Media Companies v. 2015: Smartphone-Powered, Digital First

[My post here originally appeared as a guest article in Digiday a few days back; I have updated it to reflect the new $24 million investment in gamer-focused MCN Machinima led by Warner Bros.]

That smartphone in your pocket.  Small form factor.  Massive impact.  That tiny screen is fundamentally transforming (disrupting?) each of our lives, including how we engage with content (movies and television).  That means fundamental transformation of the media and entertainment business right here, right now – with tens of billions of dollars at stake – yet very few media execs “get” this.  This changes in 2015.

A whole new class of mobile-driven digital-first media companies sprouted and blossomed in 2014 – so-called multi-channel networks (MCNs).  MCNs most typically are venture-backed start-ups that aggregate individual YouTube personalities and channels -- frequently for specific niche passionate audiences (think fashion and leading MCN StyleHaul) -- in order to achieve scale, fund video production, and maximize ad dollars.  Sounds benign enough, right, especially when their impact is marginalized by the almost-dismissive and somewhat-faddish acronym “MCN.” 

But, make no mistake, MCNs are media companies with transformative impact.  They simply are a new kind of media company.  Digital-first media companies.  These are media companies by millennials, for millennials.  And, while they do not supplant “traditional” media companies, they most definitely are a necessary extension of them in this new multi-platform media world.  After all, mobile is where the youthful eyeballs that “matter” (at least to marketers) now consume the majority of their video content.

That’s why Disney – the largest traditional media company of them all – slapped down up to nearly $1 billion last year to buy one of the largest MCNs -- Maker Studios.  As vast as its resources are (and the Mouse House certainly has plenty of cheese), Disney had the commendable self-awareness to recognize that it lacked the DNA to play effectively in the smartphone-driven, short-form video, millennial world – a world that demands a very different way of thinking about content development and engagement.  Rather than build it themselves, they bought that expertise and critical mass of short-form content (and the personalities behind them).  They paid up to double down on the MCN world, which was excellent news not only for Maker’s investors, but also for other leading MCNs and the investors behind them. 

Other major studios – and perhaps even technology companies like Apple, Samsung, and Amazon, whose divergent business models increasingly are content-driven – will follow suit in 2015.  This is a classic case where demand for MCNs with scale outstrips supply.  After all, content is increasingly king, and that means big numbers.  Last year, in addition to the near-$1 billion Disney/Maker deal, Otter Media (the joint venture between AT&T and The Chernin Group) paid a rumored $200-$300 million to buy competing MCN Fullscreen, and European-based media company RTL Group recently sewed up fashion-focused MCN StyleHaul for a price that values the company up to $200 million with earn-outs.

These are numbers that make even Northern California VCs – ever-cynical about all things content-driven (especially when they are driven in LA where most leading MCNS are based) – take notice.  They have smartly started to pour tens of millions of dollars into video-driven new media companies.  Case in point, BuzzFeed.  Blue-chipper Andreessen Horowitz invested $50 million to accelerate smartphone-targeted digital-first video production.  And, the accelerating pace of foreign-driven M&A (like RTL with StyleHaul) and investment (like BSKYB and Liberty Global’s recently announced $28 million investment with others in sports-focused MCN Whistle Sports) underscores that this sea change in the media business is not just a U.S. phenomenon.  Digital-first content is borderless and globally shareable.  We live in a new world order of digital media.

Brands too are finally taking notice and fundamentally changing their behavior.  They understand that smartphones – and the millennials who hold them – demand a different and deeper form of engagement.  Pre-roll and pop-up ads simply don’t work anymore.  Millennials demand “authenticity,” a word that is a fundamental part of the new digital-first lexicon.  You hear that word – and the resulting marketing solution of “branded” or “integrated” content -- everywhere.  While that notion certainly is not completely new to marketers as we enter 2015, what is new is that for the first time, they will shift significant marketing dollars away from traditional media to more engaging and measurable digital platforms. 

Yes, there will be blood as digital begins to cannibalize traditional ad spends.  That’s why we have seen an accelerating pace of ad-tech company exits like increasingly video-focused Facebook’s reported $400-$500 million buy of LiveRail and Yahoo!’s recent $640 million acquisition of BrightRoll. 

