VC’s are already beginning to recognize the potential of the Big Apple and will invest more there, creating draw for new ideas and quality talent.
By Ray Downs
By Lindsay Toler
By Lindsay Toler
By Chad Garrison
By Allison Babka
By Lindsay Toler
By Jake Rossen
By Lindsay Toler
The video entitled "Thank you, I will miss you guys" is barely more than a minute long — all one shaky, handheld shot trained on the face of then–21-year-old Ben Vacas.
Vacas, known online as Braindeadly, has big brown eyes, a faux hawk, a stubbly goatee and a British accent, discernible as he tells his 40,000 YouTube subscribers goodbye.
"I woke up today hoping to make a video, but I went into a call with Machinima this evening, and they said that my contract is completely enforceable. I can't get out of it," Vacas tells the camera. "They said I am with them for the rest of my life — that I am with them forever.
"If I'm locked down to Machinima for the rest of my life and I've got no freedom, then I don't want to make videos anymore," he says, quietly. The screen fades to black.
The video closes with a written message: "I'm really sorry guys, but I am completely powerless. If this is the last thing I say, please don't make the same mistake as I did, and always read before you sign something."
Vacas gained prominence online as a top-ranked hunter in World of Warcraft, a video game he has played for more than seven years. He began making YouTube videos last year, mostly of him joking around with other players and commenting on World of Warcraft and other games.
It wasn't long before Machinima, a multichannel YouTube network that specializes in video-game content, came calling. The network offered him a partnership: It would put ads on his videos, and he would get a cut of the revenue generated from those ads. It sounded pretty good to Vacas, and in November 2011 he signed a contract with the company.
But the devil was in the details: After signing with Machinima, he learned the company would own the rights to whatever content he made for the rest of his life and beyond, "in perpetuity, throughout the universe, in all forms of media now known or hereafter devised." Not only that but his contract with the network was open-ended. There was no point at which it was set to expire.
Over the last two years, YouTube has quietly transformed from the province of amateurs to an increasingly cutthroat ecosystem where everyone — stars, networks, advertisers — is competing for views, viewers and view time.
Big money is at stake. That's because YouTube, with the backing of its parent company, Google, is pouring hundreds of millions of dollars into a campaign to compete with traditional television — and it's betting that multichannel networks such as Machinima will be the key to its success.
Armed with venture capital, these networks are scooping up talent, offering young creators modest compensation in return for the ability to sell ads on their videos. The more channels a network can bring under its umbrella, the more eyeballs it can promise advertisers, and the richer it becomes.
But a recent string of high-profile disputes is prompting comparisons between YouTube networks and the exploitative Hollywood studios of the 1930s and '40s: Both convinced young and naive talent with little leverage to sign contracts that leave them at a disadvantage. For networks, that means contracts that bind creators to them indefinitely, demand rights to their content in perpetuity and take large ownership stakes in any resulting businesses.
Internet and intellectual-property lawyers say that a rash of public disputes between networks and their talent suggests a serious problem in the emerging industry. But while two of the largest networks, Machinima and Maker Studios — both based in LA, both darlings of venture capitalists — have been accused of some of the worst practices, investors remain undeterred.
In November, while Maker Studios was in the middle of a public dispute with its highest-profile star, Time Warner was raising $36 million in venture-capital funds on behalf of the network. And in May, just weeks after Ben Vacas posted his emotional video, Machinima closed a round of fundraising, led by Google, worth $35 million.
The question, then, is this: Can networks like Machinima and Maker sustain their rapid growth if the creators on whose backs they built their businesses revolt?
"I'd always wanted to be a filmmaker," says Hugh Hancock, the man generally acknowledged as the godfather of the art form "machinima," when reached by phone at his home in Edinburgh, Scotland. "The issue was, back then in 1996, it was before the digital-video revolution, it was before 3-D animation was in any way affordable, so I'd always given it up as a pipe dream."
Everything changed with the release of Quake in June 1996.
The 28-level, first-person-shooter game was one of the first games in which developers opened up the video game's code and gave it to players — saying, in effect, make your own games with this technology. Players could repurpose Quake's characters and settings to create original stories then render them in 3-D animation.
At first these films were called "Quake movies," but as creators began using other games, they were dubbed "machinima" — a misspelled portmanteau of "machine" and "cinema." A small, devoted community developed around the art form.
"Back in '97, '98, there were probably 50 of us who were really serious about it and another 200 who dabbled," Hancock says.
In 2000, Hancock registered Machinima.com to be a hub for that community. People would upload videos to the site or watch others' films made using Quake or other games such as the Sims or World of Warcraft.
