Disney's $1 Billion Online Video Bet: What Investors Need to Know

Disney acquires Maker Studios in a deal that could be worth almost $1 billion.

Mar 25, 2014 at 10:15AM

After a difficult start to the week, U.S. stocks opened higher on Tuesday morning, with the benchmark S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES:^DJI) up 0.67% and 0.64%, respectively, as of 10:15 a.m. EDT. In this morning's headlines, Dow component Walt Disney (NYSE:DIS) announced it is acquiring Maker Studios, a top network of online video content on YouTube, in a deal that could be worth up to $950 million. As someone who has wasted countless hours on YouTube, I feel uniquely qualified to comment on this deal.

What does Maker Studios do?
Established in 2009 around a small group of YouTube "stars," Maker Studios has become the No. 1 producer and distributor of online video, federating 55,000 YouTube channels with 380 million subscribers and generating 5.5 billion monthly views. Maker Studios has experienced rapid growth: a year ago, the company had only 165 million subscribers over 10,000-plus channels.

Is Maker Studios profitable?
It's not entirely clear since Maker Studios doesn't disclose its financials. Disney said the deal will be "mildly dilutive" to earnings per share through fiscal 2017.

How much is Disney paying exactly?
Maker Studios shareholders will receive $500 million in consideration up front, with the possibility of a performance-linked earnout of up to $450 million if the company achieves "strong performance targets."

What is the significance of the deal?
The entertainment landscape is changing, and that includes the formats of the content and the platforms on which users view the content. YouTube, in particular, has led to explosive growth in the volume and popularity of short-form, user-generated video content. Disney is explicit about the audience it is targeting with this acquisition: millennials (roughly speaking, the demographic born between the early 1980s and early 2000s). The deal is meant to help ensure Disney stays relevant in the shifting entertainment landscape.

What else can we conclude from the deal?
If Disney is willing to pay close to $1 billion for Maker Studios (assuming it pays the full earnout), that suggests Google (NASDAQ:GOOGL) got an obscenely great deal when it acquired YouTube for $1.65 billion in 2006 -- even though YouTube was unprofitable at the time. Indeed, as far as I can tell, Maker Studios depends entirely on revenue-sharing agreements with YouTube.

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Alex Dumortier, CFA has no position in any stocks mentioned. The Motley Fool recommends Google and Walt Disney. The Motley Fool owns shares of Google and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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