MCNs may confound Hollywood today, but they've made inroads the business can't afford to ignore any longer.

Despite the flurry of YouTube Multi-Channel Network M&A over the past 12 months, MCN skepticism continues to abound. Nearly every week, a client or journalist expresses incredulity at the either the price paid for an MCN or the implied value of YouTube’s user generated content. “Rupert’s interest in Time Warner makes sense: scale, a leading content library, HBO as a Netflix competitor. Starz is a high quality, cash-generating asset,” an executive at a leading US network emailed me last month (republished with permission), “And Disney is doubling down on IP: LucasArts, Marvel, live sports…. But I don’t see how Maker fits in.”

These responses stem from an underlying truth: the MCN/UGC (User Generated Content) model is fundamentally at odds with Hollywood’s own modus operandi[1]:

  1. Production costs are extremely low, typically $500-$1,000/minute, compared to $100,000+ for TV and up to $1,500,000 for film
  2. There is limited oversight from non-creatives: little-to-no studio/network “notes”, audience testing, production audits etc.
  3. Content tends to be thought up, planned, produced and released in a matter of hours or couple of days – not months or years
  4. Not only do MCNs largely eschew Hollywood’s rigid windowing strategy, but the vast majority of consumption (and value) is front loaded
  5. Audiences are primarily built around people, not IP or brand (or even the former mixed with the latter)
  6. Hyper-specialized audiences are also an asset, not a reflection of programming failure
  7. Consumption is distributed across thousands of niche videos and storytellers, not “hits” (let alone blockbusters)
  8. MCNs appear to act as more of an ad exchange or technology provider than a content company

For those working deep inside Hollywood today, the MCN model may not be anathema, but it is confounding. How can content be reliably “good”? How can it ever be profitable? How can it scale? While certainly worthy of exploration, these questions overlook the critical – and often unique – advantages of the platform. But before getting into abstractions, we need to first consider their scale.

 

They’ve Got What You Can’t Have

REDEF_YouTubeMCNs_1.1

Over the past few years, the leading MCNs have scaled their audiences into the tens of millions. Maker’s trending monthly audience is at nearly 45M in the United States alone – representing a 60% increase (or 17M MAUs) since being acquired in March of this year. In a business based on “eyeballs”, these sums are certainly nothing to blink at. What’s more, these viewers are comprised almost entirely of pre-teens and young adults – many of whom are not only drifting away from television, but also Hollywood itself. “We have top channels, high quality original content that audiences love”, a digital media executive tells me, “but we just can’t get Generation Zs – or even Millennials anymore. It’s just not clicking.” Meanwhile, Maker boasts that 80% of its audience is between the ages of 13-34 and Fullscreen[Disclosure] is quick to remind advertisers that one in three millennials now consumes all of their video online.

Yet, MCNs provide far more than just Millennial and Gen Z relevancy – they also enable micro-targeting. Across their thousands of channels and creators, MCNs can give marketers an unprecedented ability to deliver rich video advertising to highly specific audiences. This massively expands the base of potential advertisers (it’s easy to forget how few companies or products can actually afford TV advertising), enhances commercial ROIs and allows individual content creators to be as niche and esoteric as they see fit.

REDEF_YouTubeMCNs_1.2

As the leading MCNs have grown their channel base and enabled content creators, they’ve proven not just the mainstream appeal of YouTube “UGC”, but also the tremendous scale of its consumption. In October alone, the Top 3 non-music video MCNs delivered an estimated 2.6 to 5.4 billion minutes of video entertainment each. When compared to the domestic basic cable TV business, the trio would find themselves below the average for total minutes watched per month. Yet, while cable TV ratings rapidly erode, Maker, Fullscreen and Machinima enjoy a blended 85% in compound annual minute growth. By this time next year, they could be in the Top 45, 50 and 75 most watched cable networks in the United States.

REDEF_YouTubeMCNs_1.3

In an era of content binging and DVR-filling, the consumption of MCN video is also distinct. The leading YouTube personalities are invited into audiences’ homes with phenomenal regularity – from several times a week to daily. Even the largest, most multi-platform media conglomerates struggle to have such routine access to its fans (let alone among pre-teens and adolescents). As a result, MCNs are uniquely positioned to deliver time-sensitive video advertising – especially as TV consumption continues to fragment across distributors, mediums and windows. In addition, the majority of this consumption is more intimate, authentic and personal than that of more “professional” Hollywood productions. In many cases, videos are simply a single YouTuber speaking directly to their followers. The intimacy of this relationship makes product placements and native advertising particularly effective and enables production decisions to be shaped by audience interests (Epic Rap Battles of History) and tested via direct dialogue. Finally, more than half of MCN consumption takes place on mobile devices – a screen every content creator and distributor is desperate to “make work”. After all disruption tends to come from new, not pre-existing consumption.

