Big studios eye multichannel networks, but price may not be right

First, a quick note: I'm covering Streaming Media East today in New York, so check back into FierceOnlineVideo for news related to the conference, and follow me on Twitter @FierceOnlineVideo for updates from the show floor.

Last week, Fullscreen, a multichannel network (MCN) that has routinely topped competitors Maker Studios and Machinima in overall views of its YouTube channels, said it had hired Allen & Co. to explore options for being acquired. The rumor was that it was in negotiations with Time Warner Inc., to head down the same road as Maker Studios, which closed its $500 million acquisition by Walt Disney Co. this week.

That apparently isn't happening, as a source said Time Warner would not acquire Fullscreen. Its reason? Spokespeople for the company refused to comment to Variety, but the selling price was rumored to be a factor in its decision.

If that's true, then the big MCN land grab of 2014 may not be all it's cracked up to be.

What MCNs are truly worth is not completely clear yet. They are great avenues for earning ad revenue--the primary way to make money on YouTube, which itself takes a 45 percent cut of those ads up front--but despite their increasing heft in the YouTube universe there are still issues for potential buyers to contend with.

First, MCNs are exclusively a YouTube phenomenon. Creating the channels platform (tied in with its ContentID software) was a big booster for the online video provider. It gave rise to MCNs, which partner with content creators to promote their channels and YouTube shows to online audiences, for a share of ad revenues. But being only on YouTube could eventually limit MCNs' financial growth: They can add more and more channels, but effective promotion of those channels could decrease due to the sheer volume of content available.

Fullscreen alone has more than 15,000 channels under its umbrella.

That volume issue and the costs involved with managing those channels already has artists chafing at the share of ad revenues they must give MCNs. A well-publicized 2012 spat between Maker Studios and artist Ray William Johnson had its roots in a contract renegotiation that asked for 40 percent of ad revenues from Johnson's popular "=3" show along with rights to Johnson's content "in perpetuity."

"Networks do a lot of stuff for those top-tier creators. Lawyers and agents and managers and teams, production space--they're very valuable and networks want them on the team," said Hank Green of Vlogbrothers in a commentary on joining a YouTube network.

Less popular channels, however, don't get that level of support, although most still benefit from having their content marketed by the networks they join, along with legal protection from YouTube's still-somewhat arbitrary copyright enforcement system.

That may not matter to corporations like Disney or Time Warner, which are clearly interested in gaining a solid foothold in the short-form online video space by purchasing established MCNs that host the most popular YouTube channels.

But Time Warner's back-off from Fullscreen suggests that buyers are taking a cautious attitude to how much an MCN can really contribute to their bottom line. Last year, AwesomenessTV was acquired by DreamWorks Animation for $33 million, a purchase that may ultimately reach $117 million depending on performance payouts. Disney's purchase of Maker Studios may ultimately cost up to $950 million. That's a huge jump.

Fullscreen isn't off the market, in any case. Relativity Media, AOL and Yahoo are reportedly interested in making offers, the Variety article said.

But the cool reaction toward Fullscreen by Time Warner signals that there's still a wide gap between $117 million and $950 million. It may take a few more key buys by other companies before the real value of multichannel networks becomes clear.--Sam