Building the Middle Class of the Creator Economy
The American Dream exists, but what is the reality?
|Dec 17, 2020|| 102||26|
[Hi readers, This essay was published today in Harvard Business Review. Hope you enjoy it, and let me know your thoughts in the comments below! -Li]
In 1788, George Washington predicted that America would be “the most favorable country of any in the world for persons of industry and frugality,” ideal for even those in the lowest social classes to immigrate to, given “the equal distribution of property, the great plenty of unoccupied lands, and the facility of procuring the means of subsistence.” Opportunity, he argued, was inherent in its vast lands and religious tolerance.
In 2016, 228 years later, Alex Zhu, the co-CEO of Musical.ly and later VP of product at Bytedance, echoed these sentiments in the context of starting a new social network. Launching a new platform, he said, was like starting a new country: Getting users to move from an established network that had an ossified economy and social classes to a new network requires the possibility of success—the lure of the American Dream. Furthermore, the new social network had to create upward mobility for all users, to “make sure there’s a middle class coming up.”
On most content platforms today, the ethos of the American Dream is alive and well—a recent study of kids ages eight to 12 found that nearly 30% aspire to become YouTubers. With countless examples of normal people achieving massive success on the platform, this should come as no surprise. Just last year, YouTube creator David Dobrik’s monthly AdSense checks from the platform were $275,000 for an average of 60 million views. On Substack, the top 10 creators are collectively bringing in more than $7 million annually. Charli D’Amelio—who recently became the first TikTok creator to surpass 100 million followers—is estimated to be worth $4 million at age 16. She started on TikTok just 1.5 years ago.
But while some have been propelled to massive stardom, examples of a wide swath of the population achieving financial security from these platforms are few and far between. The current creator landscape more closely resembles an economy in which wealth is concentrated at the top. On Patreon, only 2% of creators made the federal minimum wage of $1,160 per month in 2017. On Spotify, artists need 3.5 million streams per year to achieve the annual earnings for a full-time minimum-wage worker of $15,080, a fact that drives most musicians to supplement their earnings with touring and merchandise. In contrast, in America in 2016, 52% of adults lived in middle income households, with incomes ranging from $48,500 to $145,500.
The missing creator middle class
The sustainability of nations and the defensibility of platforms is better when wealth isn’t concentrated in the top 1%. In the real world, a healthy middle class is critical for promoting societal trust, providing a stable source of demand for products and services, and driving innovation. On platforms, less wealth concentration means lessening the risk that a would-be competitor could poach top creators and threaten the entire business.
Ever since Wired magazine editor Chris Anderson first published his “Long Tail” theory in 2004, the idea has been endlessly reinforced, contradicted, and debated. He argued that the internet’s removal of physical limitations (local audiences, scarce shelf space) would empower niche products and creators to flourish.
In the search category, the phenomenon has proven true: Google has revealed that on a daily basis, 15% of all queries have never been searched before, a figure that has remained stable since 2013.
But for content platforms, the move to digital content hasn’t been correlated with a burgeoning long tail: the top creators are massively successful, while long-tail creators are barely getting by. On Spotify, for instance, the top 43,000 artists—roughly 1.4% of those on the platform—pull in 90% of royalties and make, on average, $22,395 per artist per quarter. The rest of its 3 million creators, or 98.6% of its artists, made just $36 per artist per quarter.
Even in the video gaming world, signs point to success being increasingly concentrated among a smaller number of game creators. An essay by Electronic Arts product lead Ran Mo points out that on the online gaming platform Roblox, concentration at the top has increased even as total usage has grown: In 2018, the top game on Roblox accounted for 8 to 10% of concurrent users, while in 2020, the top game accounts for upwards of 20 to 25% of concurrent users. He proposes two reasons for this concentration: the lack of an upper limit for engagement in games, and the social nature of games leading to winner-take-all network effects.
A 1981 paper by Sherwin Rosen, an economist at the University of Chicago, offers a prescient explanation of how the “superstar phenomenon” would become more pronounced as a result of technology. Rosen argued that in markets with heterogeneous providers, like most creator economies, success accrues disproportionately to those on top: “lesser talent often is a poor substitute for greater talent [...] hearing a succession of mediocre singers does not add up to a single outstanding performance.” This phenomenon is further exacerbated by technology which lowers distribution costs: the best performers in a given field are freed from physical constraints like the size of concert halls—and can address an unlimited market and reap a greater share of revenue.
