What does the recent wave of media M&A mean for online video?

Josh Wein

Traditional media distributors are consolidating at what seems like an increasing rate. What started in the TV broadcasting sector--with operators such as Sinclair and Nexstar--appears to be spreading to pay-TV. What does it mean for online video?

Within the last week, Tribune announced a $2.7 billion agreement to buy control of Local TV, LLC; Allbritton was said to be for sale and Gannett agreed to buy Belo Corp. for $2.2 billion. Meanwhile, expectations for mergers among cable operators remain high as Charter (Nasdaq: CHTR), Time Warner Cable (NYSE: TWC), Cablevision (NYSE: CVC) and others have all been said to be either potential buyers or sellers. On the satellite side, analyst Craig Moffett of Moffett Research has said a merger between Dish (Nasdaq: DISH) and DirecTV (Nasdaq: DTV) would be the most attractive future for Dish.

"Old" media is scaling up. These companies are consolidating in part to gain more leverage over each other in distribution negotiations. Tribune CEO Peter Liguori said so in a teleconference with stock analysts this week.

Interestingly, the Tribune deal could be a boon for online video distributors down the road. The scale it offers Tribune is also giving Liguori, a former cable network executive, the confidence to begin investing more heavily in program development at Tribune's WGN America cable network. He believes Tribune can build WGN America into something that rivals FX or AMC. If he's right, that will mean more popular TV shows and networks available for online video distributors such as Netflix (Nasdaq: NFLX) and Amazon (Nasdaq: AMZN) to license.

But the increasing concentration of the media sector could also cause trouble for online video. Critics of consolidation worry that mergers among production outlets limits the number of potential clients for content producers. Moreover, if the industry is correct about the importance of scale and its correlation to increased leverage in distribution negotiations, online distributors could get squeezed when doing business with consolidated content owners. And increased scale on the pay-TV distribution side would give those companies more leverage to extract exclusive online rights from their program suppliers.

Aside from the extended Hulu auction, there seem to be few online distribution businesses for sale today. The same cannot be said on the content development side, where another wave of consolidation is occurring on a much smaller scale.

Revision3, AwesomenessTV and Digital Broadcasting Group (DBG) were all acquired within the last 14 months. Those deals were valued in the tens of millions--not billions--and only DBG was acquired by another online video company. But if those deals begin to pay dividends to Discovery Communications, DreamWorks Animation and Alloy Media--the companies that acquired Revision3, AwesomenessTV and DBG respectively--expect more deals to follow.

It's not as clear whether scale has the same benefits for online video distributors yet. Unlike cable operators or broadcasters, online distributors such as Amazon and Netflix already have a national footprint. They don't need to buy assets in Los Angeles to reach Los Angeles customers.

And even if consolidation among online video distributors were to occur, there's little to stop new entrants from coming into the business. Intel (Nasdaq: INTC) is already on its way. Such low barriers to entry are not typically a sought-after quality among people buying and selling media assets.

--Josh | +Josh Wein | @JoshWein

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