As the community grew, the cost of hosting its videos increased; eventually it became too expensive for Hancock. Six years after its founding, he sold the site to an enigmatic pair of serial entrepreneurs, half-brothers Allen and Philip DeBevoise. (Hancock declines to state the purchase price.)
Before buying Machinima.com, the DeBevoises ran Creative Planet, a collection of digital tools and film industry-related Web properties, including Directors Net, Editor's Net and VFXPro.
That company followed the typical boom-and-bust pattern of the first wave of the Internet: It grew very fast and then imploded, although a leaner iteration of the company still hangs on today. At one point, it ballooned to 300 employees, only to correct through many rounds of brutal layoffs. "Ultimately, it crashed and burned," one former employee says.
The DeBevoise brothers left Creative Planet in the early 2000s and purchased Machinima.com in 2006 — incidentally, the same year Google purchased YouTube.
One of the brothers' first innovations was hosting the site's videos on YouTube. It was the right decision at the right time. Not only did it significantly cut down on the server costs that had burdened the website, but it was done at a time when YouTube was hungry for content and, in 2007, just beginning to pay video creators for their work.
But as smart as the decision was, it was contentious within the machinima community.
After all, Machinima.com had been a home for that community's members. Now the website's new owners were making money from the videos, and some of their creators felt cut out of the game.
"I befriended a lot of WOW machinimators, and I watched them complain repeatedly, asking to get their videos taken down," says a blogger who covered the World of Warcraft community at the time.
Utilizing YouTube wasn't the DeBevoise brothers' only controversial decision. They began to cut deals with video-game companies to advertise alongside the videos that used their games as source materials, pitching machinima videos as more exposure for the games themselves.
Today Machinima describes its content as being about not just video games but anything that appeals to men ages 13 to 34. CEO Allen DeBevoise calls them the "lost boys": males of a certain age largely unreached by advertising. They don't watch traditional TV; they don't read magazines. They just play video games.
And Machinima's channels, with an almost infinite supply of relevant video-game content, have become the place for advertisers to find them. Machinima's main channel today has 180.5 million subscribers to 5,621 channels hosting 1.3 million videos, for a total of 43.7 billion network views. That's 392 times the number who tuned in to last year's Super Bowl on CBS.
But, just as at Creative Planet, where former employees say the DeBevoise brothers lost focus buying up too many properties without a coherent vision, there is a sense that the rapid expansion of Machinima might mean the dilution of the company's winning formula.
Decisions such as offering partnership deals to loathed, view-trolling "reply girls," who earn pageviews mostly thanks to their prominently displayed cleavage, have called the company's judgment into question. Machinima also raised eyebrows by signing up underage creators like AdvancedUAV, who was twelve when he partnered with the network, making him both a target for trolls and a cause for concerned adults.
Even more troubling, though, are reports about the contracts Machinima has inked with its partners.
In scores of videos posted on YouTube, the company has been accused of locking partners into contracts with no end date. It also has been accused of offering a very low, nonnegotiable CPM, the amount of money paid per thousand video views. The company also has fielded complaints over its habit of using partner YouTube accounts to "like" and "favorite" other Machinima videos, driving more traffic and views within the network.
More than anything, though, Machinima's detractors are worked up by the fact that the network has asked for rights in perpetuity to the content created by its talent.
Vacas is not the only one who has taken a public stand against the company. Dozens of creators have written blog posts or created videos complaining about the contracts — videos that often show a savvy understanding of public relations in the digital age.
Take YouTube user KSIOlajidebt. In March, a few weeks after Vacas posted his video, KSIOlajidebt released an anti-Machinima video of his own.
"ENOUGH IS ENOUGH," says KSIOlajidebt, who, according to his Facebook page, graduated from high school this year. "We as a people can stand up to the control freak that is Machinima. We need to not only shout-out, but let the right people know about Machinima and their ways." At the end of the video, he ticks off the names of tech reporters at Wired, TechCrunch, Kotaku and others, telling his fans to tweet his link to them.
But after dozens of his subscribers succeeded in getting the attention of Kotaku's Stephen Totilo, KSIOlajidebt went silent — he did not respond to calls for comment. His video, like Vacas', quickly was switched to private.
A representative for Machinima downplays the contract disputes.
"Machinima's network is now comprised of over 6,000 creators. Even with our large network, we find disputes are rare. In these rare cases, Machinima engages and focuses on mutual success for the company and our network partners," Sanjay Sharma, executive vice president for strategy and business development, says in a statement. "Today, Machinima's agreements are consistent with developing norms for multichannel networks."
