Tag: EC-1

Patreon provides business infrastructure to independent content creators: people making videos, music, podcasts, paintings, comics, games, magazines and other forms of media for fans online. It helps them turn the small subset of superfans within their broader fan base into paying monthly patrons and manage relationships with those patrons across the web. Patreon is angling to become the dominant platform for creators to build these membership businesses, a position from which it could expand into other products and services for creators.

In this section of the EC-1, I am digging into the structure, performance and health of Patreon as a business. The sections are organized as follows:

1. Business model
2. Revenue
3. User metrics
4. New revenue streams
5. Costs and efficiencies
6. Mergers and acquisitions
7. Investors and fundraising

My analysis of Patreon’s product, competitors, and overarching thesis have been spun out as their own articles.

Reading time for this article is about 20 minutes. Feature illustration by Bryce Durbin / TechCrunch.

Business model

Patreon’s business model is straightforward, though it is becoming more complex. It charges creators 10 percent of their revenues through the platform, which is divided into a 5 percent platform fee and a 5 percent payment processing fee. Patreon has always had a flat 5 percent platform fee, but its payment processing fees have varied in the past.

Patreon has shifted strategy, no longer acting as a marketplace connecting fans and creators but as a SaaS platform with a suite of tools for creators. Rather than viewing its fees as a marketplace rake, a better analogy is to the commission model akin to that of a talent manager, agent or record label. Patreon’s incentives are directly aligned with its customers’ goal of generating more income from their fans.

That simple model will get more complicated, as Patreon is poised to introduce additional commission fees in exchange for access to some new functionality and services. Plus, the company acquired two startups last year (Memberful and Kit), which each come with their own business models.

Revenue

On January 23rd, Patreon announced it expects to process more than $500 million in payments in 2019. That would put the company’s 2019 revenue from its core Patreon platform at north of $50 million, given its 10 percent cut.

Back in May 2018, CEO Jack Conte said in a video that they would process $300 million in payments that year, implying roughly $30 million in revenue for 2018. That was twice the $150 million they processed in 2017 (the payment fee was variable until 2018, so the 10 percent assumption doesn’t hold for 2017, but I assume revenue was in the $12-15 million range).

None of these figures include revenue from Memberful or Kit. Kit’s revenue is likely a rounding error by comparison, and there is no longer any team working on it or resources allocated to developing it further. 

In contrast, Conte told me calling Memberful a rounding error would be “way off” and that it’s a product with “incredible product-market fit and incredible traction” whose revenue doesn’t look tiny next to Patreon’s. TechCrunch’s Josh Constine reported it had 500 paying customers and seven employees at the time of the acquisition. I haven’t found helpful data to use in estimating Memberful’s revenue, so whether this is $3 million or $5 million or another amount, I don’t know.

Is Patreon profitable? “Yeah, we’ve a ways to go there,” said Conte. After multiple years of trying to figure out its long-term business model and role within the online creator ecosystem, Patreon has clarified that creators are its customers and it will generate new revenue streams by offering new products and services to them.

User metrics

Creators

Patreon reports the total number of creators earning at least $1 on its platform as “over 100,000,” but they have been using that statistic since mid-2018. The independent website Graphtreon, which estimates Patreon data using the company’s API, says the total number of creators with at least one patron is 132,500. 

Based on this same Graphtreon data set, the number of creators increased 105 percent year-over-year in 2017 (to 92,500), but then only 39 percent in 2018 (to 129,000). Patreon’s Head of Communications said the correct 2018 growth rate for creators is “slightly over 50 percent growth.”

Revenue almost doubled over the last year, and revenue is tied to creator earnings. If revenue growth is holding steady while creator growth is slowing, it implies Patreon is adding fewer small creators who don’t generate much income, but is still gaining strong traction among more established creators who do.

Creator churn tightly correlates to creator income on the platform. People don’t walk away from a meaningful source of income, but they will walk away if they have been trying to gain patrons for weeks and only have $10 to show for it. A large number of creators join Patreon before they have a fan base — they see successful creators on Patreon and mistakenly attribute that success to joining Patreon rather than bringing a pre-existing fan base to it. They churn after a few months of gaining little to no financial backing. 

From the data Patreon agreed to show me during my research, I can tell you that the annual churn rate of Patreon creators drops under 1 percent for those generating $500 per month in revenue through the platform. The greater the income, the lower the churn, and after $1,000 per month in particular, it is very rare for creators to leave the platform at all.

$1K Creators

Given those churn metrics, Patreon’s team now measures the company’s progress by two KPIs: 1) the number of creators earning $1,000+ per month and 2) the total amount of money those creators are earning through Patreon.

