That’s $25B a year!

Now, let’s take a look at Netflix’s estimated yearly content spend (inclusive of original + licensed):

Chart courtesy of backlinko

2022: $17B

2023: $12.6B

2024: $17B

2025 (estimate): $18B

Total: $64 billion

So, in other words, in the four years since 2021, YouTube has spent 56% more on content than Netflix (and that’s made up exclusively of rev share).

The beauty of YouTube’s business model, of course, is that YouTube’s income and creator investment is entirely passive. It is a platform unmatched in its scale, and as a result of its billions of active users can sit back and collect a mountain of advertising revenue, which it in turn shares with its creators.

Netflix, on the other hand, has to make (difficult) choices on what content will resonate with consumers, and put up risk capital against those choices.

It’s a reminder that the YouTube business model is incredibly appealing in its simplicity and elegance. When you factor in the ~12.5% share of TV viewing time the platform has (the highest of any streamer by a considerable margin), it’s no wonder Netflix (~8.9%) considers YouTube its most formidable competitor, and why people often claim that “YouTube successfully ate TV”.

A shifting media landscape and an ensuing clash between old and new media.

Netflix and the other premium streamers / Hollywood studios find themselves at an interesting crossroads. On the one hand, they scoff at user-generated content, viewing it as low-grade and pedestrian. On the other hand, it is hard to ignore the scale and success of platforms such as YouTube and TikTok, and the subsequent creator economy they have helped birth. It is equally hard to ignore the success of some of these individual creators, who have effectively leveraged their massive audiences into lucrative brand deals, sponsorships, and entire businesses (e.g., Mr. Beast, Emma Chamberlain).

Yet, when these two parties meet for negotiations - especially since Netflix is increasingly interested in adding some form of UGC to its platform - the premium streamers often balk at the terms and prices these creators demand (which often includes final cut privileges). While premium streaming platforms and legacy studios may have traditionally held greater leverage in negotiations, the media landscape has evolved dramatically in the last ten years. If these companies want to cash in on the booming creator / UGC economy, they’re going to have to pay up and acknowledge their power is not as one-sided as it once was.

The Suno story is a fascinating example of the tech-fueled disruption that continues to erode the traditional barriers of entry in media. This is true for many forms of media (certainly video content), but today our focus is on music. And to understand the significance of Suno and its competitors, we must first go back to a pre-internet music industry to see just how much the business landscape has changed.

Up until the mid-2000s, recording, distributing, and promoting professionally-produced music was difficult, labor-intensive, and expensive. Very expensive. As a result, the music industry was fairly vertically integrated. Major record labels held the proverbial “keys to the kingdom,” controlling the recording, manufacturing, marketing, radio promotion, distribution, and retail access to physical records. High barriers to entry existed across this entire value chain, and as a result individual artists were almost entirely dependent on these large corporations and their vast resources to reach global recognition and scale. If we look at each part of the value chain individually, we’ll see exactly why.

Let’s start with artist discovery. Before anyone had the ability to upload a clip of themselves singing to YouTube, new artists were typically discovered through one of two ways: A&R execs (people whose job it is to scout new talent) would frequent live music venues hoping to find promising talent, or less likely, you might’ve known someone with recording equipment and mailed in a very rough demo of your music to a record label, hoping someone would actually listen to it. Either way, the goal was: convince a record label to take a chance on you.

If they did, labels would then finance studio time and “artist development” for their signed talent. Without this studio-backing, recording music was simply not possible for independent artists; recording required multimillion-dollar studios operated by a team of specialized engineers.

The Beatles recording “A Day in the Life” at Abbey Road Studios (1967)

Distribution was yet another moat. The major labels owned or controlled vinyl pressing and CD manufacturing plants and a global distribution network that was capable of delivering physical records to music stores all over the world. And, when an artist finally did have a single or album out for sale, labels used their industry connections and leverage to promote the material - mostly via radio - so that it would chart well and sell.

Fast-forward to today and most of these barriers are virtually non-existent. Anyone with a laptop or smartphone can record music (analog or digital) and upload it for the world to listen to at the click of a button. Chances are, of course, not many people will actually listen to it - which is why labels still have advantages - but it’s certainly easier now than ever to gain an audience. Justin Bieber and Shawn Mendes are a couple of the many global stars who got their initial recognition from YouTube videos before signing with labels.

And while the first wave of the internet certainly threatened the distribution moat, what we’re now seeing is advanced AI software target the recording and production moats. That’s where Sunoand Udio come in. Think of them like GarageBand on steroids. These platforms offer an astonishing value proposition: a suite of professional-sounding songs generated in less than a minute based off some simple instructions, written in plain English.

But no one would actually listen to AI slop when there’s so much incredible music at our disposal, right? Well, according to the WSJ, Telisha Jones used Suno to transform a poem she wrote into a song called “How Was I Supposed to Know?“, which ended up reaching No. 20 on Billboard’s Hot R&B Songs chart, after which she signed a seven-figure record deal.