So, is inequality inevitable among creators? Perhaps to an extent. Not everyone can become a celebrity, but there are examples of middle-class creators: those that aren’t household names but have a solid base of customers who provide the foundation for a decent income.
What is certainly true is this: Creator platforms flourish when they provide opportunity for anyone to grow and succeed. When the American Dream is just a dream, the fate of platforms becomes precarious. Vine serves as a cautionary tale: Despite inventing the short-form comedy video format and reaching 200 million monthly active users in November 2015, the company gradually lost its creators to platforms like Instagram, YouTube, and Snap, where they could earn more, build bigger audiences, and have a wider range of creative tools. Opportunities for audience growth and financial success were more readily available on other platforms, contributing to the platform’s decline.
The Charlis and Addisons will always emerge and exist, but it’s vital for creator platforms to provide paths for upward mobility and democratize opportunities to succeed. How can platforms do this?
10 strategies to grow the middle class of creators
The middle class in America didn’t just happen naturally, but was born of 20th-century policies that created widespread prosperity: Roosevelt’s New Deal; the Fair Labor Standards Act, which established the minimum wage, overtime pay, and prohibition of employment of minors; a rise in unionism; the passage of the GI Bill; and the creation of the Federal Housing Administration. These policies shifted the balance of power to workers, distributed opportunity for wealth creation, and mitigated growing income inequality, helping to build a strong middle class that comprised 61% of American adults by the end of the 1960s. As policy priorities shifted, that number shrank to 51% in 2019.
Platforms, too, can make decisions that affect their own economies. Some inequality is inherent in the nature of the passion economy: supply is heterogeneous and non-substitutable, and the trust and affinity that creators build with their audiences should be celebrated. But platforms—from established to brand new—can do more to strengthen the creator middle class and broaden the path to success. What are some platform design decisions that can help make success attainable by many?
1. Focus on content types with lower replay value
How many times can a person listen to the same podcast episode? Probably not many before the content becomes repetitive and boring. In contrast, one can listen to a favorite song on repeat ad infinitum. In video games, there’s not only value in replaying a game, but increasing marginal utility because players gain mastery and can enjoy a game even more after sinking hundreds of hours into it. This suggests that categories with high replay value—like music and game platforms—are most susceptible to concentration among a few mega-hits. To create a more equitable creator ecosystem, platforms can direct users to content types where there’s greater appeal in experiencing a wide array of content.
2. Serve heterogeneity in user preferences & empower niche
Rosen’s theory of superstar economics is predicated on “imperfect substitution among quality differentiated goods”—great surgeons who can save 10% more lives get much more than 10% incremental demand. This highlights an attribute of various content categories that I’ll call objectivity of quality: some content categories have more definitive, universal quality standards than others. The “best” test- prep tutor could be possibly ascertained through measures like test scores, while there may not be a universally “best” fan fiction author, as user preferences vary widely.
When various segments of users have different preferences and opinions on quality, there’s a greater opportunity for a diverse array of creators to succeed. Platforms can encourage creators and consumers to explore and develop these niches. For example, the online children’s education marketplace Outschool sends teachers a weekly email that aggregates parents’ requests for new class topics, with dozens of new requests each week like “Painting a Goldendoodle” and “Scooter lessons and tricks.” This feature helps creators understand what niches would be fruitful for offering a class.
3. Recommend content algorithmically with an element of randomness
Some theories on why the long tail hasn’t flourished in a world of infinite digital products are that customers find it hard to know what to search for, and that most recommendation systems are basic, simply recommending what other users have consumed/purchased. The weakness of this system is that users rarely see anything outside of their interest areas and can get locked into filter bubbles; popular creators are further amplified, making it challenging for newcomers to break out.
However, when algorithms do the searching for users, there are more opportunities for niches to thrive. A TikTok blog post elaborates on the multitude of signals used in its recommendation system, including whether users watched a video until the end, whether they shared it, if they followed the creator, device type, language, country, and more. But notably, TikTok also stated that combatting filter bubbles and introducing diversity into the feed were direct goals, and it did so by injecting different videos into the For You Page that don’t match what users have engaged with before:
Sometimes you may come across a video in your feed that doesn't appear to be relevant to your expressed interests or have amassed a huge number of likes. This is an important and intentional component of our approach to recommendation: bringing a diversity of videos into your For You feed gives you additional opportunities to stumble upon new content categories, discover new creators, and experience new perspectives and ideas as you scroll through your feed.
