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US media companies targeting MCNs more aggressively: PwC

MUMBAI: Media companies in the US are in a race to engage and entertain younger audiences on digital platforms and to accelerate content and business innovation at scale. Multi-Channel Networks (MCNs) have recently emerged as potentially highly attractive businesses to support those strategic objectives.

The first quarter of 2014 saw intensifying deal activity between major media companies and MCNs, according to PwC which released its Q1 US Entertainment, Media & Communications Deal Insights report.

Most notable by value was Disney’s announced acquisition of Maker Studios for at least $500 million. Smaller deals like Big Frame, which sold to DreamWorks through AwesomenessTV (itself a recent acquisition) for $15 million also took place. German broadcaster ProSiebenSat.1 took a 20 per cent stake in MCN Collective Digital Studio, supplementing organic efforts to build up its own MCN Studio 71, which launched in August 2013.

In digital video, YouTube emerged as the largest player attracting 1 billion monthly unique visitors – equal to 40 per cent of the global online population. These viewers watch over 6 billion hours per month – one hour per human being on earth.

New entrants to the media and entertainment business – the so-called Multi-Channel Networks (MCNs) – have emerged to build nascent businesses on top of YouTube and other digital video platforms’ scale, and form a new, still emerging piece of the growing digital video ecosystem. The growth of these businesses as a new digital access point by traditional media companies to their target audience has not gone unnoticed. Major media companies have recently begun targeting MCNs for potential acquisition.

MCNs are independent networks aggregating thousands of channels. Some MCNs have also started to produce their own content. MCNs partner with video platforms such as YouTube to syndicate, monetise and manage content they curate from digital video talent. And some also utilise their own online and mobile platforms for featuring video content. MCNs such as Fullscreen and Maker Studios attract 3-4 billion video views monthly.

Content on these digital-native video networks is noticeably different. While talent and shows are frequently organised in verticals not dissimilar to cable networks, from news to comedy to lifestyle verticals such as cooking, beauty, music or gaming, the execution of the content differs in story selection, voice, production style, and talent. The tone is frank, often unfiltered, and relatable to a younger demographic. Formats are dominated by entertainment, are shorter and vary in production value. Topic selection is in tune with what is “en vogue” with younger audiences this very moment. In fact, the content on MCNs increasingly triggers the next viral trend.

Why focus on MCNs? In the face of these changes, media and entertainment companies are seeking to gain access to attractive digital audiences at scale. They are in a race to build up new capabilities critical for success in the video entertainment ecosystem of the future. To do so, they can develop capabilities in-house or look externally for acquisitions. Judging by the recent M&A volume, media companies may increasingly be choosing the inorganic option.

They are looking to acquire:

Demo leadership: YouTube has become the aggregator- of-choice of video content for Millennials, who are consuming more and more video. A highly desirable audience for advertisers, young adults have become increasingly challenging for traditional media companies to engage in broadcast television. MCNs excel in this audience; for instance, 80 per cent of the Maker Studios audience is in the 13-34 age bracket.

Engaged audiences: MCN viewers are highly engaged in the content. In January 2014, Fullscreen viewers averaged 40.6 minutes, twice the time spent by the most-engaged viewer of a traditional media player’s YouTube channel.

New capabilities and technologies: Traditional media companies need to augment their own content development capabilities in order to produce content for younger audiences and drive greater innovation. Large MCNs can provide these companies with access to the talent, ideas, and storytelling angles that allow content innovation for Millennials at scale.

With access to data from thousands of online video channels, YouTube networks may possess the digital tools and processes to generate insights that can help content creators develop and build audiences.

Access to online video ad dollars: Advertisers are following video viewers to digital platforms. According to eMarketer, 75 per cent of media buyers are likely or very likely to shift advertising dollars from TV to digital video. 10 Media companies are adapting in order to service advertising customers and compete in a crowded advertising ad market.

Learning agenda: MCNs can provide media companies with significant opportunity for learning and experimentation, e.g. around what works in short-form originals for digital platforms, around OTT distribution, and around building direct relationships with viewers. Learning how to make existing TV and film content even more successful online, as well as how to build fans for digital- first originals and monetise them via advertising and other revenue streams can be a critical new capability that drives value.

Looking ahead, more Deals: The history of digital media on the internet has proven that it is very challenging for traditional media and entertainment incumbents to build innovative, highly scaled offerings with large user bases on their own. There are two primary reasons for this:

1. Old playbooks for new platforms: Incumbents may attempt to “export” the success they have had in their natural media domain to the digital world. They may use many of the same structures, systems, processes, and talent to do so. However, the experience over the last few years has shown that a digital “win” has to be genuinely earned – and that more often than not this takes a fresh, new approach.

