MCN multiples

09-07-2015

German broadcasting group ProSiebenSat.1 is set to become the latest ‘traditional’ media company to assume control of a major multi-channel network (MCN), by taking a 75% stake in Collective Digital Studios (CDS) and merging it with smaller in-house MCN Studio71.

The combined entity, dubbed Collective Studio 71 (CS71), is valued at US$240m and will be responsible for roughly two billion video views per month.

ProSiebenSat.1 joins fellow broadcaster RTL (which owns MCNs BroadbandTV and StyleHaul), as well as studios Disney and DreamWorks, as one of the largest media groups on YouTube.

MCNs have become key components in the online video ecosystem, representing the agents that unify diverse sets of YouTube channels.

Historically, YouTube was a fragmented platform, with consumption spread across many channel outlets. This remains true. However, individual channels have increasingly fallen under the umbrellas of MCNs, which sell advertising against their composite audiences.

This consolidation is why large traditional media groups such as ProSiebenSat.1 are now paying attention, and more pertinently, putting their money into the sector.

When a YouTube channel’s monthly views are measured in the single-digit millions, its audience may be comparable to a minor broadcast channel. When that view count is aggregated across multiple channels and hits the billions, the stakes become much higher.

Capturing a significant share of YouTube’s US$4bn-and-growing annual advertising revenue is the prize here. With Facebook now entering the game as well, the prize money is set to increase still further – and the role for an MCN, beyond that of a squashed middleman, is primed to expand.

Tapping into this potential at an appropriate price, however, is an additional challenge. Ampere Analysis has recently assessed 15 MCN investment and acquisition deals spanning 2012-2014, which valued MCNs at sums ranging from nearly US$1bn down to just US$7m.

Despite such a wide range in deal values, the valuations follow a relatively consistent pattern. Across the 15 deals analyzed prior to the creation of CS71, the vast majority of company valuations clustered at a ratio of US$0.1 per monthly view. In other words, for each monthly view an MCN registered at point of acquisition, US$0.1 could be added to the valuation of the company. An MCN achieving one billion views per month would therefore be valued at close to US$100m.

CS71 is no exception to this pattern – at two billion monthly views and a US$240m valuation, its value per monthly view weighs in at US$0.12. This is in line with the amount paid by Disney for Maker Studios (roughly US$0.13 per monthly view, depending on performance), a little more than RTL paid for BroadbandTV (US$0.09 per monthly view) and less than the price RTL paid for StyleHaul (US$0.17 per monthly view).

And it is easy to see why traditional media groups in particular might want to invest. As broadcast audiences stagnate or decline, OTT video platforms go from strength to strength. ProSiebenSat.1’s Digital & Adjacent business grew 31% year-on-year in Q1 2015, while its traditional broadcast business grew by just 5% – and this was a particularly strong performance compared with other recent years.

Yet the argument for investing in an MCN is not just about hedging bets against the future of broadcast. Buying an MCN taps into instant global reach, allowing a firm previously constrained to a handful of saturated markets to enter new high-growth territories.

Furthermore, the combination of an MCN and a traditional content company such as a broadcaster is potentially a powerful one. Broadcasters can take advantage of existing relationships with media buyers to add value to an MCN’s advertising sales business.

Content owners can use an MCN’s properties to experiment with and develop new formats, as well as to tap into audiences that may have already left traditional TV.

In addition, bringing production in-house – ‘verticalising’ the MCN – alleviates much of the pressure that many MCNs face from not owning content. If a YouTube channel can easily shift to another network, an MCN’s margins can pay the price as the network wrestles to retain control of its top properties. In-house content for an MCN’s channels not only addresses this risk of churn but also allows the MCN to keep more of the proceeds of advertising sales.

But for those companies wanting to enter the game now, the pickings are ever scarcer. Few top MCNs without an affiliation to a major traditional media group remain. In addition, with no apparent decline over time in average valuations per monthly view as MCNs increasingly focus on verticalisation of their properties, recording solid year-on-year growth in viewing and revenue, the MCNs that remain are becoming increasingly expensive.

The acquisition of AwesomenessTV by DreamWorks in 2013 saw the MCN valued at US$95m, based on the chief financial officer’s likely earn-out predictions. Hearst’s investment in AwesomnessTV in 2014 valued the MCN at US$325m.

Deal values will almost certainly continue to rise as confidence in the success of the MCN model improves and profitability picks up, but the acquisition and consolidation of smaller MCNs, alongside the creation of new home-grown networks, is now likely to be the most cost-efficient mechanism for gaining a foothold in the sector.