YouTube stars cash In video rights for millions of dollars

Investors bet the back catalogs of top YouTubers will increase in value

Justin Watkins for more than a decade has made YouTube videos of himself playing and commenting on games such as Roblox, for an audience of mostly young children. 

His YouTube channel called Thinknoodles is a hit, with millions of subscribers, but he was surprised by the pitch he received from a startup: Would he accept more than $2 million in exchange for the advertising revenues from his thousands of old videos?

Investment firms for years have sought to lock up income streams from assets such as mineral rights and songwriter catalogs, with classic-rockers Bob Dylan and Bruce Springsteen cashing in for hundreds of millions of dollars. Now YouTube videos are becoming their own asset class. 

Bruce Springsteen on tour

NEW YORK, NEW YORK--DECEMBER 13: Bruce Springsteen performs at the 7th Annual John Henry's Friends Benefit held at Town Hall on December 13, 2021 in New York City. (Photo by Al Pereira/Getty Images) (Getty Images / Getty Images)

Spotter Inc. and Keli Network Inc., which does business as Jellysmack, are flooding the personalities behind top YouTube channels with offers to license their old videos, pitching the deals as timely infusions that can help them expand their businesses. 

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The startups offer cash sums in exchange for the future advertising sales generated by a YouTube creator’s old videos, striking deals that can stretch for as long as five years.

Spotter said it had spent $740 million on content licensing agreements since 2019 after announcing earlier this year that it planned to invest $1 billion by the middle of 2023. Jellysmack has put aside $500 million for similar deals.

SoftBank Group Corp.’s Vision Fund invested in both companies, betting the videos would increase in value as YouTube stars attract larger audiences. Other smaller firms are also pitching deals to creators.

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The money spigot is creating dilemmas for popular creators, who usually run profitable video operations but face pressure to upgrade their channels and expand into other businesses, such as food and merchandise sales.

Often, the deals require creators to upload videos on a consistent schedule or risk penalties, according to people familiar with the terms.

Softbank building with sign, person walks in front of building

SoftBank Group Corp. the Japanese conglomerate's Vision Fund invested in both Jellysmack and Keli Network. (Photo by CHARLY TRIBALLEAU/AFP via Getty Images / Getty Images)

Jellysmack offered Mr. Watkins $2.1 million for his YouTube back catalog’s earnings during the next five years, he said.

Mr. Watkins said Jellysmack’s proposal allowed it to seek recourse if he failed to create an average of 41 videos a month, a rate the company calculated based on his uploading history.

After asking Spotter for a competing offer, the company returned with a $1 million deal that also required Mr. Watkins to regularly upload videos, he said.

Mr. Watkins declined Spotter’s proposal, and Jellysmack retracted its offer after his channel briefly lost access to ad revenues because of a mix-up with YouTube’s monetization system.

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"I don’t see a lot of transparency into how these calculations are made," Mr. Watkins said.

Jellysmack said it has made significant improvements to its financial offerings since the beginning of the year. The company has also offered customized deals with shorter contract lengths and more flexible terms, said Chief Business Officer Dov Marmor.

"At the end of the day, I think capital is not right for everybody," Mr. Marmor said. "The right creator for us is one that actually has a specific use case for that capital, and putting it to work to grow their business."

Silhouettes of mobile device users are seen next to a screen projection of YouTube logo in this picture illustration taken March 28, 2018. (REUTERS/Dado Ruvic/Illustration) ((REUTERS/Dado Ruvic/Illustration) / Reuters Photos)

Spotter Chief Executive Aaron DeBevoise said he could count on one hand the number of times the company needed to enforce contractual terms with creators.

"We track it, but most of the time the creators deliver on what they promise they’re going to deliver," Mr. DeBevoise said.

A YouTube spokeswoman said creators are "business savvy and, as with any business opportunity they encounter, we encourage them to always do their due diligence to find the partner that’s right for them."

YouTube, which is part of Alphabet Inc.’s Google, typically pays creators 55% of the earnings from ads that run on their long-form videos, an arrangement that helped spawn the so-called creator economy, a growing array of startups offering everything from business software to financial services catering to online celebrities. 

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Advertisers are expected to spend $29.5 billion on YouTube this year, according to Credit Suisse estimates.

In February, Spotter said a $200 million funding round led by the Vision Fund had valued the company at $1.7 billion. Jellysmack has also raised funding from the Vision Fund valuing the company at more than $1 billion.

There are signs that business has begun to slow. YouTube’s advertising revenue fell from the third quarter of 2021 to the same period this year, the first such decline on record.

On Thursday, a Jellysmack spokesman said the company "forecasts a steeper decline in ad spending across most social video platforms in 2023" while cutting 55 employees, the startup’s second layoffs this year. The spokesman said Jellysmack would continue to invest in the business and key growth areas.

Jellysmack and Spotter have pitched their funding as low risk and less demanding than other forms of financing, such as loans or venture capital.

Jellysmack offered one YouTube creator cash equal to 80% of the expected value of their back catalog over the next five years, citing an algorithm and other data points, according to a marketing presentation viewed by The Wall Street Journal.

A separate Spotter presentation pitching a five-year deal didn’t provide an estimate of the same creator’s catalog value. The presentation said Spotter used a "predictive engine" to calculate its offer.

"You’ll never be obligated to Spotter to do anything you’re not already doing," the company wrote in the presentation.

Some creators have expressed skepticism about the startups.

"It takes a lot to win over creators who have spent a lot of their time getting the runaround," said Jeremy Burchard, co-founder of RootNote, a creator-analytics company. 

Others said the money has proved helpful. Preston Arsement, a 28-year-old YouTube creator with more than 22.1 million subscribers on his main channel, struck his first Spotter deal in 2020. 

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Mr. Arsement used the money to buy "a few million dollars" worth of real estate in the Dallas area to house an expanding roster of crew members who help produce his trademark gaming and prank videos, he said.

Later, Mr. Arsement said he set aside $2 million for charitable giving after taking another Spotter deal this year.

Mr. Arsement said his management company has developed a formula for evaluating future offers. He said Spotter’s video-uploading requirements didn’t trouble him.

"I am already as committed as I can be to YouTube," Mr. Arsement said. "It was honestly just even more motivating and exciting."