MCNs Fullscreen & Maker Studios - Why Is $500M to $1Billion the Magic Number? Here’s Why

As I wrote yesterday, it is now widely reported that Relativity Media has made a bid anywhere between $500 Million to $1 Billion to buy leading MCN Fullscreen.  Not surprising, since Fullscreen is also widely reported to have recently hired I-banker Allen & Co. to sort through multiple bids.  All of this, of course, follows fast on the heels of Disney’s recent acquisition of Maker Studios for $500 million with performance payments potentially bringing the deal up to a near-$1 billion price-tags (well, $950 million actually).

Since I follow the MCN space closely, I am frequently asked how these mega-price-tags can be justified.

In a guest piece in Variety a few weeks back, I laid out the strategic rationale for the buyers.  Won’t repeat them all here -- but one that is worth repeating is that scarcity alone, of course, is a price accelerator.  And, Fullscreen, next to Maker Studios, is the largest horizontally-focused MCN with 15,000 plus YouTube channels covering the gamut of subject matter and niche audiences.  So, when you entertain multiple bids (which Fullscreen is reported to be doing here for those reasons), you have the perfect storm for the target company.  That is every entrepreneur’s goal in an M&A process (I know, I have been there).

Certainly, it is not fundamental MCN financial performance and metrics that drive these lofty numbers.  This is not your everyday M&A.  The big fish making these moves are banking on the fact that their much deeper resources and significantly broader platform can unlock value in ways that stand-alone MCNs never could (again, I write more about this in my Variety piece).

Nevertheless, in any M&A process, both the acquiring party and the target company try to use comparable relevant deals (comps) to their advantage to shift numbers up or down.  So, let’s compare some key metrics related to these two deals (assuming the Fullscreen deal closes):

(1) Maker Studios -- 380 million subscribers and 5.5 billion monthly views.

(2) Fullscreen -- 300 million subscribers and 3 billion monthly views.

As is evident, Maker Studios clearly has significantly more “mass” (assuming that all eyeballs are created equal).  So, Fullscreen’s ultimate price-tag should be lower than Maker’s, correct?

Not necessarily Young Skywalker.  Each MCN has its own personality -- or, better said, each MCN has its own roster of unique individual YouTube “celebrity” talent and personalities.  That means that not all MCNs are created equal in the eyes of any specific buyer.  One MCN may be significantly more valuable to that particular buyer than another because it is more simpatico to its underlying vision.

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.  I certainly can understand why many in the digital media business (okay, most) believe we are.  But, let’s not forget one lesson from the past that is perhaps -- just perhaps -- at least a bit relevant to this discussion.  A few years back, there was a little online video company -- not alone in its space -- that was acquired not because of its underlying financials (in fact, the company was hemorrhaging money), but because of its perceived strategic value to the acquiring company.  That little company was YouTube.

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

You be the judge now ... in hind-sight.  YouTube is THE global video channel, of course.  Nothing comes close.  The entire MCN business is built on top of it.

In this case -- with Fullscreen and Maker Studios -- much of it is so-called premium online video content with real human personalities that is developed and produced with some meaningful resources.  We are not talking dancing cats here.  And many of these individual “channels” have achieved massive viewer numbers.  So, how many blockbuster films by the acquiring companies (Disney, Relativity) -- or syndicated TV shows -- or hit video games -- do you need starring MCN-cultivated talent to justify these numbers?  Not many.  And, let’s not forget that MCNs cater to the coveted Gens Y and Z demographic.  Disney and Relativity (if the deal closes) can, among other things, market and promote their other products (movies, television shows, theme parks, games, merchandise) directly to that audience -- driving potentially massive demand that, in turn, accelerates and expands monetization of those assets.

THAT’s what the buying studios are banking on ...