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As we entered 2014, Southern California-focused venture capital needed its first big digital media win — and it got one, a very big one, when Disney agreed to acquire leading multi-channel network (MCN) Maker Studios for $500 million, with triggers that can drive that number up to $950 million.

MCNs are companies that aggregate individual YouTube personalities and channels to more effectively resource, promote and monetize them together than is otherwise possible individually. They develop short-form (“bite-size”) premium video content ideal for mobile platforms. Most are focused on specific vertical markets like gaming, dance, fashion, or sports.

In the past two months, leading MCNs — most of which are based in LA, the home of video production and creativity — have been at the center of feverish strategic investment and M&A.

Warner Bros. invested $18 million in Machinima, a gamer-focused MCN that is amongst the largest. DreamWorks — via its AwesomenessTV division (which itself is an MCN that was swallowed up for a price potentially north of $100 million one year earlier) — recently picked up much smaller MCN Big Frame for $15 million. Even AT&T has entered the fray, investing in a new $500 million venture with The Chernin Group to develop MCN-like “bite-sized” premium video content. The Chernin Group offered up leading anime-focused MCN Crunchyroll as a tasty part of that deal.

Now another one of the remaining large-audience MCNs, Fullscreen, is widely reported to have retained Allen & Company to evaluate multiple bids, the most public of which is Relativity Media’s rumored near-$1 billion overture.

But, what justifies the $500 million to $1 billion price tag for some MCNs?

It certainly isn’t the standalone financials — at least not yet. Neither of the two billion dollar babies — Maker Studios and Fullscreen — is believed to be profitable. But that didn’t stop Disney, and that isn’t stopping big media and others from jumping headfirst into the MCN game in our increasingly short-form YouTube video world. Why?

It’s all about strategic value in the eyes of the beholder — and scarcity.

Disney, Relativity, and other potential MCN buyers operate in a completely different way and on broader platforms to monetize than do those individual MCNs. They bank on the fact that their much deeper resources can unlock and drive value in ways that standalone MCNs never could. Disney will leverage Maker Studios’ massive Gen Y and Z numbers (nearly 400 million subscribers and 5.5 billion monthly views) to promote its existing products (movies, television shows, theme parks, games, merchandise) directly to Maker’s coveted youth demographic. Disney will be able to reach that audience on new platforms much less familiar to the studio (primarily mobile) and drive demand that, in turn, accelerates and expands monetization of those “traditional” assets. How many blockbuster films or syndicated TV shows or hit video games or theme park merchandised items do you need starring MCN-cultivated talent to justify these numbers? Not many.

Disney is also the beneficiary of a nice little head start with Maker’s just-announced eight-figure advertising deal with Omnicom — a deal that is a sign of much more to come. MCNs like Maker and Fullscreen feature professionally produced premium online video content with real human personalities that command increasingly higher numbers. (We are not talking dancing cats here.) Many of these individual “channels” and grass-roots “celebrities” have accumulated massive audiences (Fullscreen itself has 300 million subs and 3 billion monthly views). These more obvious direct marketing revenues will only accelerate — and massively –in the years ahead.

Then there’s the issue of scarcity, a matter that always drives up M&A price tags. Maker Studios is the largest horizontally focused MCN, with 15,000 plus YouTube channels covering hundreds of separate niche vertical audiences. Fullscreen is second with no horizontally focused MCN being a close third. That drives multiple bids (which is reported here) — every entrepreneur’s M&A dream. And each MCN has its own personality. No two are alike. That leads to even more scarcity in the eyes of the “big fish” circling around the MCN world, each of which has its own personality too (as do the dealmakers who negotiate these M&A deals — yet another significant factor).

Ultimately, there is no single “right” answer — or price tag — in any specific M&A deal. It is not a precise science. Never is. Never will be.

So, are we in the midst of an MCN bubble? Only time will tell.

But, let’s not forget one lesson from the past that is perhaps at least a bit relevant. A few years back, another little online video company that was not alone in its space was acquired not because of its underlying financials (in fact, that company was hemorrhaging money) but because of its perceived strategic value to the buyer. That little company was YouTube.

Was its $1.6 billion price tag — incredulous to many at the time — justifiable?

You be the judge. YouTube is the world’s video channel, of course. Nothing comes close. MCNs are built on top of it.

But Maker just launched a video destination of its own — and short-form mobile-focused premium video content is in its early innings (just like YouTube UGC video content was back then). And premium video comes at a premium price.

Peter Csathy is CEO of Manatt Digital Media Ventures, a business consulting and venture capital firm that works closely with media companies, MCNs and other digital media entrepreneurs. He is a prolific blogger at Digital Media Update and thought leader in the digital media, entertainment and technology industries. He has led several companies that achieved successful exits.


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