Ben Vacas' video was posted to YouTube on May 8. Within hours, it appeared on Reddit, where the post racked up 2,221 comments and 7,964 "up" votes. That was enough to promote the video, and the commentary it provoked, to the website's massively trafficked front page — the Internet equivalent of getting on Good Morning America.
The most popular comment in the resulting thread came from user HuskyStarcraft, a YouTube creator with more than 600,000 subscribers. He explained that he had been approached by Machinima years ago but turned the offer down because he felt the terms of the contract were unfair.
The experience motivated him to create his own channel, he wrote. The Game Station channel is now an affiliate of Maker Studios. "It's really sad that this keeps happening (this is the fifth or so video I've seen on this EXACT topic) but keep fighting the good fight," wrote HuskyStarcraft, whose real name is Mike Lamond.
Thousands of other users wrote messages of support; the publicity from Reddit even helped Vacas to connect with a lawyer.
The same day, back at Machinima's Hollywood headquarters, an employee, presumably without knowledge that the network was being ripped apart on Reddit, uploaded a piece of new content to the network's homepage: a trailer for the video game Primal Carnage.
Immediately, angry Reddit readers "nuked" it: Within minutes, the clip received more than 500 dislikes and racked up hundreds of comments decrying the company's shady practices. The video was hastily wiped from the site.
Also that same day, a 32-year-old Belgian named Bachir Boumaaza, the self-proclaimed "Best Gamer in the World," known online by his YouTube username AtheneWins (or simply Athene), made his own video.
Shot in black-and-white, the video features the same soft, sad piano music as Vacas' video. In it, Boumaaza makes a shocking announcement.
"If things are wrong, I'm not the kind of guy that — that just ignores it," he says, gazing earnestly at the camera, head cocked to one side, a shock of shiny black hair falling over his face. "This is a very hard decision, and I've been thinking about it. But the only thing that I can do — the only thing that feels right, right now — is to leave Machinima." Boumaaza apparently had an older version of the network's contracts, one that allowed him to come and go as he pleased.
The news that Athene, a bona fide YouTube celebrity with 589,798 subscribers and 382 million video views, was leaving Machinima reverberated throughout the YouTube community.
Reached by e-mail, a representative for Boumaaza said me, "Over the past six months, we've regularly talked to several people from Machinima about complaints we have been hearing from partners about how they felt intimidated by their business and contract practices.
"Every time that we brought this to Machinima's attention to make them aware that this could lead to a PR disaster, we were assured that these were things of the past and that they had started taking a different approach. But when the situation with Braindeadly occurred, it was clear to us that nothing had changed."
At the time, Athene had made no decision regarding which network he would join, the spokesman added. The star would be open to joining a network that "wants to make YouTube a better place for content producers or wants to give gamers more freedom and resources."
Shortly after the controversy blew up on Reddit, I reached Vacas via Skype.
"It was really amazing to see how many people took the time to support me after I made that video," Vacas said, reflecting on the fallout. "It just shows how much the community can do when they all group together and help others out."
He added that Machinima had since offered him another deal, but with terms that were no more favorable than his previous contract. He said he would be working with a lawyer to settle the matter.
Machinima has borne the brunt of the public criticism, but complaints about unfair YouTube contracts also are heard throughout the industry. No one is immune, not even YouTube's biggest star.
On December 10, Ray William Johnson, whose channel boasts more than 6 million subscribers — more than any other on YouTube — couldn't keep quiet any longer. A little after 7 p.m., he fired off a pair of tweets heard 'round the world.
"Yo @MakerStudios I left your company two months ago. **ANY TIME** would be good to sign my AdSense account back over to me." AdSense is the account into which YouTube ad revenue is deposited — the way in which YouTube stars receive compensation for their work.
The tweet was followed by another, two minutes later: "@MakerStudios holding a YouTuber's AdSense account hostage after you promised to sign it back over is bad for your business."
The spat was particularly ironic since Maker Studios positions itself publicly as the network for YouTube stars, founded by YouTube stars. Among them is LisaNova (Lisa Donovan), who parlayed her YouTube fame into a brief stint on MADtv before starting the network with fellow YouTube stars Danny Diamond (her fiancé, Danny Zappin) and Thebdonski (her brother, Ben Donovan).
The trio has said that it sees Maker as the United Artists of YouTube — akin to the studio founded by Charlie Chaplin, Mary Pickford and other Hollywood stars in defiance of the controlling studio system. Zappin is fond of telling the story of how Maker helped move YouTube star ShayCarl and his family to Southern California from Idaho so he could be part of their fledgling company.
