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

If Maker is going to be as big a business as, say, Breaking Bad network AMC, it must improve its returns. One way to do this is to increase the RPM rate. That might happen if ad buyers begin to price digital viewership closer to the way they value television eyeballs. Kreiz insists that it only is a matter of time before "parity" is reached, and the company now has 15 ad sales professionals intent on getting better RPM rates on channels like Epic Rap Battles. Maker also is able to negotiate brand-integration deals that don't require any sharing with YouTube. And the RPM economics also could improve as Maker lures its fans away from YouTube onto other distribution networks with more generous ad-sharing arrangements. With that in mind, Maker recently acquired Blip, a web series content platform.

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The other way for Maker to grow its business is to develop ancillary nonadvertising revenue -- using YouTube to test and establish brands but selling audiences merchandise such as hats and T-shirts (which it already does) or extracting licensing fees in the repackaging of content for Roku, Xbox or perhaps cable and satellite television (which it hasn't yet).

And that's where a media veteran like Kreiz can come in handy.

"The type of discussions we're having now are at an entirely different level," says Suster, pointing to the big companies like Canal Plus investing in Maker's C-round of financing. "We are not playing small ball. We're not just building a YouTube network. We believe this is a next-generation studio. We're not looking to sell to DreamWorks. We think we can build something that becomes a lasting part of the entertainment ecosystem."

Adds Greycroft's Dana Settle: "I think this has the opportunity to become the next major media company. That's what the investors certainly believe in. We were really fortunate to be in a situation where the founders brought a guy like Ynon on board to transition."

Still, other MCNs like Machinima reportedly are struggling. And some Maker observers believe there's great risk in being so closely tied to YouTube. For example, a blog post by entrepreneur Jason Calacanis in August predicted that YouTube soon would learn to adopt innovations such as talent collaborations and group sales, cutting out middlemen like Maker. "MCNs are toast," wrote Calacanis.

Despite these issues, the company maintains that its growth trajectory is on target. Although Maker won't provide exact numbers, Suster says that annual revenue is north of $100 million. "We are progressing ahead of track," adds Kreiz. "We have tripled our revenue last year and expect to triple again this year. Many companies that operate on the web don't have revenues at all."

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Watching all of this from the sidelines now is Zappin, who after making a Faustian bargain to give up some control of Maker in return for funding, still is trying to figure out when and how the company got away from him.

On April 16, he sent a resignation letter to the company's board requesting severance of stock vesting and six months of salary. He indicated his willingness to stay on as an adviser. Soon after, the board held a meeting and authorized Zappin's separation agreement, voting Kreiz into the CEO role. In what might be the biggest strike against his lawsuit, Zappin voted in favor of the move.

According to Suster, after the board meeting, Zappin changed his mind and demanded that he be given a senior executive role in order to "save the company." When the request went nowhere, Suster says that Zappin "became hostile."

But, according to Zappin's lawsuit, Kreiz was dissatisfied with merely being a board member and touted a plan to investors to turn the company into a billion-dollar power within three years but needed assurances he couldn't be fired. So Kreiz and the VCs "orchestrated a plan," alleges the suit, to approach Donovan and her brother Ben, another founder with significant stock holdings. In return for lucrative employment agreements, they would authorize the issuance and vesting of stock and an amendment to the board's composition to shift the company from one that favored the founders to one that favored the outside investors. The lawsuit says that had Zappin known the full details of the alleged scheme, he would have taken steps to stop it. (On the other hand, Zappin acknowledges that he was fine with a "succession plan" -- he just doesn't like how it all went down.)

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After the lawsuit was filed June 25, a furious board reconvened for a new vote to take away Zappin's seat. Nearly everyone -- the VCs, Zappin's ex-girlfriend Donovan and even talent who had been given small stakes in the company -- voted to get rid of him. Zappin, who continues to hold about 20 percent of the company's common stock and stands to make quite a bit of money if Maker ever goes public or is bought, was unable to do anything.

Adding a bit of mystery to the case, Zappin hints that something sinister occurred in the weeks following his resignation, but he won't speak specifically about it, promising that more about the "improper actions" will be revealed in his lawsuit. Others at Maker assert that everything that happened was aboveboard, that Zappin knew about the changes and gave them his full backing before having cold feet.

As the litigation plays out and Kreiz works the phones to line up partnerships, licensing and ways to lure advertisers, Zappin has had more time to reflect. He says that after launching the legal war, he withdrew from friends and family to his Venice home, preferring solitude. "I felt devastated," he says. On Oct. 17, he announced that he acquired the digital entertainment news website NewMediaRockstars, which chronicles upstart YouTube players -- companies like Maker Studios.

One day, Zappin is absolutely firm that nothing short of retaking Maker will suffice. The next, he says that "depending on how things go with the litigation, I'll either be going back to Maker or moving on to something else that's new and cool and maybe building something again from the ground up."