Video in 2015: Smartphone-powered, digital first

Peter Csathy is CEO of business accelerator and development firm Manatt Digital Media, where he also serves as a venture capitalist.

That smartphone in your pocket. Small form factor. Massive impact. Its tiny screen is fundamentally transforming (disrupting?) each of our lives, including how we engage with content, specifically movies and television. That means fundamental transformation of the media and entertainment business right here, right now – with tens of billions of dollars at stake – yet very few media execs “get” this. This changes in 2015.

A whole new class of mobile-driven digital-first media companies sprouted and blossomed in 2014 – so-called multichannel networks (MCNs). MCNs most typically are venture-backed startups that aggregate individual YouTube personalities and channels — frequently for specific niche passionate audiences (think fashion and leading MCN StyleHaul) — in order to achieve scale, fund video production, and maximize ad dollars. Sounds benign enough, especially when their impact is marginalized by the almost-dismissive and somewhat-faddish acronym MCN.

But make no mistake: MCNs are media companies with transformative impact. They simply are a new kind of media company. Digital-first media companies. These are media companies by millennials, for millennials. And while they do not supplant “traditional” media companies, they most definitely are a necessary extension of them in this new multiplatform media world. After all, mobile is where the youthful eyeballs that “matter” (at least to marketers) now consume the majority of their video content.

That’s why Disney – the largest traditional media company of them all – slapped down up to nearly $1 billion last year to buy one of the largest MCNs — Maker Studios. As vast as its resources are (and the Mouse House certainly has plenty of cheese), Disney had the commendable self-awareness to recognize that it lacked the DNA to play effectively in the smartphone-driven, short-form video, millennial world – a world that demands a very different way of thinking about content development and engagement. Rather than build it themselves, they bought that expertise and critical mass of short-form content (and the personalities behind them). They paid up to double down on the MCN world, which was excellent news not only for Maker’s investors, but also for other leading MCNs and the investors behind them.

Other major studios – and perhaps even technology companies like Apple, Samsung, and Amazon, whose divergent business models increasingly are content-driven – will follow suit in 2015. This is a classic case where demand for MCNs with scale outstrips supply. After all, content is increasingly king, and that can lead to big numbers. Last year, in addition to the near-$1 billion Disney/Maker deal, Otter Media (the joint venture between AT&T and The Chernin Group) paid a rumored $200-$300 million to buy competing MCN Fullscreen, and European-based media company RTL Group recently sewed up fashion-focused MCN StyleHaul for a price that values the company up to $200 million with earn-outs.

These are numbers that make even Northern California VCs – ever-cynical about all things content-driven (especially when they are driven in LA where most leading MCNs are based) – take notice. They have smartly started to pour tens of millions of dollars into video-driven new media companies. Case in point: BuzzFeed. Blue-chipper Andreessen Horowitz invested $50 million to accelerate smartphone-targeted digital-first video production. And the accelerating pace of foreign-driven M&A (like RTL with StyleHaul) and investment (like BSKYB and Liberty Global’s $28 million investment with others in sports-focused MCN Whistle Sports) underscores that this sea change in the media business is not just a U.S. phenomenon. Digital-first content is borderless and globally shareable. We live in a new world order of digital media.

Brands, too, are finally taking notice and fundamentally changing their behavior. They understand that smartphones – and the millennials who hold them – demand a different and deeper form of engagement. Pre-roll and pop-up ads simply don’t work anymore. Millennials demand “authenticity,” a word that is a fundamental part of the new digital-first lexicon. While that notion certainly is not completely new to marketers, what is new is that for the first time, they will shift significant marketing dollars away from traditional media to more engaging and measurable digital platforms.

Yes, there will be blood as digital begins to cannibalize traditional ad spends. That’s why we have seen an accelerating pace of ad tech company exits like increasingly video-focused Facebook’s reported $400-$500 million buy of LiveRail and Yahoo’s recent $640 million acquisition of BrightRoll.

But it doesn’t end there. Several brands will go even further and invest big to become millennial-driven, digital-first MCN-like media companies themselves. Red Bull is the poster child here, aggressively developing and aggregating its own video content for digital consumption whenever, wherever. GoPro, Marriott and Pepsi also have proudly announced such ambitions. Make no mistake. We are not just talking advertising and marketing here. We are talking whole new media businesses for brands, bringing them head-on against both studios and other MCNs. Red Bull, in fact, operates its “Media House” studio as a separate P&L and is measured by its standalone success.

Those who listened closely in 2014 heard (and internalized) these smartphone-driven digital-first media transformational winds of change. So, listen closely now. Do you hear it? That is the “whoosh” of massive mounds of money changing hands all around the video ecosystem. Just last month, BSKYB and Liberty Global formally announced their $28 million Series B round with others in Whistle Sports – an MCN big bang to start the year.

In the immortal words of Karen Carpenter (how ‘bout that for a deep reference?), “We’ve only just begun ….”

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