#6 - How does the Creator Economy work? (Part III: Platforms)

A look at creator economy businesses, and how distribution platform economics make or break creators.

Apr 19, 2021

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Hello readers! This is the last of a 3-part series about how the creator economy works. The goal is to help you succeed as a creator, fan, brand, or platform operator by understanding the ecosystem. In case you missed it — Part I: Creators, Part II: Fans.

In this edition, I will:

1) Provide a framework for looking at the businesses serving different creator needs.

2) Dive into platforms that focus on distribution, and show you how its business model works, and how its content discovery system works.

What do different “platforms” do?

The word “platform” gets overused, and some valuable businesses in the creator economy often aren’t platforms at all. For the purpose of this post, I’m defining “platform” as a digital service that facilitates online interactions (and transactions) between interdependent sets of people.

Businesses play various roles in the creator economy. I’ll give a big picture overview, but focus the majority of the post on distribution platforms, where content is published, consumed, and often monetized. Distribution platforms capture the majority of value generated from content today, and have the most impact on creators and fans.

A framework to organize businesses in the creator economy is a matrix where verticals represent use case or purpose, and horizontals reflect different key aspects of a creator business regardless of content vertical. Below is a sample matrix to help you visualize. (Not meant to be a comprehensive map of creator economy businesses).

Businesses can fill multiple roles. Some span horizontally across all verticals (Discord for community), while others focus on meeting end-to-end needs of one vertical (Substack for newsletter writers, Teachable for course creators).

1. Creation

e.g. Cameras, filters, editing software

These tools are often utilities, and not platforms. They help with the content creation or editing process, but don’t enable interaction and connection between people.

A common evolution for creation tools is to start as a utility layer for creators to produce content, and subsequently evolve to become a publishing destination as well (e.g. VSCO and Polarr).

If a product generates meaningful value and revenue as a creation tool (e.g. Adobe Creative Cloud, Final Cut Pro), there may be no need for it to ever become a platform.

2. Distribution

e.g. Instagram, YouTube, Clubhouse

The primary value of a distribution platform (to creators and fans) is discovery, which we will dig into later.

Distribution platforms are where consumers go to discover creators and consume content. As discussed in Part II, consumers spend significant time here. Consequently, these platforms are also where creators go to get discovered and grow a following.

Note: There’s a new class of “distribution” tools in the form of “link-in-bio”. These aren’t standalone destinations (yet). They act as traffic control hubs for cross-platform, multi-SKU creators to direct audience from one place to another (Linktree and Beacons.ai). I categorize them under business operations tools, which aren’t necessarily platforms.

3. Community

e.g. Discord, Circle, Slack, Reddit

If distribution platforms help creators reach new consumers and grow a following (rent your audience), then community platforms help creators to form and strengthen the relationship with followers and among followers (own your audience).

Without community platforms, creators would primary engage with fans through content, which means their line of communication with their audience would be at the mercy of platform changes (e.g. opaque algorithms) for content distribution.

With community platforms, creators have a space where they have a more direct communication path with fans beyond the context of content. Creators establish a home for their audience on community platforms, a place where creators set the rules of engagement and further cultivate fandom.

4. Monetization

e.g. Patreon, OnlyFans, Ko-fi, Gumroad

These are the businesses focused on generating revenue for the creator. Common formats include pay gated content or tipping where the platform takes a nominal cut.

Some distribution platforms have incorporated similar features, for instance Clubhouse offers payments with 0% platform fee). The hypothesis is that if consumers know all the money goes to the creator, then they will send more, which means creators earn more. Goals for this are 1) retain creators on platform by allowing them to earn via “tipping”, and 2) send a signal for new creators to come to the platform to earn while growing an audience. Facebook has also taken this approach by eliminating the platform fee for its creator subscription product through 2021.

There are also platforms that enable offline monetization beyond content, such as Shopify and Spring, which help creators to design, make, and sell merchandise.

5. Business Operations

e.g. Karat, Stir, Beacons, FamePick

Creators are small businesses. And since 75% of kids want to be content creators when they grow up, these small businesses will only grow in popularity in the next decades.

Creator businesses have the same needs as many traditional SMBs, whether it’s business intelligence, CRM, lending, working capital, hiring, or brand partnerships. Some businesses have stepped in to connect creators with brand sponsors, while others slid into the market gap for cross-platform community management.

Business operations tools aren’t all platforms (e.g. analytics sites don’t facilitate any connection or interaction between creators and fans), but some do have the ambition to become the operating system for creator businesses — more on that another time.

6. Vertical End-to-End

e.g. Teachable, Pietra, Substack

These are the platforms enabling a specific kind of creator to run their end-to-end business in one place.