But it doesn’t end there.  Several brands will go even further and invest big to become millennial-driven, digital-first MCN-like media companies themselves.  Red Bull is the poster child here, aggressively developing and aggregating its own video content for digital consumption whenever, wherever.  GoPro, Marriott, and Pepsi also have proudly announced such ambitions.  Make no mistake.  We are not just talking advertising and marketing here.  We are talking whole new media businesses for brands, bringing them head-on against both studios and other MCNs.  Red Bull, in fact, operates its “Media House” studio as a separate P&L and is measured by its stand-alone success.

Those who listened closely in 2014 heard (and internalized) these smartphone-driven digital-first media transformational winds of change.  So, listen closely now.  Do you hear it?  Yes, that is the “whoosh” of massive mounds of money changing hands all around the video ecosystem.  Just last week, Warner Bros. led an additional $24 million round in gamer-focused Machinima -- and a few weeks before that, BSKYB and Liberty Global formally announced their $28 million Series B round with others in Whistle Sports – a double-barreled MCN big bang to start the year.

In the immortal words of Karen Carpenter (how ‘bout that for a deep reference?), “We’ve only just begun …”.

StyleHaul’s $150 Million Valuation -- Good (Very!) for Other Vertically-Focused MCNs

As expected, fashion-focused MCN StyleHaul’s sale to Euro-based media conglomerate RTL Group is confirmed as of this morning.  And, consistent with my prediction a few weeks back, the deal values StyleHaul well north of $100 million -- essentially $150 million in fact.  But, reports indicate that the ultimate “haul” for investors could exceed $200 million via performance incentives.  Very stylish indeed!  (Here is my earlier analysis of why the deal makes sense for RTL).

This bodes well for other major vertically-focused MCNs -- i.e., those focused on a particular niche markets/audiences.  Those include Tastemade (foodie-focused), Mitu Networks (Latino-focused), DanceOn (a client that is dance-focused), Machinima (gamer-focused), and Whistle Sports (a client that is sports-focused and which just announced a major $7 million strategic investment from UK-based media giant BSKYB).  Why?  All target passionate groups under-served by “traditional” media outlets who are hungry for fresh content -- particularly short-form video for mobile engagement.

MCN M&A -- it’s not just about broad-based horizontal MCNs (like Maker Studios and Fullscreen) anymore.  In fact, vertically-focused MCNs cater to self-defined passionate audiences -- and that means deeper engagement and opportunities to monetize (via higher CPMs, more targeted sponsorship dollars, and direct commerce).

MCN Whistle Sports Scores $7 Million from BSKYB -- Here’s Why

Truly, the MCN world doesn’t sleep -- we are seeing a constant barrage of major strategic developments in the world of short-form video and mobile/digital-first strategies.

The latest data point?  Leading sports-focused MCN Whistle Sports -- still early in its first quarter (it only launched this past January) -- just received another $7 million investment from UK-based broadcasting giant BSKYB.  And, expect more significant sums coming soon to Whistle Sports -- which I just recently profiled the company and interviewed CEO John West here on my blog -- as part of its still-open Series B round.  This news follows Variety’s report just in the past couple days that Luxembourg-based RTL Group has acquired fashion-focused MCN StyleHaul.

Ahh yes, the growing internationalism of MCNs.  It ain’t just for U.S.-based media companies anymore (let’s not forget German-based media giant ProSieben's major investment in Collective Digital Studio and own Euro-based Studio71 which now aims to expand across the pond to the U.S.).  And, the rationale in this case is clear (just as it is in the case of StyleHaul).  Language is rarely a barrier in sports content, meaning that sports (just like fashion) travels well.  And, BSKYB -- already heavily and long-invested in sports -- can help to accelerate Whistle Sports’ international expansion (while it itself begins to play more aggressively in the mobile and digital-first content world, just as all other major “traditional” media companies need to be).  The Whistle -- which essentially is a digital and mobile-first ESPN for millennials, by millennials -- had just recently opened a London office.

Whistle Sports now scores 8+ million subscribers and 1.25+ billion video views, despite the fact that it is still early in its game.  That means that its growth is impressive.  And, BSKYB’s investment brings the company’s overall investment to $25 million from long-time media giant Bob Pittman and others.

I know Whistle Sports well -- and am proud to count it as a client and congratulate them on yet another major strategic victory.  I was first drawn to this MCN due to its impressive list of partnerships with virtually all major U.S. sports leagues, including the NFL and the MLB.  Being a deal guy, I know that finalizing deals with major players like those notoriously challenging and complex organizations are no small feat.  That reflects a highly talented and experienced executive team, led by CEO John West whom I have come to know.  And, impressive they are.