This focus on $1,000+ per month creators (which I’ll refer to as “$1K Creators”) likely derives from their stickiness as customers, the disproportionate contribution they make to Patreon’s revenue and the strategic decision to narrow the platform’s scope to building tools for creators with existing fan bases (not trying to help creators without fan bases get discovered).

These $1K Creators receive 70 percent of the patronage and so generate 70 percent of Patreon’s revenue (or ~$35 million in 2019). Given the extent to which content is a hits business, in which the superstars in each field capture a massively disproportionate percentage of the economics, Patreon is less top-heavy than one might otherwise expect. While it has many $50,000+ per month creators, and indeed its single highest-earning creator — earning roughly $400-500,000 per month by my estimate — accounts for nearly 1 percent of all money flowing through the platform, Patreon’s dominant revenue source is creators earning between $1,000 and $50,000 per month. This is the mid-tail of content creators that the company’s business thesis hinges on.

Patreon doesn’t disclose how many $1K Creators there are, but CEO Jack Conte said “It’s a tiny portion. Because it’s an open platform, we at one point had hundreds and hundreds of thousands of creators who were making $0.” By the estimates of Graphtreon creator Tom Boruta, there are currently more than 4,300 creators making at least $1,000 per month (and more than 9,200 creators making $500+ per month). That small subset — 4,300 out of 132,500 active creators or about 3.2 percent of its customers — is Patreon’s core focus nowadays.

Patrons

In 2018, creators used Patreon to generate income from more than 3 million active patrons. That is a 50 percent year-over-year increase from the 2 million patrons Patreon had processed payments from in 2017. Using data from Second Measure — a firm that tracks billions of anonymized debit and credit transactions from millions of U.S. consumers — Patreon appears to be retaining patrons at a healthy rate. Averaging across several cohorts, 62 percent of first-time patrons on Patreon are still sending payments six months later and 51 percent are still doing so after a year. For comparison, those retention rates are about 10 percent behind Netflix’s best-in-class 73 percent and 66 percent metrics, respectively, but on par with those of Hulu (61 percent at six months and 53 percent at 12 months).

Far from a uniquely San Francisco phenomenon, patrons are geographically distributed too. According to the same Second Measure data set, while New York City leads in (U.S.-based) patrons, San Antonio is the second most common city with 2.2 percent of U.S. transactions, with Austin, Chicago, Houston, Las Vegas, Dallas, Tucson, Colorado Springs and Atlanta all making appearances in the top 20 (a “city” here is a legal jurisdiction, not a metro area). Moreover, Patreon confirmed that 40 percent of all money flowing through Patreon since founding has come from patrons outside the U.S. 

Can Patreon become a powerful, multi-billion-dollar company at the heart of the global media and entertainment industry? It’s founders and investors certainly believe so.

In this Extra Crunch EC-1, I dove into Patreon’s founding story, product, business model, and competition. Now I want to dissect the foundational thesis of where Patreon could unlock massive economic value. If it turns out they got the thesis wrong, tactical and product details won’t save it.

As I see it, Patreon’s thesis includes four hypotheses:

1. There’s a ton of untapped economic value in getting the mid-tail creator market to adopt membership business models.
2. Creators will adopt membership business models once they become exposed to the idea.
3. Creators need a dedicated “membership” service independent of the platforms they use for most of their content distribution and social interaction.
4. By owning membership, Patreon will be able to expand into providing numerous other products and services to creators.

I agree there is substantial untapped opportunity for mid-tail creators to leverage memberships, that Patreon can secure meaningful market share even amid competition by the largest content distribution platforms, and that being the dominant infrastructure provider for creator memberships is a highly strategic position from which to expand into numerous other products and services for creators. Where I’m more cautious is regarding the pace by which creators will adopt this and the percent of mid-tail creators for which this is a good fit. Let’s dig in.

Reading time for this article is about 11 minutes. Feature illustration by Bryce Durbin / TechCrunch.

1. There’s a lot of untapped economic value in getting the mid-tail creator market to adopt membership business models.

Creators produce media content for others to consume online and are independent (and not employees) of large media companies. The “mid-tail” creator is an individual who has a dedicated base of “true fans” probably numbering in the hundreds or low thousands. From my research, there are no good metrics for how many such creators exist.

Patreon wants to be the platform for mid-tail creators, which it defines as creators who can earn $1,000-500,000 per month through its platform. Currently, the platform has about 133,000 creators earning at least $1.00 but only 4,300 of them fit into that category. Those 4,300 drive most of the $500 million in payments it expects to process this year, however. Conte said of the number of creators who could fit in this range, “it’s hundreds and hundreds of thousands of those creators, and we have a very small proportion of them now.”

