The traditional world of network and cable television is in decline, with ratings slumping and subscribers shrinking. It’s a big iceberg, and it’s melting slowly, but the trajectory is clear. At the same time, however, a new breed of programming that in many ways looks and feels like television is blossoming online. For a long time the only way to make money in that world was through advertising, primarily on YouTube, but in the last few years the industry has seen a shift, with content creators switching to direct sales and subscriptions.
One of the startups behind that revolution is New York-based VHX. The company’s tagline is “launch your own streaming video service,” and over the last two years it has helped a lot of relatively small creators build thriving businesses. Today the company announced that it will move beyond just handling payments for its creators, and will start working with them to build apps for smartphones, tablets, and over-the-top platforms like Roku and the Apple TV.
“There is a lot of opportunity these days for small content creators to steal a piece of money we used to spend on cable,” says Rich Greenfield, an analyst with BTIG. “People will consume on lots of different devices, but if you can get onto the biggest screen in the house, there is a much better chance people will pay for your content.”
VHX is starting with two new Apple TV apps, and both highlight the interesting dynamics at work for niche content creators as the world of online video and traditional television merge. One is Black&Sexy, an online video series which focuses on romantic comedies starring African-American characters.
Building an indie media company was a struggle, and the low point for co-founder and CEO Dennis Dortch was probably the day he found himself in a Los Angeles county courthouse after failing to keep up with his rent. The writer and director had been funneling all his money into Black&Sexy, a business that at the time consisted mainly of a very popular YouTube channel. The company made money advertising against its videos, but not enough to grow its offerings and pay his landlord.
Dortch managed to avoid eviction and bankruptcy that day, and beginning in February of 2014 Black&Sexy began putting some of its content behind a paywall, selling select episodes through VHX to its die hard fans for $3 a pop. "We would make the first nine episodes free and then sell the season finale," Dortch explained. That sales model brought in enough money to keep the business running and the rent paid, but it wasn’t very predictable. "You couldn’t start planning the next season until you saw the sales from that last show."
Subscriptions brought in three times the revenue of advertising
In February of 2015 Black&Sexy tried another option: a subscription service that provided access to every show for $7 a month or $60 a year. Only a small percentage of its overall audience signed up, but each of those customers was now far more valuable than they would have been as just one more click in an ad-supported model. "We earned in one month what we used to earn every three months in sales, for the same amount of work, and that payment repeats each month as long as the series lasts," said Dortch.
Following the success of its sales and subscriptions, the company was offered a development deal with HBO and a licensing deal with BET. "Hollywood executives subscribed because they wanted to see, hey what do you have hidden behind that paywall," says Dortch. The small-time creators essentially took the risk out of optioning a show by proving on their own that a paying audience existed. "People started to look at us differently, and during the subscription phase, BET stepped in and offered a licensing deal."
The second Apple TV app being rolled out today by VHX is for Yoga with Adriene, an instructional workout series, and another small media company that began as a YouTube channel. Founder Christopher Sharpe recalls trying to make the switch from an advertising-only business to one where they sold videos directly to their viewers. "We used a WordPress website with a plugin that allowed us to create a membership. That linked to our Vimeo account," says Sharpe. "It was hacked together, didn’t scale, and broke half the time."
Now, even while capturing a small part of the show's overall audience, paid options have become far and away its biggest revenue driver. Sharpe says the company has about 1 million subscribers to its YouTube channel, 100,000 who subscribe to the email newsletter, and 10,000 subscribers through VHX. Yet it makes just 30 percent of its total revenue from advertising on YouTube, and 70 percent from direct sales and subscriptions.
Viewing is moving from the desktop to mobile and television
When it began three years ago, the majority of Yoga with Adriene's audience was watching it on a desktop web browser. That segment is now in decline, and the growth is in people using devices like the Roku, Apple TV, and Chromecast. "Customers were paying to download the show and then trying to get it on their TV through Airplay or Plex," says Sharpe. "It's a real relief to be able to provide them with that option."
Both Sharpe and Dortch say that it would have been prohibitively expensive to bring on a full-time developer to handle mobile app development, much less something for a brand new platform like Apple TV. "It's nice because we know that they make money when we make money," says Dortch. "So we can rely on them to handle the technology side of it, and we can focus on what we know best, which is creating content."
VHX was co-founded by Casey Pugh and Jamie Wilkinson, who worked together on the Emmy Award-winning Star Wars Uncut, a platform that lets fans recreate their favorite scenes from the film. Pugh had worked at Vimeo and Wilkinson at Rocketboom. The original vision was a consumer-facing video service, a sort of social web TV dashboard where people could enjoy an endless stream of videos and see what their friends were watching or share a clip themselves. But the company eventually pivoted to focus on serving the video creators, catching its first big break when it powered the direct to consumer sales of Aziz Ansari's 2012 comedy special. "We closed our first funding round a few months after that, which allowed Casey and I to stop working out of our bedrooms."
Today the company has raised a total of $10.5 million in funding and says it has paid out $7 million to its creators. The company takes a 10 percent cut of direct sales and a flat fee of $1 per month per customer on subscriptions. Right now there about 10,000 creators using VHX, 7,500 titles available for purchase, and hundreds of subscription offerings. The VHX mobile app allows people to easily watch any shows they purchased through the platform, and in the future, each of those shows could have its own dedicated app, with a custom look on the front and VHX powering the back end.
The market for online video is increasingly crowded and competitive
VHX is well positioned to capture this new breed of business, but there will be plenty of competition. If YouTube Red succeeds, creators may find that they don't need to go off platform to begin earning a better rate than they would through advertising, they just have to convince their die hard YouTube fans to become Red subscribers. And Pugh's former stomping grounds, Vimeo, is aggressively courting web video stars who are ready to branch out beyond YouTube and sell directly to their fans. Platforms like Patreon, which take a crowdfunding approach, have also become popular among video creators. And of course, all these platforms, including VHX, may struggle to hold onto their biggest breadwinners once they grow to a certain size. Aziz Ansari, for example, is doing his latest show, Master of None, directly on Netflix, which can afford to pay him big bucks up front.
And that is probably the biggest question for VHX and this burgeoning industry. Can it support creators that scale, or will it be relegated to serving the thin middle, sandwiched in between the massive audience for pure play ad-supported YouTube videos and the smaller but more valuable eyeballs that watch high-end shows from Netflix and HBO. "To be honest, I don't think anyone really knows what that market will look like in five years," Greenfield says. What we do know, he says, is that the cable TV industry is roughly 100 million households and $150 billion in the US alone. "With cord cutting and cord shaving accelerating, that money is definitely up for grabs."