For a few years Ray William Johnson was part of the Maker family, too. Johnson, 31, launched his YouTube channel in 2008 and dropped out of Columbia University shortly thereafter. For the last four years, he's been producing videos pretty much daily.
Signs that there might be trouble between Johnson and the studio first emerged in October, when Johnson casually announced in one of his daily videos that his company, Equals Three, was in the process of leaving Maker.
"What's up, guys, you're going to notice a few things are different," he tells viewers, standing in front of the same comic-book-panel-patterned backdrop he typically uses when shooting. "I'm filming this episode from my apartment."
In the future, Johnson explained, he would no longer be part of the Maker network. He didn't go into detail, though — the rest of the video is spent, like most of his videos, cracking wise about viral videos.
After Johnson's video was uploaded to the site, a representative for Maker released a statement to the website NewMediaRockstars insisting that Johnson was still part of the Maker network but that, "with the recent decline in viewership on [Johnson's channel], it made sense for him to go back to producing the show himself."
Johnson shot back, telling the same reporter that he was leaving not because of ratings but because Maker had suddenly demanded an ownership stake in his company.
After that, both sides went quiet for a little while. Until, that is, December, when Johnson issued those angry tweets — and then explained in an e-mail to media outlets why he finally was speaking out against Maker.
"I feel that I have a responsibility to myself and to the YouTube community to stand up to them and their rather thuggish tactics," he wrote. "At the end of the day, YouTube-based networks are built around exploiting YouTube channels for profit."
Maker, he says, wanted 40 percent of his channel's revenue after production costs and half of the show's intellectual property in perpetuity.
"They wanted to own 50 percent of the intellectual property of Equals Three for the rest of eternity and weren't offering much in return," Johnson explained.
He wasn't biting.
"Negotiations quickly became a bizarre pissing contest between the heads at Maker Studios and myself. I wouldn't hand over my intellectual property, and they wouldn't stop aggressively trying to get me to sign it over to them," he wrote.
The company struck back. According to Johnson, the network shut down production on his album, which had been under way for eight months at Maker's Culver City studio, and, a day later, halted production on his four-year-old show.
After negotiations faltered, Johnson began recording episodes first at his apartment and later at Papertown Studios in LA But two months after leaving Maker Studios, he alleges, the company still hasn't turned his AdSense account back over to him.
In the e-mail he provided to the media, Johnson didn't just throw down about his contract. He got personal.
Johnson wrote that Maker CEO Danny Zappin had gotten drunk and confessed to being a convicted felon. (In a letter sent to Maker's partners a few days later, Zappin acknowledged that he'd been convicted of felony drug possession twelve years prior.) He didn't know about Zappin's conviction before he signed with Maker, Johnson wrote, suggesting it might have affected his decision to join the company.
A few hours after Johnson first took the dispute to Twitter, he tweeted again. This tweet featured an Instagram of an iMessage that Johnson claims to have received from Zappin. It read, "You're [sic] lack of integrity and character are sad. Fuck You. Prepare for war ... bitch."
Former Maker Studios partner Shane Dawson, who left the studio in 2009, tweeted at Johnson, "i got the same text 3 years ago hahhahahaa oh youtubeee."
Maker Studios declined to comment the status of Johnson's AdSense account. And since his first e-mail, Johnson has declined to provide any additional information. Instead, a representative for the star e-mailed to say, "He has been advised by his attorney to not give any more interviews until the issue with Maker has been resolved."
It's tempting to write off each contract dispute as just that — an individual incident. But taken together, these fights constitute a bigger issue, one not unlike those that developed when the film industry was first finding its feet.
At the time, studios produced shorter, lower-budget films on a tight schedule because theatrical runs were much shorter — only about a week. Studios churned out one major movie every week, plus a few B films, to meet the demand.
During the golden age of Hollywood, the studios were run on a factory basis, says Tino Balio, professor emeritus of communication arts at the University of Wisconsin-Madison and an expert on the history of the American film industry.
"They had to have total control of their talent in order to assign them to projects, in order to make all of these films to keep their theaters filled," Balio says. "They could not negotiate with talent each time they decided to make a motion picture."
They met this challenge by adopting the "option" contract. A new star might be signed for a fixed term (typically seven years). Each year, the studio had the option to renew the contract — but the actors were unable to break it during its duration.
"It was bondage," Balio says. "It changed over time, but basically, when a performer signed an option contract, he or she was bound to the studio because no other major studio would hire that performer if he or she broke their option contract."
