The P2P Content Revolution Of The Creator Economy
Industry Deep Dive #2
This post serves as an introduction to the content-enabling industry, the macro-driver behind two investment thesis I will post just after: Focusrite PLC & Fiverr. I think an introduction is necessary as this growth driver is not obvious.
The Creator Economy
Legacy Media
Historically, media was controlled by institutions:
Cinema => Movie Studios
Music => Record Labels
Podcasts=> Radio
Fashion => Magazines
Articles => Newspapers
Channels to reach consumers were scarce. The distribution network, alongside an accumulated brand image, was a strong competitive advantages for every major media institution. Distribution also involved a lot of time & money, which made media itself very expensive. Therefore, institutions didn’t take many gambles, and only promoted the work of few content creators.
To succeed in becoming an artist, writer or movie director, you had to be really good, and you had to make it your vocation: Newspapers were written by journalists, music was made by musicians, fashion was produced by trained fashion designers.
But… Here comes the Internet
The speed of internet connection has exponentially improved during the 20th century, allowing increasingly sophisticated forms of media to be shared and consumed ever so easily by an increasing amount of people.
Suddenly, the competitive advantage that media companies enjoyed vanished. People could send content instantly to a wide audience, bypassing the traditional distribution networks. However, there was still a need for content aggregation — consumers were not going to receive 100 songs per day by email. Consequently, platforms emerged as the new distribution network.
Initially, platforms were mostly geared towards amateur content sharing. However, this changed, as platforms figured out a way to monetise the content through add revenue. The consequence was the appearance of an incentive for amateur content producers to create high quality content: high quality content would bring more add revenue.
A New Incentive Structure For Content Creators
Let’s step back a minute and contrast the initial situation with the current one. Before, the expected value of becoming a content producer was limited as there were few spots, and barriers to entry were high as one had to make content creation his vocation. Now, barriers to entry are low. The required investment to start a proper Youtube channel is under $1000, and the potential payoff is huge. Furthermore, having a small Youtube channel while working a job is a possibility. An example of spectacular success would be Mr Beast: His channel started with a camera and a computer, and is now bringing in hundreds of millions in add revenue.
To summarise the point, becoming a content producer used to be a binary, high-reward, high risk bet. Now, it is a low risk, high reward bet, with a spectrum of success potential. As a consequence, a whole market for “semi-professional” content emerged.
The Economics of Semi-Professional Content Creation
The process:
The Economy of semi-professional content creators is made of 3 components:
Platforms: Youtube, Spotify, Instagram
Marketing Solutions: Amazon, AdSense, Pubmatic, Magnite, Marketing Departments of big DTC businesses
Content Enablers: Avid, Focusrite PLC, Fiverr, Adobe, Canva
Content Enablers supply semi-professionals with hardware, software and services that enable the creation of content.
Semi-Professionals create content.
The content is posted on platforms, where it is distributed to consumers and assessed in function of the engagement consumers have with it.
This information is then received by marketing decision makers, who use it to figure out where they should advertise.
They pay the platform for advertising spots.
The platform then pays a proportion of the proceeds to the content creator.
The content creator uses a portion of his profits to upgrade his content generation machine.
Increasing Value
The key driver of value in this economy is how much time is spent consuming content. Demographics are a growth tailwind. Younger generations spend much more time on platforms. Also, high speed internet penetration is increasing. However, the main driver of aggregate content consumption in the long run is the quality and breadth of the content library. The cost to the consumer is essentially 0, or a small subscription fee, so the extent to which platforms gain share over traditional media really only depends on how much consumers enjoy consuming the content on it.
Taking the example of Youtube, time spent per user on the platform is up 50% since 2019. This has driven revenue per user up by a similar proportion.
I believe there is a self reinforcing process driving this growth:
Content creators compete for views, which drives the quality of content higher.
Higher quality content increases the market share of platforms and add revenue
More add revenue gives an incentive to more aspiring creators to come compete.
The size of the content creator economy is estimated to be around 100 billion, and due to the factors mentioned above, it is growing at a double digit rate. If you strip out the fees platform take, this is essentially a ballpark for the amount of add revenue content creators can claim as a whole.
Sustained Growth For Content Enablers & a Pandemic Base Effect Entry Point
As competition gets harsher, the infrastructure behind content creators will get larger. Heck, Mr Beast’s channel is probably comparable to a billion-dollar multi-national in size.
This youtuber describes how much he spends on his youtube channel
Therefore, I believe that the demand for goods and services enabling the creation of content will increase faster than the overall market. A few examples include:
Hardware: Music instruments, Audio Interfaces, Cameras, Microphones etc…
Software: Video Editing Software, Music Software
Services: Thumbnails and other artwork, editing, marketing & SEO
Fiverr & Focusrite PLC , respectively sell services and goods enabling the creation of semi-professional content, and will benefit from these long-term drivers.
However, the pandemic has accelerated this growth temporarily, and now comparables are tough, prompting steep price declines in these companies stocks. I think this makes for a great long term entry point.
In the next two posts, I will translate the organic growth driver I described in this article into two investment thesis for these companies.