If you spend long enough on YouTube,

there's now a very good chance that a

substantial share of your watch time is

going to channels partially or fully

owned by private equity. Major firms

operating in this space have raised

billions of dollars collectively from

companies like SoftBank, Amazon, Disney,

Goldman Sachs, and Blackstone, and they

are using that money to acquire YouTube

channels as strategic investments.

According to my own analytics, where

YouTube lets me see what my audience

watches, some of these names should be

familiar to you. Task and Purpose,

Veritassium, Donut Media, Simple

History, Fern, Fireship, Economics

Explained, Mentor, Pilot, Futurism,

Astramm, The Drive, and History Hits

have all publicly been acquired by

private equity. Outside of the nerd

corner of YouTube, some of the biggest

names in the space, including Coco

Melon, Colin and Samir, The Theorists,

and Dude Perfect, have also all

partially or completely been acquired.

These are also only the acquisitions

that we know about because they chose to

be upfront with their audience. There's

no law requiring these deals to be

publicly disclosed. And as you'll soon

see, there are some really good reasons

why they might want to keep it quiet.

So, why is this a problem? It's easy to

say that private equity is just

inherently bad. And to be fair, it's had

some problems. But that shouldn't be

enough by itself. Instead, what you

should know is why private equity firms

have suddenly become so interested in

YouTube channels and what this will

likely mean for the future of the

content that you watch.

Big YouTube channels are really just

businesses in the entertainment

industry. Even completely independent

creators still need to cover their own

living expenses. And creating content

does cost money. Film equipment,

software, location shoots, perhaps a

hired video editor. It all adds up. A

lot of medium-sized creators barely

scrape by paying themselves fairly

modestly. And in the interest of

transparency, even this channel, which

now has over 70,000 subscribers, has

lost money most months since I started

it. Anyway, all of this can be fixed

with scale. As creative brands grow,

their revenue increases while their

costs stay relatively stable. At a

certain size, most of these channels can

generate strong cash flows and

predictable profits, which should make

them desirable investable assets like

any other business, right?

Well, not exactly. These operations are

incredibly risky, even by small to

medium business standards. Most of them

depend on a single platform for the

majority of their revenue. And these

platforms can ban, restrict, or moderate

their content overnight, often with

little to no explanation.

Sunnyv2 and about a dozen copycat

channels have built their entire career

on saying that the algorithm stopped

recommending their content because it

genuinely happens so often. On top of

that, most of these businesses depend on

a single personality to host the

content, even if there's a larger team

working behind the scenes. Human beings,

especially those that share their lives

online, can get burnt out, get embroiled

in controversies, or just fall out of

favor with an audience that outgrows

them. Typically, the wealthy investors

and lenders that give money to private

equity firms for them to make their

acquisitions would be scared away by

these business fundamentals. But over

the past 5 years, a few things have

changed which kicked off the great

buyup. The first major change was that

creators demonstrated their ability to

scale their own brands to generate

profits beyond sponsored segments,

audience donations, and integrated

platforms. Some of these brands have

been very successful, others not so

much. Even if Beastburgger and Prime

Energy completely implode, they were a

test case that showed that real brands

can be launched through clowns on the

internet. If that initial success could

be paired with a private equity team

that actually knew how to run a

business, theoretically, then there

would be some real money to be made.

Another big push that's come from the

fact that legacy media, which is large,

centralized, rigid, and needs to be

broadly appealing, is losing out to

millions of individual creators who are

flexible, can make content specifically

targeted to particular audiences without

worrying about tarnishing the reputation

of a gigantic media company. These

companies now have to fight for

advertiser dollars, which are being

split over more mediums than ever. Now,

this trend is nothing new. Google has

been the largest advertising platform in

the world for more than a decade now.

But another threat these legacy

businesses are facing is the competition

for talent. A lot of people would rather

operate their own YouTube channel over

working on something like an old school

TV show. Investors in these companies

are worried about these threats and

they're putting pressure on company

leadership to do something about it. One

of the central focuses of Netflix Q1

memo to their investors was reassurance

that they are not having any problems

finding advertisers and they presented a

better opportunity to creators to make

their show through them rather than

produce it independently.

Other legacy companies have started

taking a simpler approach. If you can't

beat them, buy them. Even if the

business case is not that strong, a

company like Disney giving a few million

dollars to private equity firm that

specializes in acquiring YouTube

channels lets their executives say that

they are prepared for the threats that

new media presents. Appeasing

shareholders is often a lot more

important to senior management than

making genuinely good business

decisions, especially when an investment

of a few million is actually quite

cheap. Before around 2020, old school

media companies were still going about

this in their own old school way. They

would invest in traditional companies

that just happen to have a new media

digital first focus. Think of businesses

like Vice, Buzzfeed, Mashable, and Vox.

These brands would build their own IP

and primarily rely on platforms like

Facebook and YouTube to distribute it.

