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OCT
24
9 MOS

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

Born in Columbus, Ohio, to a church-going family whose matriarch ran a Christian heavy-metal record label, Zappin consistently has teetered on the line between mainstream and rebel. He says he was a straitlaced kid who avoided drinking or drugs, but after a few semesters at Ohio State, he went to Florida for spring break, had a blast and just decided to stay. He enrolled at a local college and studied film and business, but he never graduated. During the mid-'90s, he moved around, first to New York and later to California, where a pilot he made for Comedy Central went nowhere.

When he got out of prison, Zappin connected with others who had discovered the viral potential of social media and started wondering whether there was a business to be built there.

"One day, Danny called me and said, 'I have this idea,' " recalls Scott Katz, who worked at Maker in the early days, mostly on clarifying the business plan and finding funding. "It was about getting all these YouTubers together and forming a United Artists for YouTube."

The vision to create a talent-run studio that would give its creators promotional, management and ad-sales support wasn't Zappin's alone. Donovan's LisaNova channel pre-existed Maker and became so popular that she appeared on The Ellen DeGeneres Show and MADtv. When Maker launched in Venice, Calif., in 2009, with only seven employees, she went in to $200,000 of personal debt to help finance the new company. (She later got a grant from YouTube, and Maker also was supported with a $60,000 brand deal with Sanyo lined up by Zappin.)

EXCLUSIVE: Ynon Kreiz Joins Maker Studios as Chairman

Some of Donovan's money was spent leasing a home in Venice so that YouTube star Carl, a comedian who was posting big-traffic videos like him playing "inappropriate Pictionary" with his children, could move to Los Angeles. That 419 Grand Blvd. residence became a kind of mecca for the YouTube creator-community, a digital media version of 1960s Haight-Ashbury or the Sunset Strip. "Every YouTube star you could think of came through that place and either partied or crashed," says Zappin, mentioning such YouTubers as Shane Dawson and Ryan Higa, among others. "And thousands of videos were made there. We eventually got rid of it because it was becoming a liability. Too many parties."

Maker's network continued to expand, and the founders marveled at the escalating traffic and subscriptions. Maker's primary channel quickly became known for its humorous sketch comedy, celebrity impersonations and personal video logs. "Every second, every refresh, the numbers were crushing," says Donovan. "It was the fastest sub gain any of us had ever seen. The YouTube community was going crazy for it."

To accommodate growth, in 2012 Maker moved into a new headquarters in Culver City and the previous year brought in business-oriented execs including COO Courtney Holt, the former MySpace Music president. But along the way, Maker's success created tensions. Zappin's repeated fights with top YouTubers including Ray William Johnson, The Fine brothers and Philip DeFranco are legendary at the company. Zappin also cites the "stressful" time as the reason that he and Donovan broke up. But perhaps what ultimately has affected Maker most was the decision to take money from venture capitalists.

"I was always against it," says Katz, who no longer works at Maker and is a co-plaintiff in the lawsuit. "Bringing on VCs comes with a price. The flip side was Danny explaining to me that we needed to grow fast. And bringing on the money allowed deals with bigger YouTubers who required guaranteed [advertising revenue shares]. In the VC world, once you take funding, you are on a path."

STORY: SXSW: Maker Studios Execs on Turning Down TLC and How Mobile Views Threaten Revenue

That path eventually led to Kreiz, who invested in Maker in spring 2012, bringing a very different skill set.

The 48-year-old established himself as chairman and CEO of Fox Kids Europe, which he co-founded with Haim Saban in 1996. It became one of the fastest-growing pay TV channels before eventually being sold to Disney for $3.3 billion. In March 2008, Kreiz was tapped to run Endemol, the world's largest independent TV production company.

At the time, Endemol had been saddled with debt from a 2007 buyout. Kreiz's main task was restructuring, but amid the global financial crisis, Endemol struggled and Kreiz stepped down in June 2011.

Kreiz says that after the Endemol drama, he made investments in nine companies and became interested in the burgeoning YouTube ecosystem and multichannel networks (MCNs) like Maker. "I saw this space as a particular opportunity," he says. "I traveled to Los Angeles to study the opportunity. Maker stood out because of their programming and content DNA. The founders had great intuition about how to navigate the company."

Kreiz met with Suster, the VC player who had become one of Maker's key financial backers. "He said he wanted to invest," says Suster. "I said, 'Absolutely, but would you consider getting more involved?' "

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At the time, Maker already had surpassed 1 billion views a month and was developing partnerships with Snoop Dogg, Robert De Niro's Tribeca Enterprises and Kevin Smith in addition to hiring dozens of engineers focused on scaling the enterprise.

While the viewership numbers are impressive, what Maker cares about most is a metric called "RPM," or revenue per thousand views. The money can come from YouTube through its Google AdSense program or from direct deals with advertisers. On YouTube, Maker videos typically earn about a $1 to $3 RPM. But 45 percent of that goes to YouTube. And about 70 percent of the rest is turned over to the video's creators. (Less established talent needing more production and marketing support from Maker get a lesser share.) That leaves the margins for an MCN like Maker relatively thin.