Why Hollywood is making it rain on the YouTube ecosystem and why it's only beginning

By Michael Carney , written on April 7, 2014

From The News Desk

After Dreamworks Animation acquired YouTube multi-channel network (MCN) AwesomenessTV, a prominent online video investor predicted to Pando that the category was ripe for consolidation and Hollywood M&A execs were beginning to lick their chops. That investor was Greycroft Ventures’ Mark Terbeek and his words at the time were, “I think [the space is] going to get wild in terms of transactions.”

Terbeek may have been a few months early in his prediction, and he may have failed to foresee the anti-YouTube backlash unleashed by creators during the second half of last year – temporary as its effects appear to have been – but his words now appear prescient. The checks, be they in the form of strategic investments or acquisitions, are flying from old Hollywood down to the green fields of YouTube.

Just two weeks ago, Disney dropped the biggest check yet in the online video ecosystem, acquiring MCN-category 800 pound gorilla Maker Studios in a deal that could be valued up to $950 million. (A deal reminiscent of its August 2007 acquisition of kids content website Club Penguin for $700 million, although Disney will hope this one turns out better.) Days later, Awesomeness (via Dreamworks) snapped up its LA neighbor Big Frame in a $15 million deal giving it access to an additional 300 channels, 39 million subscribers, and 3.4 lifetime billion views around categories including fashion, beauty, fitness, and music.

In the weeks preceding the Disney bombshell, Warner Brothers led an $18 million debt round in gamer-focused MCN Machinima, which shortly thereafter named former cable TV exec Chad Gutstein as its new Chief Executive. Fullscreen also raised a $30 million Series A round in June 2013 made up entirely of strategics: The Chernin Group, Comcast Ventures, and WPP Digital. Warner Brothers parent Time Warner Inc. had previously led Maker Studios’ December 2012 Series C round, earning up to a 4.75-times return on its recent exit.

It’s unlikely that Time Warner’s objective in backing Maker was purely to generate  a financial return – a $100 million best case scenario payout hardly moves the needle for a $59 billion company generating $29 billion in revenue and $8 billion in earnings. More importantly, the Maker and Machinima deals have let the Warner entertainment conglomerate peek under the hood of a few YouTube challengers, thereby gathering an intimate understanding of the state of the online video platform many are calling “the future of TV.”

AwesomenessTV, being the original Hollywood acquisition in the YouTube space, continues to offer entertainment execs the best glimpse into the long-term potential for such deals. In its February 25 earnings call, Dreamworks revealed that over the last 10 months Awesomeness had grown monthly video views 300 percent to 3.2 billion and increased subscribers 160 percent to 37 million over the same time. In other words, if reaching new teen and millennial audiences and driving engagement were the goal, acquiring Awesomeness has been a raging success.

Dreamworks said nothing of monetization or profitability of the digital video group, but given the inherent advantages of producing content and selling advertising at Hollywood scale, it stands to reason that these metrics improved as well. The company noted that it expects to pay $96.5 million of the possible $117 million in post-acquisition consideration owed to AwesomenessTV’s sellers “based on adjusted EBITDA targets for 2014 and 2015.”

What the above deals demonstrate is that Hollywood is beginning to view the YouTube space as more than a hobby. We're three years into the premium-content experiment on YouTube and the leaders in the category are more clear than ever. Expect the incumbent studios to look more and more seriously at investments and acquisitions in the space. After all, if you can't build it, buy it.

[Illustration by Hallie Bateman for Pando]