First Machinima, Now Maker: Why Studios Suddenly Got Hot for MCNs

Warner Bros. stake, Disney talks are evidence of where Hollywood sees the future of content going

Machinima Maker Studios MCNs

All eyes are on the Los Angeles-based corner of the online video world known as multichannel networks (MCNs) right now as result of two major developments just this past week: reports of Disney in preliminary talks to acquire Maker Studios for $500 million or more, and the $18 million Warner Bros. invested in rival MCN Machinima.

And these eyes aren’t just rival studios and others in the media business. The tech world and venture capitalists are watching closely.

So why here? Why now? Why the lofty pricetag?

Studios are increasingly — and smartly — looking to move “downstream” with their content” to expand their traditional video portfolios to include niche, personality-driven video content, which is at the heart of what MCNs do. I’m not talking YouTube “dancing cat” user-generated content. This is real premium video content, just in a different form and driven by different, and frequently innovative, development.

Leading MCN video personalities have massive passionate audiences, like Maker’s own PewDiePie, a wacky videogame enthusiast who was YouTube’s top channel in 2013. These personalities are stars in their own right. They reach the key youth demographic that studios – and the brands that support them — crave. Generations Y and Z increasingly watch videos online and on mobile.

At the same time video content moves downstream, studios have the unique power and multi-layered platform to move these MCN stars “upstream” — to feature them in more traditional vehicles (movies, TV, videogames, merchandise) and significantly expand their niche audiences. That’s good for everyone: the studios, the marketers, the personalities. In a sense, MCNs can be seen as the farm club for the studios, like the Groundlings compared to “Saturday Night Live.”

Maker and Machinima are two of only a small handful of MCNs that have achieved critical mass. Others include LA-based Fullscreen and Big Frame. That means scarcity. That means when moves are made in this space, other moves most certainly will follow.

Despite their modest production costs and global reach, MCNs have their share of financial challenges because they haven’t yet been able to monetize their ad inventory nearly as effectively as the TV business. But they have real strategic value for studios that is not necessarily reflected in their financials alone. Look at AwesomenessTV, which sold to DreamWorks Animation last year for up to $117 million.

MCNs perform another critical role: That’s where content innovation happens. Whereas traditional studio content typical follows proven formulae, no rules exist in the MCN world. Freed from constraints, creators experiment with new storylines and new forms of content. With MCNs, studios can see what works in this hyper-kinetic world of convergence, to scale and monetize that content and those personalities in ways that MCNs never could with their far more limited resources and platform.

But what justifies the rumored eye-popping $500 million or more, given the challenging economics that face online advertising-driven MCNs?

Think of it as the “YouTube effect.” Back in the day, the media world was rocked by the whopping $1.65 billion pricetag Google paid for the young upstart with massive viewers but essentially no revenues. In that case, traditional valuations went out the window and now that looks like a bargain.

Why? For similar reasons we have here: scarcity and strategic value. Google saw what others didn’t: that YouTube could play a game-changing role in its larger monetization machine. That’s where the young eyeballs were going. YouTube’s stand-alone revenues mattered little.

Ultimately, studios may feel the same way with MCNs. They may feel that MCNs are the next YouTube and don’t want to miss this party. In that context, strategic value will drive valuation rather than standalone MCN revenues.

If Disney buys Maker Studios for the rumored pricetag, that would be a big win both for Maker’s investors and for the LA-based venture community. MCNs are the poster children for Silicon Beach-based content-driven investment, potentially proving that content is, in fact, king.

Peter Csathy is CEO of Manatt Digital Media Ventures. He and his team both advise studios and those who make investments in this space.