Size matters, in business as much as in the bedroom. With this in mind, consolidation in the online video ecosystem is something that industry insiders have been predicting for years. There are just so many benefits to scale in this category, and building it organically is such a daunting proposition. But, unsurprisingly given the complexity of these deals, there’s been more talk than action to date.
That changed dramatically on Friday when news of a planned “merger of equals” between Break Media and Alloy Digital was reported by the New York Times. The companies – which collectively represent titles such as SMOSH, Made Men, Clevver Media, Aweme, Screen Junkies, The Gloss, and The Escapist, among others – officially confirmed the news this morning, announcing the formation of a consolidated company called Defy Media.
PandoDaily caught up with Break CEO and newly minted Defy President Keith Richman for a closer look at the deal. He says:
The best and easiest path to build a scalable, profitable business is to get bigger faster. But, “mergers of equals” are really hard to do – something always gets in the way, whether it’s economics, egos, lawyers, or whatever. Everyone’s always saying, if only two companies in this space could get together, it would kick off a wave of consolidation. There are just too many good businesses that are sub-scale.
Defy has no shortage of staggering vanity metrics to tout about why it’s now the baddest cat on the online video block, particularly in the 12- to 34-year-old demographic. The combined company has more than 30 million YouTube subscribers and 125 million monthly unique viewers on the Google-owned video platform. Perhaps just as important in a world where companies are scrambling to develop an “off-YouTube strategy,” Defy has a combined 50 million monthly Web uniques. All told, this audience will help the company generate more than $100 million in revenue and reach profitability in 2013, both of which are rare in this industry.
But beyond these flashing lights, Alloy CEO Matthew Diamond, who is now CEO of Defy, and Richman view this as a whole that is far greater than the sum of its parts.
“You can get reasonably far targeting a single audience, but it gets harder as you get bigger,” Richman says. “This deal gives us both a broader offering to bring to the marketplace, whether that be advertisers, syndicators, OTT partners, talent, or whoever. We’re seeing a ton more economies of scale.”
Break and Alloy, while similar, are different enough that they should offer each other true synergies beyond simply additional scale. Break has been one of the most successful off-YouTube content companies of its generation, while Alloy is one of, if not the, largest owned-and-operated YouTube network. In a world where both strategies appear to be critical components of building a successful online video business, the new company will be better for the tie-up.
“Also, we have overlap, but not exact overlap of the audiences and advertisers we serve,” Richman says. “We think there’s a great opportunity to take the 12- to 15-year-old who’s interested in Smosh and get them interested in Break – to migrate demos through cross promotion.”
There are more complementary than redundant skillsets across the companies, Richman says, including those in content, technology, and product. The new Defy president might be excused for his hyperbole, but it’s not far from the truth. The two companies were built on opposite coasts – Break in Los Angeles and Alloy in New York – meaning they have very different philosophies and core competencies. One thing the two companies share is a reputation for having among the best sales forces in the industry, meaning the combined group should be equally formidable.
There will be little to no operational changes in the near term for the newly consolidated Defy. This is, in part, because the companies value their scale and have no immediate plans to rightsize the headcount, which today stands north of 350. But it’s also a function of the fact that the final deal terms took longer to iron out than either company expected, and thus there has been less time to begin operational integration than either would have liked. Going forward, Defy will continue to be dual-headquartered in New York and Los Angeles, with sales offices in other major metros.
While this deal wasn’t completed with an exit in mind, according to Richman, it introduces a number of attractive options.
“Matt and I have both been very keen to get north of $100 million in revenue, because it allows a lot more flexibility in exit potential,” he says. “We’re at the scale now where we think [an IPO] would be received positively. It’s nice to know that it’s now an option in the near term.”
When asked who the big loser in this transaction was, Richman says, “I hope everyone. I’d like to think that all our competitors are disadvantaged by this. We wouldn’t have done this if we didn’t think that. If there were knocks against either of our businesses, our hope is that we’ve filled them out with complementary offerings and put ourselves in a much better competitive position.”