This dose of randomness that enables normal creators without pre-existing large audiences to get exposure helps aid anyone in becoming successful on the platform, rather than creating a hardened social hierarchy in which “the rich get richer.” In fact, TikTok explicitly writes, “neither follower count nor whether the account has had previous high-performing videos are direct factors in the recommendation system.”
4. Facilitate collabs and community
In Daniel Pink’s 2001 book Free Agent Nation, he writes, “Free agents may be bowling alone, but they’re not going it alone [...] loyalty hasn’t disappeared; it has simply changed from vertical to horizontal.” He was referring to the broad trend towards self-employment in America and the necessity of building out a strong network of peers in a world without company-provided networks. The exact same can be said today about content creators.
Collaborations drive creator growth and success in a number of ways: Because content consumption is driven, in part, by which creators a user already follows, creating content together is an opportunity for cross-promotion. There is a huge precedent for using collaborations to drive discovery in the music industry and among YouTube creators. Taylor Lorenz’s article about Hype House and other TikTok collab houses—in which creators live and create content together—outlined their benefits: “Living together allows for more teamwork, which means faster growth, and creators can provide emotional support for what can be a grueling career.”
Hype House co-founder Thomas Petrou said, “When we moved in, Chase had 3,500,000 followers. If he went and got an apartment by himself, he might have 5 or 6 million now but not 9 million. Also, when you have a house, everyone wants to come over. No one wants to go to a two-bedroom apartment. Now, we can invite every big creator to the house.”
What are the opportunities for startups? For starters, while many grassroots communities of creators are already springing up, platforms can do more to enable creators to connect with one another for emotional support, collaboration, and education. For example, Stir makes it easier to handle the financial side of collaborations, whether it’s for a YouTube video or merchandise line. Teachable’s online teacher community provides a dedicated space for creators to network with others who are in a similar business phase. Given the lack of formal colleagues in this new unbundled work world, creators are well-served through alternative sources of community.
5. Provide capital investment to up-and-coming creators
If creators are the new small businesses, what is the new version of small business lending? Some creator verticals require upfront capital or investment to unlock the next level of growth, and could benefit from funding in order to lower the barriers to entry. While the returns on being a successful creator may not be venture scale, there could be new models like social tokens or niche creator-focused funds that provide a bundle of funding and education. Podfund, in the podcasting vertical, is an example of the latter, providing funding between $25,000-$150,000 to podcast studios and high-potential creators in exchange for a revenue share.
Patreon Capital, an initiative the company launched in early 2020, provides merchant cash advances to creators. Nicholas Quah reported, “Patreon provided the team with a cash advance of around $75,000 to cover the production budget for the series, with the expectation for Multitude [a podcast production company] to pay back a slightly greater sum from Next Stop’s Patreon earnings over the next two years.”
For much of history, the paradigm of creator monetization—whether for writers, painters, musicians, or other creative talent—was to receive payment and support on an ongoing basis (patronage) or to be assured of demand before creating something (commission). Platforms that enhance the predictability of income and provide upfront financing to creators are building on this precedent.
6. Decouple creator payouts from audience demographic
Unlike most other platforms, the TikTok Creator Fund de-couples content from commercial imperatives, a dynamic that both Hank Green and I have explored. On TikTok, Creator Fund payouts are driven by engagement and views; in contrast, YouTube—which pays creators 55% of ad revenue shown on their videos—incentivizes creators to make content for an affluent, advertiser-friendly audience. The higher the advertising rates and the more sought-after the audience is for advertisers, the more creators earn on their videos. Likewise, on Instagram, the prevailing monetization model of affiliate links and brand sponsorships incentivizes creators to cater towards a high-income audience.
Hank Green writes of the Creator Fund, “people with wealthy audiences don’t automatically make more than people with poorer audiences.” The “radical egalitarianism” of the Creator Fund stems from rewarding creators that generate the highest engagement, rather than those that generate the highest spend.
