For Traditional Media, Mantra Is: Bigger, Younger, Hotter

Disney and Warner Bros. are among TV studios turning to multichannel networks to deliver attractive audiences
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The Walt Disney Co. announced in March that it had agreed to acquire YouTube multichannel network Maker Studios for $500 million—a number that could balloon to $950 million, based on Maker’s performance. The deal is the biggest ever in the MCN space, but just one of many recently wrapped. That same month, Machinima closed an $18 million round of financing led by Warner Bros., then elected former Fox Networks Group CEO Anthony Vinciquerra to its board of directors before naming former Ovation Network COO Chad Gutstein its new CEO. This month, AwesomenessTV—acquired last year by Dreamworks Animation for $33 million—announced that it would buy fellow MCN Big Frame for $15 million.

The outpouring of love (and cash) from traditional media has drawn attention to the MCNs. It has also raised some questions—beginning with: What, exactly, are those big companies paying for?

“It’s not so much the revenue that these MCNs are generating,” says Tuna Amobi, a senior analyst for S&P Capital IQ. “The main upside for a company like Disney or Time Warner is the ability to use these assets as an incubator, to build some new franchises, to test out potential new ideas that could help launch new franchises.”

Those incubators bring huge audiences with them. Though the major MCNs have begun to produce their own content and experiment with various platforms, their principal role is to aggregate YouTube video channels, providing support to creative partners in exchange for a percentage of ad revenue. Through hundreds, sometimes thousands of channels, they deliver massive audiences. AwesomenessTV and Big Frame will combine to reach 80 million subscribers. Machinima has attracted 321 million subscribers. Maker Studios boasts 380 million.

And size isn’t all that matters.

“The YouTube audience and the MCNs skew pretty young, an appealing demo for all media companies,” says Craig Hunegs, president, business and strategy, Warner Bros. Television Group. “We believe we can cultivate talent currently working with Machinima, to connect with that harder-toreach audience for our TV shows and feature films.”

More Subscribers, More Problems

Not that there aren’t growing pains. Machinima went through two rounds of layoffs in the last year— the most recent one affecting 42 people, or roughly one-third of Machinima’s workforce. That layoff was announced March 6, as reports surfaced in The Wall Street Journal and elsewhere that Warner Bros. was mulling a significant investment in the company. In a statement released that day, Machinima called the layoff an effort “to create greater focus internally on selling creative ad solutions and branded entertainment while better leveraging its long-standing partnership with YouTube to drive media sales.” Four days later, the Warner Bros. deal was announced.

Maker laid off 30-40 employees in 2013, saying at the time, “Our business is evolving and as we strategically plan for our next phase of growth, we are making adjustments in some key areas and changing allocation of internal resources.” And this after the company became embroiled in a public dispute in 2012 with YouTube star and former content partner Ray William Johnson, who accused the company of using “thuggish tactics” to pressure him into signing an onerous contract, and also revealed Maker cofounder Danny Zappin to be a convicted felon.

Zappin later admitted to serving time for felony drug possession. He resigned last year as CEO of Maker, then sued the company, claiming he was misled and coerced into stepping down. As part of his ongoing legal effort to regain control of the company, Zappin has asked a California judge to delay the Disney-Maker deal. A Disney representative declined to comment for this story. Maker did not respond to a request for comment.

The key problem facing the MCNs, however, is the same issue that vexes the entire digital video universe. “The biggest item is the pace and state of monetization,” says Gutstein, who adds that mobile utilization has hampered monetization efforts. “The pace of mobile viewership has far outpaced in the last 18 months the monetization. The monetization is starting to pick up. There have been leaps and bounds made, but there’s still a long way to go.” Still new to his seat at Machinima, Gutstein is bullish on the long view. “Once the monetization catches up, these businesses become very profitable right away,” he says.

Until that moment arrives, the embrace of larger companies focused on cultivating talent and marketing their own intellectual property to elusive audiences could insulate the MCNs from revenue concerns. And the resources provided by larger companies can help accelerate growth.

“We were ambitious before Dreamworks,” says Brett Bouttier, COO, AwesomenessTV. “But being in business with them and having their support has been like rocket fuel.”

The MCNs, in turn, offer the promise of something the traditional media companies can’t come by easily.

“They don’t have the infrastructure to produce or aggregate this kind of an audience,” says Dan Weinstein, founding partner of Collective Digital Studio, an MCN that reaches 30 million subscribers. “So they’re looking at others who have done it and continue to do it well to help them enter into the space.”

The Walt Disney Co. announced in March that it had agreed to acquire YouTube multichannel network Maker Studios for $500 million—a number that could balloon to $950 million, based on Maker’s performance. The deal is the biggest ever in the MCN space, but just one of many recently wrapped. That same month, Machinima closed an $18 million round of financing led by Warner Bros., then elected former Fox Networks Group CEO Anthony Vinciquerra to its board of directors before naming former Ovation Network COO Chad Gutstein its new CEO. This month, AwesomenessTV—acquired last year by Dreamworks Animation for $33 million—announced that it would buy fellow MCN Big Frame for $15 million.

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