These creators are underserved small businesses

Whether they’re sole proprietors hustling for side income or full-time production teams shooting videos in a studio, mid-tier creators are businesses. However, as I explained in my analysis of Patreon’s product, these are customers not typically thought of as small businesses, and even if they are, they’re usually seen as too complicated, low ROI, and volatile. These mid-tail creators are not being chased by top talent managers, agents, record labels, etc. because they don’t command enough earning potential (in the eyes of the traditional industry). Creators are entrepreneurs, but unlike other types of small businesses, they need to stay focused on creating their product and interacting with fans, not managing a business.

Without time to handle business, these mid-tail creators are then left with advertising as a reasonably simple revenue model. Having thousands of passionate fans, though, may generate enough ad revenue to cover lunch, if they’re lucky. Plus, they often are not even creating content to appeal to a massive global audience anyway. Instead, they want to provide a lot of value to a more targeted audience than advertising allows.

If you remove advertising from the picture, then every potential revenue stream comes back to the same subgroup of fans: superfans who care enough that they will buy merch, event tickets, albums, art prints, and basically anything that a creator produces. The superfan-creator dynamic isn’t just transactional, like buying a pair of shoes from a store with good reviews. Rather, it’s quite emotional. Superfans don’t just value the final output, but also the process of creation and the person doing it. They want access to the whole thing.

If a product targeted mid-tail creators, however, it could address their particular needs, and this is where Patreon steps in. SVP of Product Wyatt Jenkins described the challenge of serving this customer: “There’s a tension between capitalism and art that exists in the world that we can’t untangle, we just have to do our best. So all the language in all the product is like teaching artists business. That’s the challenge we face everyday.”

Membership unlocks value

A membership business model is like a subscription to a community. Membership is about fans paying dues (on a recurring basis) to be part of a creator’s inner circle, receiving a mix of perks like exclusive content, access to discussion groups, members-only merchandise, first dibs on event tickets, video calls with the creator, etc. There can be different tiers of membership that provide better perks. Beyond the tangible benefits, it also provides deeper emotional value to fans: being (formally) part of a tribe.

Membership is a business model that can be distinctly applied to the circumstances of content creators. Creators make for natural recurring revenue businesses, since loyal fans want to both continuously consume content and also want an ongoing relationship with the creator. People will pay to be your friend. It is not about trying to change who is popular or how popular they are — it’s about helping them make more money through deeper engagement with their core fans. It makes the mid-tail of creators fatter.

Patreon talks about membership as a fit for the 1-3% of a creator’s online fan base most passionate about them. For some niche creators, it could be much higher.

On the flip side for creators, membership offers reliable, recurring revenue. They can choose to go full-time, make capital expenditures and hire employees based on forecasted income. As a result, mid-tail creators who are part-time or full-time but scraping by can evolve into a landscape of stable small and mid-size businesses managing customer churn and happiness. Especially if there are tools to understand those tactics and take action without having technical savvy or traditional business experience.

In December, Patreon CEO Jack Conte shared a list on Twitter predicting what being an independent content creator will be like in 10 years. One of his predictions was that there will be fierce competition between distribution platforms to get creators paid.

That competition has already begun, which is good for creators, but is it good for Patreon?

Patreon holds a strategic position in the creator toolset, particularly around building membership businesses — the recurring income from superfans that allows for creator sustainability. Among its competitors are some of the richest tech companies in the world who own content distribution platforms, like Facebook and YouTube. A crop of vertical-specific subscription infrastructure companies could push back on Patreon’s early market share by offering creators better features for specific use cases. A range of B2B software companies, blockchain projects, or even Hollywood agencies could decide to target Patreon’s core creator customer.

This article is an analysis of each of those challenges to Patreon, and how the company can navigate them to come out ahead.

• Fending off the content platforms
• Infrastructure competitors
• Next-generation talent representation
• Affinity group-specific solutions
• The future for Patreon

Reading time for this article is about 16 minutes. Feature illustration by Bryce Durbin / TechCrunch.

Fending off the content platforms

Creators heavily use content distribution sites like Facebook, YouTube, Twitch and others to publish their work and engage with their fans. Given the amount of effort expended on these platforms, it seems inevitable that they would find value in running their membership businesses through them as well.

Indeed, these platforms — particularly Facebook and YouTube — are investing significant resources into building out full-featured tools for creators to generate revenue directly from their fans.

Facebook is the top threat to Patreon, although others are also certainly important to watch.

The top distribution platforms have three advantages against Patreon. First, they have enormous budgets, plain and simple. Second, they already count most of the world’s creators and fans as users. YouTube, for example, may not be a hub for podcasts or for poetry, but the vast majority of podcasters and poets already have YouTube accounts … as do most of their fans. These platforms don’t need to do customer acquisition in the traditional sense, they just need existing users to test out new features.

