Why Hearst, Disney And Bertelsmann Are Betting Big On YouTube Networks – And What’s Next

Editor’s note: Pete Borum is the co-founder and CEO of Reelio, where he oversees the business, creative, and engineering teams that power branded content partnerships on YouTube.

Hearst recently announced the acquisition of 25 percent of DreamWorks Animation’s YouTube network AwesomenessTV for a cool $81.25 million. For those of you who are still under the impression that YouTube is a place for cat videos (and who apparently haven’t seen YouTube celebrities like Bethany Mota on Dancing With the Stars or plastered on billboards in Times Square and in New York subway trains), you’re probably scratching your head.

Why would one of the biggest media companies in the world pay so much money for a YouTube network? And, wait, what the heck is a YouTube network? Well, worry not. This article is for you.

It’s hard to believe that Spanish YouTube sensation elrubiusOMG makes between $150,000 and $1.5 million in ad revenue for screaming like a kid as he plays the horror video game “Five Nights at Freddy’s.” But it’s true — there’s a whole new generation of video content producers making a killing on YouTube, and revenues are only going up each year.

But why would brands pay so much money to partner with a YouTube star? As with most things brands pay for, it’s all about reaching an audience in a way that is unique, that is memorable and – most importantly – that motivates a purchase.

Despite YouTube’s size and engagement (there are 6 billion hours of video watched per month – that’s 20,000 years of video watched every day!), brands have had a hard time reaching audiences on YouTube. Don’t believe me? Ask yourself two questions: When is the last time that you intentionally didn’t skip an ad on YouTube? And when is the last time that you intentionally visited the YouTube channel for FedEx, Coca-Cola or McDonald’s? Yeah, that’s what I thought.

But whereas brands’ videos may not get a lot of views, many YouTubers rack up hundreds of thousands or millions of views with each video. And when those YouTubers try new products and encourage their fans to try them, those fans pull out their credit cards. So it can be worth a lot of money to a brand to have these YouTubers try out their products on camera.

If individual YouTube stars can rake in hundreds of thousands of dollars for posting their videos, it only makes sense that bundling many of these channels should be worth much more — to the fans who want more of their content and to the advertisers that want to connect with their fans.

That’s the sequential logic that led to the creation of multi-channel networks, or MCNs. These large, far-reaching networks of YouTube talent combine individual channels into verticals that speak to a particular topic or fan base and drive incredible amounts of traffic and engagement.

And major media companies are discovering lucrative opportunities in acquiring these MCNs.

Why Brands Are Suddenly Seeing Dollar Signs With MCNs

Initially, these popular YouTube channels and MCNs were undervalued because many believed advertising revenue from Google couldn’t sustain a large business. However, as these channels successfully diversify their monetization strategies, establish cross-platform deals, and create valuable intellectual property, larger companies are increasingly seeing major strategic and financial value in these networks and their audiences.

Another recent example is RTL Group’s acquisition of StyleHaul, a $150 million vertical MCN focusing on aggregating talent around fashion. RTL Group’s acquisition allows the company to monetize the MCN’s 199 million followers across 5,000 content providers and multiple social platforms and sell its original published works.

Acquisitions of other creators-turned-publishing houses include DreamWorks Animation’s earlier acquisition of AwesomenessTV for $33 million (meaning the firm earned a 246 percent one-year ROI on investment, and that the network has increased in value 2.5x in the same period), AT&T and The Chernin Group’s majority share acquisition of Fullscreen, and Disney’s acquisition of Maker Studios.

How YouTube Works

To understand MCNs further, it helps to know how YouTube works. When a fan “subscribes” to a popular YouTuber, he’s telling YouTube that he likes this person’s channel and his content more than any of the other millions of YouTube channels and wants to see more of it. YouTube then fulfills that request by placing that channel’s new videos on the fan’s personalized YouTube homepage and sending a notification email directly to his inbox.

This deliberate process earns the YouTuber valuable and competitive real estate in the mind share of his fan base — an enormous advantage in an ecosystem that sees the equivalent of 48,000 seasons’ worth of Breaking Bad (432,000 hours of video) uploaded every single day.

YouTube fans also often follow their favorite talent on Twitter, Facebook and Instagram, which gives brands and the YouTuber the chance to monetize fans multiple times over. The result is a direct path to engaged audiences that delivers a strong advantage to any brand that’s willing to pay for access to that highly sought-after demographic.

The MCN, in this case, represents the business interests of its YouTube partners, securing and negotiating deals with advertisers, ensuring the successful execution of the deal, and taking a margin in the process.

For major media companies like Disney and RTL Group, this model presents a potential existential crisis, as fewer and fewer millennials are watching TV. These brands are taking advantage of MCN acquisition opportunities by delivering original video content and leveraging parent company distribution to pump up their represented talent.

Trends You Can Expect in 2015

As more brands jump into the channel-acquisition game, we can expect a few trends to emerge.

First, as smartphones become more accessible to less-developed countries, high-quality screens and cameras will be put into the hands of nearly 2 billion people. Combine this with Google, Facebook, and SpaceX’s efforts to provide global Internet via balloons and satellites, and you can expect to see YouTube viewership and upload rates triple in the coming years.

As usage grows in developing markets, new and existing MCNs will aggregate channels there, just as they have in the U.S. and other developed markets. More media brands will then acquire these companies to develop a footprint in strategically important markets that allow them to structure large, international deals with advertisers without requiring enormous investments in production and distribution infrastructure.

Second, major media organizations will apply their skills in integrating productive assets while divesting less-productive assets to MCNs. For example, after acquiring Lucasfilm, Disney wasted no time and invested in new “Star Wars” films and shut down LucasArts. Applying this skill to MCNs will mean an increased focus on their most productive channels, with smaller channels in these MCNs receiving little to no attention.

We can already see this happening through Maker Gen, a program Maker Studios introduced that’s aimed at creators with smaller audiences. The company has two tiers of content creators depending on the size of the channel. Creators with smaller audiences will seek monetization opportunities outside MCNs in nonexclusive marketplaces, like Reelio.

Third, much better production quality and long-form storytelling will come out of YouTube. For many years, TV and film talent have mostly stayed away from YouTube because the economic opportunities haven’t compared to their current projects. However, as ad dollars flow more freely into the online ecosystem, these media companies and stars will dedicate more of their resources to productions intended for YouTube. With their superior storytelling technology and expertise, Hollywood will significantly raise the bar for YouTube content.

As YouTube videos increase in quality, they’ll draw higher ad dollars and more production resources. Because of the mind-boggling diversity of talent on YouTube and the sheer number of brands entering the space, we’ll see more creative productions coming out of YouTube that meet or exceed TV standards.

Forget what you thought you knew about YouTube. While this platform will remain a safe place for amateur how-to videos and commercial replays, it’s actively maturing into a legitimate threat to film and TV studios and shows no signs of slowing down. Just don’t expect film and TV studios to sit idly by and watch the change happen.