Whistle Sports -- always high on my MCN “hit list” for major strategic moves (others include StyleHaul (gone), Mitu Networks and DanceOn).  Not M&A yet.  No need to go deep when you have a team like BSKYB helping you to rush your international play-book ahead to an eventual major liquidity victory.

StyleHauls It In from Euro-Based RTL Group -- Here’s Why

The MCN world rests for no one.  While the LA-based digital media world was readying itself for the weekend this past Friday (and I served as Best Man at a mega-wedding for my best friend of 45 years, Chad Hummel -- with whom I work at Manatt), Luxembourg-based RTL Group reportedly swooped in to buy leading fashion and beauty-focused MCN StyleHaul (I just recently exclusively profiled StyleHaul and its charismatic CEO Stephanie Horbaczewski here on my blog).  Terms undisclosed (although I am confident that the final price-tag is well north of $100 million).

No surprises here, apart from the unusual timing of the breaking news.  RTL already owned a minority stake in StyleHaul, previously investing $6 million.  And, Stephanie’s company has long been thought to be in M&A “play” (although US-based media companies were rumored to be the leading candidates in those reports).  In fact, just last week I moderated a panel at the Variety Summit in LA focused on the fast-breaking digital world -- and predicted on the record that StyleHaul would be the next leading MCN to be gobbled up (just in time for the Thanksgiving season -- ladies and gentlemen, how about THAT at 5 am!) (I repeated this prediction on Friday in an interview with the Los Angeles Business Journal that was just published this morning).  In the past few months alone, Disney buys Maker Studios.  Next, AwesomenessTV buys Big Frame.  Then, Otter Media buys Fullscreen.  And, now this.

Why StyleHaul specifically and MCNs in general?

(1) RTL already knows the company and its management team, since it already had been a major investor and board member;

(2) The fashion and beauty vertical market travels well -- style truly is international and speaks no language and this MCN’s 199 million network subscribers are truly global, which is perfect for an international company like RTL Group;

(3) Fashion and beauty products sell!  And, that makes StyleHaul’s business model somewhat unique amongst MCNs, enabling commerce to be a potential significant (and perhaps dominant) video-fueled revenue stream for the company (in addition to more typical ad revenues and sponsored/branded content opportunities); and remember, StyleHaul need not split any of commerce revenues with YouTube;

(4) StyleHaul is one of the largest and fastest-growing vertically-focused MCNs with over 17 billion network video views and 4,900 network channels; that’s a lot of content;

(5) MCNs in general have sprung up as a result of two primary realities: (1) our video world is increasingly (dominantly?) mobile -- and that means consumers are increasingly thirsty for the kind of short-form video content that is the MCN world’s specialty; and (2) those mobile-thirsty consumers are heavily the advertiser-coveted millennials who frequently forego traditional video programming in favor of the YouTube economy and non-traditional YouTube video “celebrities”; I have written about this reality over and over again.

Congratulations to Stephanie and her team.

And, we ain’t finished yet.  More vertically-focused MCNs will be swallowed up in the near-term.  Here are my previous predictions (which ain’t bad so far -- 2 of the 7 are now gone; so check out the 5 remaining).

DramaFever, the Next Digital Video M&A Mega-Deal? Here’s Why (& Why "Korean Drama” Matters)

Yesterday, rumors began to swirl about leading, but little known, Korean “drama” site DramaFever -- that it is in M&A “play” right now for a deal valuing the company up to $140 million.  The potential buyers?  AMC Networks and European broadcast group RTL Group.  Earlier, Barry Diller’s IAC had been rumored to be kicking the tires.  In any event, DramaFever, which has raised $11.5 million to date and is reported to generate $20 million in revenues, highlights the power of the “Korean Drama” -- a genre of video content that most of us know very little about.  But, clearly many in the U.S. must, because 85% of DramaFever’s audience is non-Asian.

Eunice Shin of Manatt Digital Media, and a long-time digital media expert who is steeped in the overall digital video and MCN space, sheds light on this stealth genre and phenomenon -- and why Korean Drama (and related genres) “matter.”  I consider this guest post (originally published on her LinkedIn profile under a slightly different title) to be a “must read.”  Here it is.

