The Thesis of Patreon

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, and in 2019 it expects to process $500 million in payments. 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.

“It’s not in our mission to change the fundamental economics…there are some creators who are popular and some who aren’t…we can’t change that…we can give less popular creators the best tools to better monetize their audience though and sustain themselves as a creator.” – Jack Conte

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.

from TechCrunch https://tcrn.ch/2BzuItA