For all their apparent peculiarities and limitations, MCNs have made inroads that Old Hollywood can’t ignore: massive audiences that can be economically addressed on the micro-segment level; billions of minutes of monthly video consumption; routine and highly personal access to an increasing elusive demographic; and, of course, mobile relevancy. In a broad sense, these assets and relationships would be valuable in any macro-economic environment. However, the burst of M&A activity is being prompted by a fundamental, structural change in the video ecosystem.

 

Digital is Killing the Video Salesman

Over the past thirty years, audiences worldwide have continuously enlarged their video appetites. In 1980, the average American watched a mere 113 hours of video per month. Today, that figure is pressing 160 – a nearly 40% increase. Despite this growth in consumption, the past seven years have seen a persistent decline in the economic “value” generated across the entire video ecosystem – especially on an per hour watched basis. Though inflation-adjusted spend per person is down only 10% from 2004, this drop is enough to return the industry to nearly Y2K levels. When we exclude Pay TV (as many millennials do), per capita spend is down an astounding 36% – bringing us back to the early 1990s.

If this weren’t enough, industry value is also being fragmented across an ever-growing amount of content.

REDEF_YouTubeMCNs_1.4

Hollywood may fastidiously distinguish its content from that of YouTubers and MCNs – and few would mistake Epic Rap Battles of History for HBO – but audience time increasingly does not. As viewers continue to shift from high dollar-value consumption (e.g. home video, theatrical) to lower value (time-shifted TV, SVOD, YouTube), revenue pressures will only intensify. Furthermore, logarithmic increases in supply, mixed with only incremental increases in demand/consumption has only one long-term outcome.

This is at the heart of MCN and YouTube channel value. While TV content typically costs $100,000 per minute, even the “best” YouTube videos can cost only a fiftieth of that amount. This cost advantage is as much about ensuring profitability as it is about minimizing downside risk: “At Maker Studios we can produce content at $200-$400 / minute,” blogged venture capitalist Mark Suster (whose Upfront Ventures was a Series A investor in Maker), “If we get a video wrong our loss is $2,000 at the most.” Furthermore, MCN content is already being substituted into Hollywood’s more traditional (and more expensive) mediums. In October, Maker announced that it would be producing and bundling branded programming for the Disney Channel and Disney XD, as well as Disney’s broadcast network ABC and cable network Fusion. AwesomenessTV (a DreamWorks Animation company) content has been airing on Viacom’s Nickelodeon since July of 2013.

Yet, MCN’s don’t just offer value. Their core competency is, in fact, finding a way to connect with audiences in a “world of abundant supply”. Consider the following from Business Week earlier this year:

“Ynon Kreiz [CEO of Maker Studios] says his team has developed 40 “levers” it can pull on the YouTube platform to optimize an artist’s reach and value. For example, he says, Maker has a proprietary tool that looks at variables such as geography, target audience, and number of subscribers to a channel to determine the optimal time to upload a new video. “It can be vastly different if you’re in gaming vs. in fashion,” says Kreiz. “One could be Sunday morning, the other could be Wednesday afternoon. We can automate that and adapt it in real time based on all these various attributes.”

It can be easy to belittle this intelligence as common sense or the inevitable consequence of digital content distribution. But the MCNs are data-native in ways that Hollywood, which remains focused on Nielsen ratings, programming blocks and veteran instinct, simply isn’t. As economics compress and supply surges, it will be essential for media companies to know what content is working, when and why – as well as the ways performance can be socially amplified and optimized. Disney gets this. In May, Jay Rasulo (Disney’s CFO) stated that Maker was “not an acquisition for IP,” but for the MCN’s “underlying technology”. Later that month, Disney CEO Bob Iger added that “we did not believe that we had the ability… to distribute as effectively and to sell as effectively” and that it would have taken “a long time to build [that] kind of technological expertise.”