2. Plan, plan, plan instead of launch & learn: Many digital-native successes cannot be planned well. While MCN content selection can be very data-driven and far from random, there is also an element of scrappiness – testing an idea in the market quickly and cheaply, and then iterating on it. The ability to do this hinges on a very specific capability system that includes culture as much as systems and processes.

That being said, incumbent media and entertainment companies also bring capabilities to the table that are complementary to those of most MCNs. Large media players often have strong agency and marketer relationships, cross- platform packaging and brand integration prowess, and leading entertainment brands that can accelerate the advertising monetisation of MCNs. Looking beyond advertising, some major content producers have capabilities in licensing, merchandising, and packaging shows for output on traditional TV, gaming, ecommerce that can diversify revenue streams.

Acquisitions or investments in MCNs can be a bold strategic move for media and entertainment incumbents who want to establish a scale position in the digital video world and gain access to critical capabilities.

Key challenges will be to:

  • Decide which MCN will likely add the complementary capabilities that will deliver a sustainable competitive advantage (and therefore viable ROI). Find ways to leverage the acquired asset without “breaking” it. As acquisitions of the past have demonstrated, a business-as-usual integration can limit or even destroy the digital-native capabilities of the asset and thus cause significant value leakage. Keep the cost of content in line with the revenue and monetisation potential
  •  Despite these challenges, the MCN approach to digital video curation provides a potential template for how the “channels” business of traditional cable media could evolve outside its traditional ecosystem moving forward.

PwC expects the MCN space to continue to have significant deal activity going forward. While several of the widest-reach MCNs have been fully or partially acquired, new players will continue to emerge offering yet new views on how content will need to evolve along with highly dynamic audience taste.

In the US, media and entertainment space announced deal volume remained steady versus the prior year with announced value of ~$74 billion, up ~$33 billion over the prior year The significant increase in Q1’14 deal value of $32.5 billion when compared to Q1’13 was driven by a potentially game changing mega deal in the cable space (Comcast’s $46 billion acquisition of Time Warner Cable). Also, in the Internet/Information sub-sector, one sees an example of Facebook exploring international growth with their $19 billion acquisition of messaging company WhatsApp. Deal volumes remained steady versus with the prior year with 209 announced deals in Q1’14 versus 216 deals in Q1’13.

Thinking (really) big: The first quarter of 2014 saw several “megadeals” in EMC, with four deals in excess of $1 billion. Announced mega deals in Q1’14 had total transaction value of ~$70 billion versus four deals with total transaction value of ~$37 billion in Q1’13.

The most significant announced deals in Q1’14 by transaction value were:

  • Comcast’s proposed acquisition of Time Warner Cable – combining the largest and second largest cable operators in the US. Additionally, Comcast and Charter Communications have recently announced a deal whereby Comcast will divest ~3.9 million subscribers to Charter Communications reportedly worth $20 billion.
  • Facebook’s proposed acquisition of WhatsApp – providing Facebook with access to over 500 million subscribers who use the messaging service each month.
  • Lenovo Group’s transaction to acquire Motorola Mobility Holdings – reportedly driven by a strategy to combine their respective smartphone market shares.
  • Media General’s acquisition of Lin Media – creating the second largest local TV broadcasting company.

Private equity play: In the period private equity backed announced deals represented ~18% of total EMC deals. While this represents a slight increase in percentage terms from their overall industry participation in the prior year, the volume of deals has remained consistent (~38). From a sub-sector perspective, Internet-Related/Information Services, Advertising/Marketing and Recreation/Leisure were all areas of PE investment interest.

Communications emerged as a new hot sector for PE in Q1’14 (7 deals versus 4 in PY). Advertising and Internet related/information services continue to be two of the most active sectors for PE.

Outbound deals: The number of announced deals by US companies acquiring overseas targets (outbound deals) increased slightly in Q1’14 when compared with Q1’13. Telecommunications and Internet related sub-sectors continue to remain the most active in completing acquisitions. That being said, one is still seeing significant interest in overseas markets across the sub-sectors.

Three big sectors are Advertising and Marketing, Communications and Internet related/information services. Communications took a leap (accounted for 24 per cent of outbound deals in Q1’13 vs 40 per cent in Q1’14).

Sports deals climb : Recreation and leisure deals increased in Q1’14 versus Q1’13 driven by deals for sporting teams, fitness facilities and golf/country clubs. With respect to sporting deals announced, the majority were related to soccer teams and other soccer related businesses.

TV production builds momentum early: Film/content deal activity was strong in Q1’14 led primarily by television production deals and also included digital content, motion picture production and other content related deals. The television production sub-sector is already on pace to significantly exceed its total deal volume in 2013.

As had been earlier noted in the 2013 year-end Deal Insights, geographic location will hold no bar as media players (both foreign and US) continue to look abroad for content. Cross-border deals in this sub-sector increased from five in Q1’13 to nine in Q1’14. Q1’14 cross-border deal activity included six US targets acquired by foreign companies and three foreign targets acquired by US companies.