The Korean Drama is the Perfect Case for the New Globalization of Content

For the vast majority of global citizens participating in this social world, we are all too familiar with the phrase “oh-bba Gangnam style”. Psy’s Gangnam Style video is one of the most globally viewed videos of all time with over 2 billion views. Yet to grasp scale, Psy’s popularity is only a very small portion of the overall Hallyu movement - the term referred to the Korean Wave or Korean Fever, the global fascination with South Korean pop culture and media known as KPop. Hallyu emerged in the 1990s in other parts of Asia, but the movement has been propelled into a true international market with the global growth of online and mobile content consumption.

The two strongest areas of interest in KPop are in music and TV content. The popularity of KPop music is often covered and well known. And now, TV drama series known as KDramas are grabbing the attention. The typical KDrama is most similar to what we know as a mini-series in the U.S.. They often tell a complete story in one series, self-contained typically in 16-24 episodes. With dozens of new shows produced each year, with a constantly revolving list of featured multi-media talent, there is no shortage of KDrama fandom.

With a deeply engaged and loyal audience, KPop is widely consumed not just in South Korea and throughout Asia, but has rapidly growing fans from Latin America and the United States. In the U.S., English sub-titled KDramas are most popular on YouTube and streaming sites DramaFever, Crunchy Roll (KDrama), Viki, and MNet America, as well as select content available on Hulu, Netflix, Amazon and iTunes. KDramas are more popular than ever with millennials, especially with 18-24 year-old American women, not of Korean heritage. DramaFever reports that 85% of their audience is non-Asian, with 45% being Caucasian and 25% being Latino.

No surprise that this premium content has sparked the interest of global investors, romanced by that growing, global loyal fan base.

In December 2013, The Chernin Group acquired a majority stake in Crunchy Roll, an anime and Asian drama streaming site, for roughly $100 million. In the months that followed, Crunchy Roll spun-off a Korean entertainment focused site called Kdrama, featuring a library of dramas, variety, and music shows. In May 2014, Crunchy Roll acquired Soompi, a Kpop news publisher and community website. And in recent days, it was announced that Kdrama and Soompi would rebrand to form SoompiTV. Currently, most of SoompiTV’s content is only licensed for the US and Canada, but they are working on gaining licensing rights to the global audience. Impressively, Crunchy Roll and SoompiTV – distributors of KPop and other Asian content - are part of the first few video services invested in and managed by the highly regarded The Chernin Group/AT&T OTT joint venture, Otter Media.

In September of 2013, Japan’s Internet e-commerce giant Rakuten purchased Viki, a premium video streaming service run out of Singapore, featuring Korean dramas and other Asian content. That deal was rumored to be at $200 million.

And now, with close to $20 million in revenue this past year and a very global audience, DramaFever is another leader in the KPop/KDrama media space. With a rumored valuation near $120-140 million, Drama Fever is being pursued and courted aggressively. To date, DramaFever has raised $11.5 million from investors that include AMC Networks, Bertelsmann, NALA, and Softbank.

These are some serious bets being placed on the global value of KDramas as a major media asset. Here’s why more media companies and brands will be addicted:

1) Deeply engaged, fiercely loyal global audience

Not too long along ago before many of the streaming sites had international licensing rights, KDramas had limited availability outside of South Korea, and pirated videos made their way around the world fueled by the crowd-sourced, multi-language sub-titling of popular series. A large community of fans were dedicated to making this content available, and the loyalty and following of audiences are still reflected in the ongoing virality of what many would deem as obscure, foreign content. Today, sub-titling is still crowd-sourced on sites like Viki and YouTube, with the more popular KDramas sub-titled in over a dozen different languages.

Throughout Asia, the content has cross-generation appeal, with both men and women. Earlier this year, a very popular series, MyLove from the Star, debuted in Korea and had an average viewership of 24% in Korea. It then sold rights to China where it’s been viewed online through iQiyi, a Chinese video streaming platform, over 14.5 billion times. The series finale was so widely anticipated and watched by all ages, that Chinese news outlets covered people calling in sick and taking time off to watch the finale and alluded to the high probability that the national productivity of China was impacted by the fandom around that show.

2) Deep library of addictive, binge-watching worthy content

With the soap-opera like cliff-hangers commonly written into each episode, coupled with the availability and ease for online and mobile consumption, KDramas are ideal for binge-watching through the series. I’d even argue that KDrama fans were the originators of binge-watching. There are hundreds of past KDrama titles, with constant, year-round production of new content. With this rich library, DramaFever reports that their subscribers watch on average 54 hours (3,234 minutes) per month. In comparison, subscribers on Netflix and Hulu are reported at monthly average views of 644 minutes and 223 minutes per month respectively.

