what he had failed to do in Hollywood: break through the gate.

With money from parking cars, Zappin purchased a few cameras and began uploading videos like the one where he danced as goofily as he could and challenged others to top him. Calling himself Danny Diamond, he quickly grew a following and became a leader of sorts in a ragtag community of young YouTube stars trying to figure out how to monetize their audiences. By 2009, Zappin, on-and-off girlfriend Lisa Donovan and a few others had come up with the idea for Maker Studios. The goal was to create a "studio" for YouTube that pooled the talents of digital A-listers.

STORY: Maker Studios Power Struggle Detailed in Former CEO's Lawsuit

"There's no gatekeeper," says Zappin. "You can create whatever content you want. And if you understand how the site works -- which I really studied and learned extremely well -- you can drive audience."

The success was immediate: Maker became one of the first YouTube content providers to hit 1 million views, then only three years later, it hit 1 billion views. Its current roster of producers churns out such videos as Harlem Shake FAIL (18 million views), Justin Bieber Kisses Selena Gomez! (30 million views) and Screw the Nether (Moves Like Jagger Parody) (27 million views). Maker's annual revenue now is in the nine figures, according to insiders, and its meteoric growth has attracted venture capital firms including Greycroft and Upfront Ventures and Hollywood investors such as Downey, Shari Redstone and Elisabeth Murdoch. In December 2012, Time Warner bought about a 10 percent stake in the company for $25 million, and Canal Plus and telecom giant SingTel also have contributed financing. The investments have valued the 365-employee company at several hundred million dollars, an astonishing figure for a content-only venture that hasn't reached its fifth birthday.

Zappin, now 38, shakes his head when he hears those numbers. Today, he effectively has been ousted from the company he helped build. Zappin, whose impatient demands and polarizing fights with talent were as troublesome to colleagues as his salesmanship and vision were beneficial, resigned as Maker CEO in April. Afterward, he claimed he was induced into stepping down by others at the company who had misled and pressured him. In June, he sued to challenge Maker's handover of leadership to Ynon Kreiz, the Israel-born former chief of Endemol, the international TV production company behind Big Brother, Wipeout and Deal or No Deal. Court papers filed in Los Angeles Superior Court allege that Kreiz, along with Maker's other co-founders, investors and lawyers, were motivated by greed and conspired to line their pockets with Maker's assets.

STORY: Maker Studios Completes $26 Million Series C Financing Round

The Maker case is playing out like a Hollywood version of a story familiar to Silicon Valley upstarts, from the battle Mark Zuckerberg fought with Eduardo Saverin over Facebook to the tale of betrayal that led Twitter to oust co-founder Noah Glass. At stake is control of Maker at a key time, as the online video space transitions from novelty to monetization. "I wasn't allowed to be the CEO or on the board of directors," says Zappin, "because I was a creative."

Maker insiders say Zappin's allegations come as a surprise. "When we funded the company, it was on the condition that he wasn't going to be CEO," says Mark Suster at Upfront Ventures, a Maker board member and a co-defendant in the lawsuit. "During due diligence, we found out that he had a felony."

But Zappin says his drug-dealing past is just an excuse. "This is one of the hottest companies in L.A.," he says. "We went from a $5 million valuation to $200 million in two years. We were at 2 billion views last December, and now we've got 4 billion. It's growing and definitely one of the biggest successes for our [venture capitalists]. So I wasn't failing. Let's put it that way."