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It’s OK to Stay Bullish on MCNs (Guest Column)

Multichannel networks have been getting a bad rap this past week as a result of a Recode report that Maker Studios’ earn-out from its M&A megadeal with Disney might be less than half the maximum $450 million, which would still give Maker execs and investors a nice little $700 million-plus win. Not bad.

The haters, however, are using this news as the central exhibit in their case slamming the value of MCNs — more accurately known as MPNs these days — and what they say are inappropriately lofty valuations to date for relevant acquisitions. That includes Otter Media’s acquisition of Fullscreen for up to $300 million, RTL Group’s acquisition of StyleHaul which valued the company at up to $200 million, and ProSieben’s recent acquisition of Collective Digital Studio, which valued the overall package at about $240 million.

But as someone immersed in the overall video ecosystem (yet hasn’t been involved in any of these deals), I strongly disagree. They are completely missing the fundamental point and justification for those deals. I remain bullish. Very.

Yes, these new form of digital-first and millennial-focused media companies face challenging stand-alone economics (although that is fast changing with significant new revenue streams like content licensing for original programming). And, yes, unanticipated integration challenges likely faced Disney and Maker in this case (they always do).

Those unanticipated consequences, of course, should be more anticipated in this case, where a completely new form of media company combines with a traditional media behemoth that more frequently than not have competing fiefdoms. I know this from personal experience, having worked within Universal Studios for years.

But that does nothing to diminish the strategic value of the right MCN/MPN in the hands of the right strategic acquirer who correctly looks at the world with a much broader, wider and longer-term ROI lens. And the fact that Maker’s earn-out ultimately may not reach the maximum can be (and likely is) simply a matter of negotiation. It does not mean that the deal itself is a failure in any sense of the word for Disney. That’s what negotiation is all about, and I have little doubt that both sides understood the primary drivers of the deal.

Evaluated under the right metrics of success, Disney’s acquisition of Maker for now significantly less than $1 billion ultimately will be seen as being a smart, savvy move.

First, for all media companies, you have to be where the kids are, and that’s the mobile phone — the first screen for millennials (and increasingly, even non-millennials). That’s where everyone under age 30 most voraciously consumes content. Movies, television, shortform digital-first content, user-generated content.

So on this fundamental point Disney absolutely has succeeded. With one stroke of its pen, Disney entered the mobile-first, millennial-focused video world at mass scale and with the right DNA that Disney sorely needed (and humbly conceded it needed).

That means that mobile devices are the first and best place to reach kids from a marketing perspective, too. And that includes marketing of movies, television, short-form content, UGC. That brand/marketing reach is absolutely a primary driver of the deal in the first place and how Disney will measure the ROI from it.

Buying Maker was never about standalone revenue. General M&A metrics of revenue and EBITDA multiples were thrown out the window (just as they were in the other major MCN acquisitions to date). Rather, Maker’s massive mobile footprint gives Disney an ability to market its movie and television properties to an otherwise significantly lost demographic whom Disney otherwise wouldn’t be able to reach.

Disney CEO Bob Iger has always said as much, underscoring that “we see it first and foremost as a distribution platform” for the marketing of Disney storytelling. It’s a basic point that is frequently lost on the naysayers. A highly successful Maker-driven, mobile-centric, millennial-focused marketing campaign for one Disney mega-movie property (“Star Wars,” anyone?) alone has the potential to generate hundreds of millions of incremental dollars at the box office. Do that a few times and the $700 million-plus deal doesn’t sound too bad, does it?

And that’s the fundamental point. M&A is all about transformative strategic interests (e.g., accelerating growth, buying assets you need but don’t have, getting the right DNA) that are different for each individual prospective buyer, whether it be Disney, Otter Media, RTL or ProSieben.

By all those measures, I have little doubt that Disney’s acquisition for Maker ultimately will be seen as a great strategic success. The fact that Maker’s earn-out is less than the maximum does not change that.

Peter Csathy is CEO of business accelerator and development firm Manatt Digital Media, where he also serves as a venture capitalist. He is a blogger who frequently writes for Variety and other leading digital media and technology publications.

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