3) Growing interest in the KPop Lifestyle

This past summer at the KCON conference, an annual K-Pop convention held in Los Angeles, attendance doubled from the previous year to over 42,000 in attendance, with nearly 40 percent coming from outside California. Most of the attendees were female, and less than 10 percent of the attendees were of Korean heritage. KPop is not only relevant in music, TV and film, but it is making significant plays in fashion lines, and even skincare and makeup. There is also a very large global following of Korean beauty content creators on YouTube, furthering the allure and appeal of the KPop lifestyle with a highly engaged audience.

However, there are some growth and improvement areas that KDrama creators and distributors will need to address to fully optimize and monetize their assets for this growing global audience.

• Ad/Subscription Model: Currently, the majority of content distribution is supported via ad revenue. On subscription sites like DramaFever and Viki, audiences can subscribe to avoid ads. But given the well-known work-arounds (hint: use Apple TV to watch ad-free) and fans used to dealing with irrelevant ads, it’s going to take more sophisticated features and services to convert a larger number of people to a paid subscription model. Additionally, there is an opportunity for more sophisticated and targeted advertising. On one of the more popular streaming sites, with use of my Facebook login, it repeatedly rolled a 15 second spot from a utilities company, 3 times in a row to make up the 45 second spot. Perhaps the right brands and advertisers just haven’t come yet. Or perhaps it was a strategy to drive me to subscribe to avoid the annoying, irrelevant ads. Either way, this is a clear opportunity for both brands and streaming platforms.

• Discovery: Just like the rest of online content, discovery of premium content in the crowded and confusing space is often a barrier to entry, and is certainly the case for KDramas. Many rely on social community boards for recommendations and reviews. An interesting feature for one of the streaming services could be to curate and recommend shows based on interest and watching profiles.

• Cross-over of KPop Talent: Fans of KPop stars in Asia are rabid. Simply put, they make the Beliebers look harmless. Just don’t tell them I wrote that! The most popular KPop stars are singers, dancers and actors, with numerous endorsement deals in Asia. However, the artists themselves have yet to make as strong of a cross-over to English-speaking fans as they have in Asia. Perhaps it’s because many of the stars haven’t mastered the English language yet, or perhaps it’s because the management companies who control their careers are not apt to monetizing on the global scale.

• Brand Integration: Product placements and brand integration are seen with every series. But it is obvious that most of those brands are still just aimed at that first Korean audience, not considering the global market thereafter. This should spark the interest of global brands to consider. It’s a clear opportunity for the industry as a whole and a definitive growth area for further monetization.

• Rights/Licensing: Lastly, many of the distribution rights and licensing deals are still less than sophisticated and strategic. For example, My Lovely Girl (aka She’s So Lovable), a highly anticipated new series starring Rain concurrently broadcast in South Korea, is available in the US on DramaFever, SoompiTV, Viki, and on YouTube. Streaming services are fighting for the same audience with often the same content. For streaming services to differentiate, service features may not be enough. Licensing deals are bound to evolve. At the same time, building a licensing model with restricted access will be a challenge, especially for content that got its catapult from bootstrapping, resourceful, rabid fans.

As seen with the industry and ecosystem around KDramas, the growth and monetization of global content are still in its infancy, with great opportunities for distribution licensing/rights, brand integration, advertising and subscription models to advance.

Fun fact: Korean management companies are run much like the old studio system, where the studio contracted talent, and only made movies around those contracted artists. Similarly, Korean management companies target and manage talent, often with the triple threat formula in singing, dancing and acting. Many of the KDrama are cast with stars who are solo artists or a member of a group, who are trained, cast, produced and promoted by the same major management company. Korean management companies constantly scout and train new talent, and are often seen as cut-throat, talent factories. Implied criticism of this system comes as no surprise.

Eunice Shin is a Director at Manatt Digital Media (MDM), a deeply connected and entrepreneurial team, providing unparalleled, multi-disciplined services in business development and acceleration. MDM is at the forefront of digital innovation and multi-platform strategies - globally recognized as thought leaders and connectors in the digital media space. MDM’s unique perspective is through the lens of seasoned entrepreneurs, strategists, lawyers, analysts, venture capitalists, and incubators – working together to connect the digital media world. Eunice is a seasoned industry executive, passionate in partnering with innovative and transformational companies to accelerate business, creating competitive advantage and growth opportunities.