Beginning in the 1950s, though, the industry underwent a transformation. It moved away from producing as many films as possible and toward producing the best films possible.
That change was the result of two things, Balio says: the rise of television and the Paramount antitrust suit. The judgment in that case declared that studios could no longer own the theaters that showed their movies. The result was, in some ways, a transformation similar to the one YouTube is hoping for: a transition from short, low-budget films toward longer, professionally made content.
That was the idea behind YouTube's $100 million investment in 100 original-content channels, which included channels produced by Maker and Machinima, made in October 2011. In November 2012, YouTube doubled down on that bet, reinvesting in the top-performing 30 to 40 percent of those channels.
In November, YouTube also opened a production facility in Howard Hughes' former airplane hangar in Los Angeles, available to "partners" who want to up their game. YouTube's redesign, unveiled in December, also was a step in that direction. It is more about channels, less about individual videos, with the idea that YouTube will become a destination rather than a repository for video content.
Part of the problem, he says, is that YouTube networks initially adopted the language and practices of the entertainment industry, but technology is evolving quickly, and the law is struggling to keep up with it.
In the past, the talent needed Hollywood studios or record labels or book publishers in order to get their work distributed. Today, not so much.
And that, Lisi says, leaves a lot of video creators asking, "What do these guys do for me?"
"From the standpoint of people who grew up with the Internet, many of these young artists — and I call them artists because I do think they are in the truest sense of the word: They are doing what they are doing out of a creative impulse — for them, it's like, 'Why do I need a middleman?'"
YouTube, after all, was founded on the idea of cutting out the middleman, of making it possible for a filmmaker to post a film and for anyone with an Internet connection to access that film instantly.
Video makers, Lisi says, can easily reach out to each other, unlike actors or recording artists of the past. "Because these are creatures of the Internet, not only do they broadcast to their audience, they consume each other's content, they are fans of each other, and they communicate," Lisi says.
"What you have are the benefits of a union without the burdens of a union — all of the talent sharing information almost instantaneously," Lisi says. And, "Much like a union, they can threaten group action."
"It's a very interesting power dynamic, and I think that the industry is still trying to work out how to deal with this genie that is newly out of the bottle. [YouTube] provides a lot for a lot of people, but it is a genie, and you don't want to piss it off."
No one from the company would confirm whether the change was due to the onslaught of bad publicity.
As for Vacas, he finally settled his dispute with the company in October and parted ways with Machinima. Today, he's represented by a new organization called Union for Gamers.
Union for Gamers is the brainchild of Donovan Duncan, who's also the vice president for marketing at Curse, a company that has specialized in video-game add-ons and industry news.
"There's a lot of ridiculous contracts out there," Duncan says. "Gaming is something we should support, not hinder by locking people into these really bad contracts, so I came up with the idea of, well, let's build a union for gamers, by gamers."
Everyone in Union for Gamers, Duncan says, would be entitled to the same CPM, which would be raised every year. Gamers no longer would be forced into restrictive contracts — union members would have the right to leave whenever they saw fit.
He promises "resources to help people create better videos," adding, "and we'll do the labor, the administration and ad-serving side, allowing them to monetize their content."
But labor, administration and ad service are essentially what networks like Machinima do. When questioned, Duncan admits that this new "union" is really more like a new network — albeit one with high-minded intentions — and therefore competition for Machinima.
Not coincidentally, it's a network that counts several former Machinima creators among its partners. Its public face, in fact, is none other than Bachir Boumaaza, better known as Athene.
Boumaaza announced the partnership in a video posted two months after he left Machinima.
"I can talk, make videos about how the landscape on YouTube should be, but unless I come with a real alternative, why would other networks listen to what I say?" he says, sitting in the same spot, shot with the same black-and-white filter used in his video supporting Vacas.
The video appeared on July 17, but Boumaaza was intent on leaving Machinima even earlier. In a video posted in March, a full two months before he denounced Machinima in solidarity with Vacas, Boumaaza posted a video about Union for Gamers.
So Vacas' contract dispute, and Boumaaza's much-publicized support, proved to be great publicity for the new venture. But Duncan insists that Machinima's problems are real. Even without an upstart competitor to fan the flames, the blowback was inevitable.
"The community was already upset that they were getting locked into these contracts, and I come by and say, 'Well, also: It's probably not fair either, guys, you should probably look at that,' and I think that's probably what sparked that off."
VC’s are already beginning to recognize the potential of the Big Apple and will invest more there, creating draw for new ideas and quality talent.