The article goes on to state that at least 10 AI songs have charted recently. Most of these songs are not labeled as AI-generated but software exists that is able to isolate and analyze each of the individual tracks that make up a complete song and determine with fairly high certainty if a song is AI-generated. Spotify does not currently label tracks made with AI, though the company said in a recent blog post that it is “helping develop and will support the new industry standard for AI disclosures in music credits.”

Spotify may be buying time while they figure things out internally, as with this wave of AI-generated IP comes a set of complicated questions around legality, monetization, and ethics. As previously mentioned, Suno is currently facing massive lawsuits from the big three music labels (who are alleging copyright infringement on an “almost unimaginable scale”), while Udio recently settled with Universal Music for an undisclosed amount. In the latest development, Warner Music Group signed a deal with Suno that will allow it to launch new models based on licensed songs.

But assuming the legality of this is all fine (which is a very large assumption), the question remains of who should be paid for AI-generated songs? If the models that generate the music are taking direct inspiration from existing material, should those creators be compensated? Perhaps especially so when you consider that most music-streaming business models reward artists for the share of total streams they capture, not a fixed per-stream rate. So in effect, flooding services with AI-generated music that requires so little effort to make could very well dilute earnings for those artists who dedicate their lives to the craft.

And while some artists have taken to social media to deride AI-generated music, the emerging trend is that consumers both increasingly struggle to identify and even care if music is AI-generated. According to The Hollywood Reporter, 30% of Gen Zers and 26% of Millennials think AI should be used to create music without human musical contributions. If anything, I suspect that number will go up, not down, as the technology continues to evolve.

So, are we headed in the right direction? Fans of AI often point to the technology’s democratizing power: anyone who has a story can now tell it. But I think it’s worth asking, “just because we canmake it incredibly easy to do something, does that mean we should?”

Read more here…

However, if both sides are particularly inclined to play hard-ball during a negotiation, a “blackout” can occur: the networks that haven’t reached an agreement in time go dark while both sides wait and see who blinks first. But historically, distributors and networks were jigsaw pieces that fit in the same puzzle - both dependent on each other for survival. So blackouts - if they did occur - didn’t last long since both sides were willing to make concessions to keep the cable TV cash cow humming.

But this is where things get more interesting. In many ways, the Disney / YouTube TV dispute is what happens when an immovable object meets an unstoppable force. Disney and YouTubeTV represent the titans of cable networks and (virtual) cable distributors, respectively. Disney owns the juggernaut network ESPN while YouTube TV is now the third-largest US linear TV provider by subscribers, and crucially, is growing (the top two providers Spectrum and Xfinityare bleeding millions of subscribers every year). At this rate, it’s only a matter of time before YouTube TV takes the top spot as the largest pay-TV provider.

So, when Disney allegedly offered YouTube TV the same rate it recently negotiated with Charter, Comcast, and DirecTV, YouTube rejected. They instead claimed to want a new, lower rate, stating otherwise they’d be forced to raise prices. While programmers have historically held the slight upper hand in these negotiations - since they’re the owners of the valuable content - it’s not so clear if that’s still the case when negotiating with BigTech. YouTube TV’s revenue represents a fraction of a fraction of the $350+ billion annual revenue its parent company Google generates. While indeed growing, YouTube TV is a rounding error on Google’s balance sheet. On the other hand, Morgan Stanley estimates Disney was losing $30 million per week during the blackout. Many believe this disparity may have given YouTube TV greater leverage against Disney, and why they seemed perfectly willing to skip out on two Monday Night Football games while negotiations continued.

But on Friday, the two parties finally reached an agreement. While we don’t yet know the final rate they settled on, YouTube TV secured a win: their subscribers will receive unlimited access to ESPN’s new flagship streaming service at no additional cost. This is exactly what we saw between Disney and Charter a little over a year ago, which helped set what seems to be a new precedent for networks negotiating carriage fees who also now distribute their linear programming direct-to-consumer themselves. It’s an important concession, as YouTube TVcertainly wants to minimize people canceling their subscription in favor of the new ESPNservice, which could very well happen if ESPN theoretically pulled certain content off their linear channel to make it exclusive on their new service.

At its heart, this story is yet another way the tech titans are using their size and near-endless cash reserves to disrupt the media & entertainment status quo. And we continue to see that these tech players - Google, Amazon, Apple - are seeking to use their technological scale to be the ultimate gatekeepers for all types of content. YouTube envisions a world where you go from watching NFL Sunday Ticket on YouTube TV to watching game highlights and influencer commentary on YouTube, to watching the latest episode of The White Lotus on HBO Max that you signed up for and access via YouTube’s Primetime Channels. Live, user-generated, and professional content, all in one place - that’s the dream. Time will tell if they can pull it off.

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