Deliberately designing systems that don’t just financially reward more affluent creators is important because the playing field for content creation is already uneven. A 2013 paper in the Journal of Computer-Mediated Communication found that “online content creators tend to be from relatively privileged groups.” While the paper doesn’t delve into the reasons why, I suspect it’s related to the broader reasons that prevent entrepreneurship in general: access to capital and ability to take financial risks.
7. Allow creators to capitalize on superfans
Subscription and fan donations can enable creators with even modest audience sizes to earn substantial amounts. These direct fan payment models facilitate greater monetization of superfans, in contrast with ad-based models that reward scale and reach. On YouTube, creators earn just $3 to $5 per 1,000 video views. In contrast, Twitch subscriptions are tiered at $4.99, $9.99, and $24.99 per month. If each Twitch subscriber accounts for one view, it’s a monetization rate that’s at least 1,000x more than YouTube’s revenue per mille (RPM).
Going one step further, Streamloots enables gaming livestreamers to monetize their superfans to an even higher degree: The average buyer spends $26 per month on digital interactions with streamers on Streamloots vs. $6 on Twitch subscriptions. For streamers who use both platforms, Streamloots accounts for 62% of total earnings, yet only 27% of purchasers. Customers are willing to spend more to gain closer access to a creator vs. showing passive support through a subscription.
What are other types of products that can decouple monetization from audience size? Subscription fan communities (e.g. Mighty, Circle), paid access to creators (e.g. on Cameo, Looped, OnlyFans), and sales of high-value products such as courses and e-books can help creators with modest audiences to thrive. My essay “100 True Fans”—a riff on Kevin Kelly’s classic “1,000 True Fans”—outlines guiding principles for creators who are monetizing off a small base of customers.
8. Create passive (or almost-passive) income opportunities for creators
In the real world, the most common middle-class jobs in America include primary school teachers, truck drivers, nurses, and sales supervisors. What’s the commonality of all these professions? They all have non-zero marginal costs: to treat one more patient or make one more sale entails more time and effort. This dynamic creates a ceiling for customers, resulting in an equalizing effect on earnings. This stands in contrast to the digital content world, wherein creators have zero marginal costs for additional viewers.
While near-zero marginal costs cause digital superstars to accrue massive audiences, the lack of marginal costs can also work in favor of emerging creators, who are able to sell digital goods with little marginal effort/time. For instance, on Gumroad, an e-commerce site that enables creators to sell software, e-books, PDFs, and other digital goods, there’s an extreme power law for earnings. Out of the 19,480 creators who earned something in September 2020, 9% made more than $1,000 in that month; 1% made more than $10,000; and just 10 (or 0.05%) made more than $100,000. While there is significant revenue concentration, for all creators, the sales represent passive income (after products are initially created), allowing creators to scale earnings without scaling time. When income is incremental, creators are able to dedicate time to other sources of earnings and create a portfolio of various income streams.
9. Offer a form of Universal Creative Income (UCI)
Universal Basic Income (UBI), a theoretical governmental public program for regular payments to all citizens without a means test or work requirement, is an idea that has enjoyed a sudden resurgence of interest.
UBI-like policies have widespread support from economists, with a 1995 survey of American economists showing 78% supported the proposition that the government should restructure the welfare system along the lines of a negative income tax (earners above a certain threshold pay money to the state, while earners below it receive money). In response to Covid-19 in March 2020, the U.S. passed the UBI-like CARES Act, which provided $1,200 per adult and $500 per child direct cash payments. In Austria, the government established a 90 million euro fund to support freelance artists, to provide 15,000 artists with a monthly stipend of 1,000 euros for 6 months.
Why would creator platforms consider Universal Creative Income? Zooming out from content creators specifically, there’s plenty of reasons why people don’t take the leap into self-employment, despite 71% of Americans expressing a preference for self-employment over being an employee. The top obstacles are financial in nature: Freshbooks’ 2019 Self-Employment in America Report revealed that the top barriers to self-employment were: “worry about inconsistent income” (35%), “don’t have cash to invest” (28%), and “worry about earning less” (27%).
Providing creators with a basic income may be a wise strategy to incentivize more creators to devote more time to content creation. TikTok’s Creator Fund announcement echoes this sentiment: “The U.S. fund will start with $200 million to help support ambitious creators who are seeking opportunities to foster a livelihood through their innovative content.”