Third, they have a major advantage with user convenience. It’s easier to convert a fan who is wavering on the idea of becoming a patron when the button to do so is right there in front of them. That fan is probably already logged into their YouTube account so that one click could be all that’s needed — no new account creation on Patreon.com.

Facebook and YouTube want fan-creator revenue

Content platforms see new revenue streams in the fan-creator relationship now. More of them are testing ways for creators to directly monetize fans rather than solely operate off ad revenue. This is driven by 1) increasing saturation in the digital ad market, 2) greater awareness of best business practices from the gaming sector, such as enabling superfans to spend money on extra perks, and 3) deeper understanding of China’s dominant social platforms which have long had features like tipping as revenue streams.

Facebook has been building out dedicated functionality for creators. Its Creator App is a unified inbox of Facebook comments, Instagram comments, and Messenger chats, plus a unified analytics dashboard to help creators understand who their fans are. This app could quickly evolve into the type of business infrastructure that Patreon is building to help creators manage their superfan relationships and get them to spend more.

Ominously, Facebook has been aggressively testing a variety of monetization options for creators. Among them:

• Creator Memberships: users who join a creator’s $4.99 per month membership tier get exclusive content and a supporter badge next to their name.
• Subscription Groups: creators can set a price of $4.99 through $29.99 per month for fans to join a private Facebook Group, which already has a Group Insights tool to get analytics on the most active participants, the most engaged posts, and the demographics of group members.
• Facebook Stars: a virtual currency for tipping creators on gaming live streams. Fans buy a pack of Stars, and Facebook takes a 5-30% cut depending on how much they spend, while creators get $0.01 for each Star fans send them.
• A marketplace for matching creators with businesses for branded content campaigns and sponsorship deals, similar to the Niche marketplace that Twitter acquired.

Facebook isn’t alone in attempting to leverage its platform to help monetize creators. YouTube has been hard at work as well.

In June 2018, it rolled out “Channel Memberships.” Creators with at least 50,000 subscribers to their channel can offer a $4.99 per month membership to their fans that provides access to exclusive live streams, members-only posts in the creator’s Community tab, custom emojis to use in YouTube comments, and a badge that appears next to the user’s name to mark them as a member. YouTube keeps 30% ($1.50 each) of the revenue from Channel Memberships, which includes payment processing costs.

Other fan monetization features on YouTube now include:

• Super Chat: when there is a live comments feed next to the video during Live Streams and Premieres, fans can pay to have their comments highlighted and temporarily pinned to the top so more people read them.
• Merchandise: creators with at least 10,000 subscribers can create custom merchandise to offer their fans through an integration with Teespring. Featured merchandise then appears underneath the creator’s YouTube videos. Teespring pays YouTube a commission on all the sales this generates for them and YouTube shares a portion of that commission back with creators.
• Ticketing: through integrations with Eventbrite and Ticketmaster, creators can promote and sell tickets to their live events directly from the YouTube pages where fans are watching their videos.

Beyond Facebook and YouTube, there are a bunch of other content platforms with fan-creator revenue models that could undermine Patreon’s ambitions. Amazon-owned Twitch has subscriptions similar to YouTube’s Channel Memberships, while Medium has a freemium model where creators can paywall their writing and then get a cut of the overall revenue based on the amount of “applause” their posts received. So far, Twitter and Snap seem to be non-players in this market.

Patreon faces two major risks from the rise of fan-creator monetization features on content platforms, beyond just company-to-company competition. Even if Facebook, YouTube, and other platforms release a fairly weak set of features, Patreon could face a “death by a thousand cuts” scenario. In aggregate, those features could reduce pressure on creators to find an independent platform to drive their superfans to. It also means that those platforms have the credit card info of a creator’s superfans as well, reducing the switching costs of leaving Patreon.

Second, Patreon envisions itself as the nucleus of a creator’s membership business, plugging into all the other platforms where they post content and engage fans using the Patreon API. But such integrations require collaborations with the distribution platforms. They now integrate with Reddit, but if other platforms are developing monetization tools of their own (even if not in direct competition), they may view a Patreon API integration as competitive with their own offering and refuse to collaborate. If Patreon doesn’t connect to the platforms creators use most often, it makes its service a much less compelling option.

Both companies could hit Patreon hard if they wanted to. Facebook in particular is such a powerful potential competitor because if it built its own robust version of a creator CRM it could provide creators unrivaled data on who their superfans are and how best to engage them. Plus, consumers actually read their Messenger, Instagram, and WhatsApp messages (unlike messages sent to subscribers to a YouTuber’s channel).