Substack provides top newsletter writers with a salary, publishing tools, hosting, distribution, engagement features, CRM, and monetization all wrapped up in a package. Likewise, Pietra helps fashion merchandise creators to secure their supply chain, develop their product, get distribution, make sales, and run order fulfillment.

These different types of businesses provide all kinds of value to the creator ecosystem. Today we’ll focus on distribution platforms.

Distribution platform model

Distribution platforms are in the attention and engagement business. In the western world, these tend to be multi-sided marketplaces. The different sides are consumers, creators, and advertisers. These platforms help consumers find content, help creators find audience, and help advertisers reach potential customers.

A simple way to think about the business model is that their customers (who pays them) are advertisers / brands. Their product (what customers pay for) is targeted attention at scale. They can only produce this product by providing a great experience for consumers and creators. They can only earn advertiser dollars by effectively driving awareness, consideration, and action (e.g. purchase / app install).

As platforms attract creators, they provide broader content selection for consumers, get more engagement from consumers, and generate more revenue from advertisers, part of which they share with creators.

The platform then pours revenue back into additional content acquisition and creation tools, improved consumer experience, and better advertising tech (e.g. smarter targeting, ad formats, analytics). Doing so accelerates platform growth.

Creators benefit when more consumers come to the platform. With more eyeballs yearning for relevant content, a creator’s content is more likely to be discovered.

But how does content discovery — the most important role of distribution platforms — actually work? Let’s dig in.

How do content discovery systems work on platforms?

As mentioned in a previous post, most content consumption on these platforms happen through recommendations, which are shown to you algorithmically.

In truth, “the algorithm” consists of many systems and countless algorithms, and not a single person in the world can tell you all the details. Here’s what you need to know — the recommendation engine surfaces content based on two primary dimensions:

Performance: How did a piece of content drive engagement (such as Clicks, Time Spent, Likes, Comments) and satisfaction (Qualitative surveys, “Not interested”) from other consumers, particularly those whose patterns are similar to yours?
Personalization: What is your personal content consumption history on the platform? What pages / channels have you positively engaged with? What are the topics you’ve shown interest in?

Of course, these dimensions are simplified, human-comprehensible concepts. A lot happens under the hood to determine how likely and how often a piece of content gets shown to users. The key is that content discovery is all about the consumer. These systems do not know or care about the success of creators, only the engagement and satisfaction of consumers.

Platforms measure the success of their discovery systems by a metric we’ll call ‘X’ (exact metric varies across different platforms), which is meant to be a proxy signal that users are finding and consuming content they enjoy.

As an example: if Instagram’s ‘X’ = “time spent on the platform”, then in each instance of showing a user a set of content (i.e. every time a user visits Home / Explore), the system predicts which content will maximize “time spent on the platform” for that user, and takes that into account to put together an ordered list of content to show.

When the user sees that content and responds (e.g. click, scroll past, like), her engagement are fed back to the system as signals to help tune future predictions. Over time, these systems take in data from trillions of user sessions and interactions. That is how they become well calibrated at predicting ‘X’ for a given consumer <-> content pair, and therefore very good at maximizing ‘X’.

Why would “time spent” be the right metric goal? What does this mean for creators?

This goes back to the platforms’ customers — Advertisers. Advertisers pay for targeted attention at scale. So the more engaged attention a platform gathers, the more opportunities there are to show ads and make money. 💰

So the success of discovery systems is decoupled from the success of creators. Rather, the success of creators is a biproduct of platforms recommending the most engaging content to consumers.

If a creator’s content generates engagement and satisfaction from consumers, then the mechanisms of the platform will reward them. If a creator’s content — no matter how good it is — drives low engagement, then their efforts will fall flat on the platform.

Closing thoughts

Creators, fans, platforms, and advertisers are on the transformative edge of an ever shifting creator economy. As new creator economy businesses emerge (Beacon, Karat, Stir, Ko-fi, Clubhouse) to solve creator problems, incumbent platforms will observe vigilantly and respond appropriately to maintain their own relevance.

Distribution platforms are where creators, consumers, and advertisers meet. They are multi-sided marketplaces where the primary value (targeted reach at scale) is generated from effective matchmaking between consumers and content. This matchmaking / discovery engine is the core mechanism through which creators build an audience, fans find relevant content, and advertisers reach potential customers.

The high-level dimensions that platforms use to decide which content to show to users are performance and personalization. Ultimately, the success of a platform’s discovery engine are aligned to how it drives engagement and satisfaction from consumers, not how it creates success for creators.

Successful creators are a happy biproduct of a platform recommending the most engaging content to consumers. So as cliché as it might sound, creators are better served by focusing on the needs of consumers rather than gaming the system by catering to “the algorithm”.

Thanks to Benjamin Tseng for sharing thoughts!

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Next week, we’ll look at inequality in the creator economy, and why it’s okay.

Have questions or topic requests? Tweet at me. Thanks and see you next time!✌️

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