VC to VIdCon Attendees: Amazon Is the Biggest Threat to YouTube

E-Commerce Giant Aware of Opportunity, Says Investor Mark Suster

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As YouTube has grown since its 2005 launch, so too has the speculation over what company would emerge as its biggest rival. Hulu and Netflix are among the most often cited adversaries, but the serious opposition may come from a company whose core business has nothing to do with video: Amazon.

"The biggest threat to YouTube is Amazon," said Mark Suster, partner at Los Angeles-based venture capital firm Upfront Ventures, during a keynote presentation Thursday morning at online video conference VidCon in Anaheim, Calif.

Mr. Suster said he's discussed Amazon's position to rival YouTube with top executives at the e-commerce giant. "I've had this discussion [with people] one level below the CEO [Jeff Bezos]," he said. "They get it, but they just have other priorities right now."

Right now in the online video world, however, the prospect of a YouTube alternative is a hot-button issue. Internet entrepreneur Jason Calacanis, who previously received funding from YouTube, brought the issue to the fore in June when he published a blog post decrying YouTube's control of creators' businesses. Some have dismissed that post as a too-aggressive description of the need for YouTube networks to diversify business models, but many consider it accurate for laying out frustrations like YouTube's revenue split.

The Walmart of video
Early in his talk, Mr. Suster had likened YouTube to Walmart, a one-stop shop that provides merchants the broadest customer base to sell their goods. However to take advantage of that scale, Walmart takes a cut of those sales, so merchants sell more products than they would in a local store but at lower margins.

In the case of YouTube, those lower margins for the networks that manage multiple YouTube channels for creators average around 16.5% after taking into account YouTube's typical 45% cut of ad revenue and the network talent's 70% cut of that remaining 55% share, said Mr. Suster, an investor in Maker Studios, one such network.

YouTube can demand such a sizeable revenue split because it eases networks' overhead costs, like content hosting and distribution. Unless a rival is willing to assume those costs -- or a network itself can afford to do so -- YouTube's dominance is assured. Amazon could be that rival. Through products like Amazon Web Services, "they are crushing the entire [information technology] industry and web hosting, which is a large component of the value YouTube provides," Mr. Suster said.

With a reputation for sacrificing short-term profits for long-term dominance, Amazon has demonstrated an interest in acquiring more content for its Amazon Instant Video service, striking deals with Miramax, Viacom, Scripps and PBS to name only a few, recently picking up five original series and announcing five new pilots yesterday. In June Amazon Studios issued an open call for short-form videos that could be greenlit and distributed through Amazon's streaming video service. But Amazon Web Services could serve as a Trojan Horse to indirectly become involved in that content.

"Every year, every company I invest with says, 'This is the year we'll migrate to AWS to save money. And every year Amazon cuts the price two to three times. Who does that? They have cut prices since they launched AWS more than 35 times with absolutely no competition. That's the ruthless behavior of Amazon," Mr. Suster said.

Amazon could also compete with YouTube's services for creators and advertisers. "They don't have tools specifically for YouTube creators, but YouTube doesn't have the most sophisticated tools if we're being honest," said Mr. Suster. And Amazon has been architecting its display advertising business so that it could scale to serve ads against content delivered via Amazon Web Services.

"YouTube could continue to ignore [the multichannel networks], which they have been doing a great job of, but the competition will not," said Mr. Suster.