10. Provide creator education and training
Just as creator collab houses lift up their participants partly through shared learnings and cross-pollination of ideas, platforms can facilitate these learnings and provide suggestions and guidance for what creators can do to succeed.
Taylor Lorenz’s article about Hype House reveals that “Charli [D’Amelio] also credits the group for expanding her creativity and helping her branch into new content formats like vlogging. ‘I’m trying things outside my comfort zone that I might not have done if I was alone in my room,’ she said.”
In China, influencer incubators take this educational angle to the next level, and have a multi-step model focused on developing, growing, and monetizing influencers (called key opinion leaders or KOLs). Industry leader Ruhnn, which IPO'd in April 2019, offers a suite of services to up-and-coming KOLs, including training them on how to create content, engage with followers, do makeup, and more. Monetization takes the form of driving fans to become customers of the KOLs’ online stores, and managing all of the e-commerce logistics, from product design to customer service. In 2018, Ruhnn’s 113 contracted KOLs generated 2 billion RMB ($300 million) in total sales and amassed nearly 150 million fans across various social channels.
Here are a few examples of how creator education is being productized in the U.S.:
On Kajabi, the bootstrapped all-in-one course platform that boasts $1 billion in annualized payouts, educational resources take the form of Kajabi University, which offers courses for building an online business, as well as a customer success team that strategizes with customers on goals and next steps.
Substack’s Bridge mentorship program is a two-month program that pairs together emerging and established Substack writers. The program promises that mentees will “get help with their editorial strategy and business; and sharpen their creative skills around writing style, asking for feedback, and positioning their value.”
Forces pushing towards inequality
In America over the last half-century, the middle class is under siege, having shrunk by 10 percentage points from 1971 to 2011. The phenomenon of stagnant wages, accompanied by rising costs for key elements of middle-class security including health care and child care, has been dubbed the “middle-class squeeze.” About half of Americans believe it is now harder to earn a middle-class income now than it was when they were younger.
A major factor that contributes to growing inequality in both the real world and the creator world is the leverage held by the upper-income segment: Rapid technological progress has led to a wage premium for skilled workers, while low-skill workers struggle to even find a job given increasing offshoring and automation. Among OECD nations, the U.S. has the highest skill premium.
The same dynamic exists among creators: on Twitch, for instance, top streamers—who have leverage and can move to other streaming platforms and encourage their audiences to follow—get to keep a larger portion of their earnings: Those who average 10,000 viewers or more keep 70% of subscribers’ monthly payments, vs. 50% for smaller streamers.
SaaS-based creator tools (like Shopify, Teachable, Kajabi, and many others) essentially function as a regressive tax on creators, with fixed monthly fees representing a smaller share of income for top creators. And typically, tiered take rates decrease (or are negotiated down) as total GMV increases.
For many ad-based platforms, getting access to advertising revenue is reserved for creators who’ve already amassed an audience. For instance, eligibility requirements for YouTube’s Partner Program include having more than 4,000 public watch hours in the last 12 months and more than 1,000 channel subscribers. In the podcasting world, where sponsorship deals are often negotiated directly between podcasters and brands, the long tail of podcasters is left out.
A path to stronger societies and platforms
The passion economy is rooted in and celebrates the notion of creator leverage: Because creators emphasize their individuality and offer non-fungible services/products, creators wield much more power over platforms than gig workers who are entirely replaceable. With the availability of various substitutes and a loyal audience base, creator platforms do have to cater to top creators in order to incentivize them to stay—a dynamic that predisposes platforms toward inequality. The challenge is to balance the leverage that top creators have—and rightly spotlighting top talent—with lifting up newcomers.
Societies and platforms flourish when there is a path for everyone to have upward mobility, achieve financial security, and learn and grow. The beautiful thing is, in the real world as well as in the digital world, it’s up to us to build this path.
Acknowledgments: Thank you to Lila Shroff for her research assistance and thought partnership.
Thank you to friends whose feedback made this piece better: Conrad Wadowski, Hank Green, Blake Robbins, Bhaumik Patel, Sam Yam, Alex Rampell, David McDonough, Dan Teran, Rich Scudellari, Ezra Cooperstein, and Kushaan Ahuja.