But behind the scenes, they were still

operated like traditional media

companies with a lot of staff, city

offices, and all the expenses that come

with them, which meant these were

terrible businesses. They would burn

cash, and they were much more expensive

to acquire in the first place. Vice

Media was once valued at over $5.5

billion.

That's an unreasonable valuation for an

organization that primarily distributed

through YouTube channel and a Facebook

page. These are pages that get similar

monthly viewership to Atriarch's Daily

Clips channel. Now, clearly these are

not the same thing, but one is obviously

much cheaper to operate than the other

on top of being generally more

advertiser friendly. The channel Modern

MBA did a deep dive into these companies

and their respective failures. He did a

better job than I could ever do. So,

instead of retreading the same details,

I'll just leave a link to that video if

you're interested in that comedy of

errors. But the point is, the legacy

media companies that wanted to protect

themselves against a wave of social

media by throwing money at it needed a

new solution. Instead of investing in

companies to build an online audience,

they could just invest in private equity

firms that would buy out people who

already had an audience. And then

there's the private equity industry

itself. Over the past 20 years, the

scale of private equity operations has

increased from less than a measly

trillion to over 12 trillion today in

America alone. According to Prequin, a

data firm who are themselves owned by

Black Rockck. With this much money to

manage, they've simply run out of normal

businesses to acquire. New private

equity managers who want to start their

own funds are entering a very saturated

market. And one of the best ways to

differentiate themselves is to invest in

businesses that nobody else understands.

According to public releases, the

biggest firms in the YouTube space have

collectively raised about $2 billion and

borrowed an additional $2 billion on top

of that. So, it's still quite a small

part of the overall private equity

market, but that's still more than

enough money for it to become an

increasingly large part of your home

screen. Now, for the creators

themselves, this is a perfectly

understandable decision to make. Online

fame can literally collapse at any

second for any reason. So, if they can

sell part or all of their channel and

secure that bag, I don't think anybody

should begrudge them for doing it. But

it will inevitably change their content

slowly but surely over time. One of the

things that made YouTube channels a

viable investment in the first place was

their low overheads. A team of two or

three people with off-the-shelf

equipment can produce content that would

have taken a whole studio at legacy

media companies. But when a channel is

acquired by a private equity company,

they become the overhead. The analysts,

business development managers,

strategists, and acquisition teams all

need to be paid as well. This means that

to maintain profitability, the channel

needs to make more revenue, which means

more videos, more questionable

sponsorships, more products. The

investors in these firms also want to

see consistent and continuous growth,

which means they need to play the

YouTube game with low-risk videos that

are guaranteed to do well with the

algorithm accompanied by hyperoptimized

thumbnails. Ultimately, what this means

for you is that the content you watch is

going to become more generic and safe

within the parameters of what will

optimize retention. This also works with

a private equity business strategy

called rolling up where multiple

acquired channels will share management

resources with one another. So if one

thing works well for one channel, it'll

be rolled out amongst all the channels

in a portfolio. Now independent

YouTubers are absolutely guilty of this

as well. I've personally spent many late

nights making minor adjustments to my

thumbnails to help my videos do just a

little bit better. But without a bloated

team that needs to be paid and investors

that need to be kept happy, independent

creators do have a little bit more

leeway to take some creative risks from

time to time. Rolling up and

hyperoptimization is only going to

accelerate a trend of every single piece

of content on YouTube moving towards the

same generic but effective formula. This

is amplified by another problem that

comes when the channel turns into an

asset, which is that they typically want

to move away from the focus on a single

creator. For more than a decade, a

channel like Veritasium has been focused

on the host, Dr. Derek Mueller. For a

lot of regular viewers, Dr. Mueller is

Veritassium. But if you've been watching

the channel recently, you'll notice that

new hosts are slowly being introduced,

so the whole operation isn't as

singularly focused on one personality.

The business case is that it cuts down

on something called keyman risk, which

is where the entire operation depends on

one single person to continue. Since

Veritasium isn't actually Derek's

business anymore, there's nothing to

stop him restarting a new channel from

scratch or just retiring since

presumably he made millions of dollars

from the acquisition in the first place.

For other channels, this has already

happened. If you search why I left blank

in the YouTube search bar, there are

endless videos from former personalities

behind big channels talking about why

they're suddenly showing up on a

completely new channel. A common theme

among most of them is that it wasn't

their channel anymore. Most of these

splits seem pretty amicable, often with

the old channel commenting words of

support under the video itself. But

obviously, this is still a real problem

behind the scenes. After losing their

hosts, a lot of these channels have

suffered from reduced viewership, and

people are far less likely to directly

support channels through merch or paid

memberships when they know it's really

just a faceless investment firm on the

other side of the transaction. As this

industry matures, we're more likely to

see more ownorous, non-compete contracts

from acquired channels and a

continuation of a trend towards

commercially viable, predictable, and

safe content over the unique and

creative content that made YouTube so

compelling in the first place. Now, go

and watch this video next to understand

the real reason every sponsor you see on

YouTube is kind of terrible. Oh, and

make sure to subscribe so I can get

acquired one day, too.