 

To Infinity and Beyond

Though they’re leaders in the media business’s newest stage, MCNs do need to evolve. As Mark Suster and Jason Calacanis have pointed out, it’s not enough to provide content creators with distribution technologies, back-office support and ad-exchange services, or to simply aggregate YouTube talent. To minimize talent churn, improve margins and scale their business, they’ll need to start producing (more) original content; form direct-to-consumer relationships; develop Owned & Operated assets; and execute on a wide range of ancillary businesses.[2]

However, the most interesting opportunities have yet to be reaped. Iger has said that Disney will soon provide Maker talent with access to some of their “big brands and characters and storytelling”, including the Star Wars and Marvel universes. Though it may appear that the company is simply developing a new revenue stream for its intellectual property, the move provides a wide range of strategic benefits. First, this content is effectively native advertising that lets Disney massively expand its marketing reach with little-to-no additional spend (mitigating a severe industry problem). Second, it ensures that the company’s characters remain ubiquitous even as consumption fragments across more screens, distributors and channels. Third, it makes sure that this ubiquity extends to Disney’s core (and increasingly hard-to-reach) demographic: children and young adults. Finally, it offers a forum in which Disney can test franchise characters (Jar Jar Binks, anyone?) and plotlines.

The democratization of taste has also demonstrated that the “crowd” is capable of outperforming even the most venerable agents, A&R executives and producers. With 32M subscribers and nearly 7B views, Felix Kjellberg (PewDiePie) is already more popular than scores of Hollywood TV and film celebrities. And he won’t be the last; YouTube is arguably the world’s largest and most diverse talent show. The MCNs offer Hollywood not just the ability to identify top prospects across the seemingly infinite YouTube platform, but also how to nurture and grow them into commercial talent and brands – many of whom could later expand into more traditional (and profitable) products and channels. Partnering or acquiring an MCN aren’t the only ways to achieve this – New Form Digital (owned by Discovery Communications, Ron Howard and Brian Grazer, among others) is working with a handful of YouTubers to create digital shorts that may serve as “back-door” pilots for digital series – but they are likely the best way to do so at scale.

 

Tuning In

REDEF_YouTubeMCNs_1.5

For all their promise, the major MCNs have yet to achieve significant profitability. But focusing on this point is a distraction. Online distribution and in particular, user generated content, are still in their infancy. “Are MCNs essentially going to be the Viacoms or 20 Century Foxes of tomorrow?”, Variety Co-Editor-in-Chief Andrew Wallenstein asked Maker COO Courtney Holt in October. “(Look) back to the dawn of cable and the companies that understood the space, understood the audience, understood the platform and understood where it was going were the ones who were most successful. In many cases, they were true to their demographic focus, they had a programmatic editorial point of view and were nimble.” To that end, it’s important to remember that the first wave of cable networks took more than five years to become cash flow positive and nearly a decade to pay back. This was despite significant resource sharing with their corporate parents (and broadcast siblings) and a clear path to monetization: ratings. Even Fox News, which launched as late as 1996, took until 2001 to stop the bleeding – at which point 20th Century Fox was down nearly $575M in inflation adjusted 2014 dollars.

What’s more, MCNs are pursuing an opportunity that’s of unprecedented scale in the video industry. Not only do MCN creators and consumers extend far beyond the confines of any single country or region, but content programming is free from the limitations of a 24 hour linear schedule. As a result, MCNs can pursue nearly every interest and demographic– from US republicans to global anarchists, amateur metallurgists and bronies – as well as a wide variety of different business models. Maker, Fullscreen and Co. may be years and many hundreds of millions away from maturation, but their ambitions are equally outsized.

Hollywood might not believe in MCNs today, but it needs to embrace their distribution technologies, audience-driven programming and low cost production models. Otherwise, it risks finding itself in the same situation broadcast TV networks find themselves today: unable to keep up with the niche interests and changing behaviors of their target audiences. Fortunately, Maker and Fullscreen are not the only high potential or high impact MCNs. Collective Digital Studio, for example, is delivering 35% of Fullscreen’s monthly streams – but with only a fiftieth of the channels. The war for over-the-top video is far from over, but no studio can afford to sit out the early battles.

 

Matthew Ball is a Director of Strategy & Business Development at Otter Media and leads Strategy & Originals at REDEF. All views are his own. 

Notes:
[1] It’s important to note two things here: First, these attributes do not apply to all MCNs; Second, many of these attributes are changing rapidly. Vessel, for example, is focused on bringing windows to popular MCN content (#4)
[Disclosure] The author joined Otter Media, owner of Fullscreen, six months after this article was published
[2] Disney, as a matter of fact, excels at almost all of these.