Does Disney's Acquisition of Maker Studios Mean Bigger Profits Ahead?

      

Source: makerstudios.com and disney.com 

On March 24, news broke that The Walt Disney Company (NYSE: DIS  ) would be acquiring Maker Studios in a transaction whose value could reach as much as $950 million. Maker Studios is the largest developer of online content for YouTube, a subsidiary of Google (NASDAQ: GOOGL  ) , and is Disney's response to the growth of short-form online videos as a means of generating traffic and revenue. Considering the hefty sum the company is paying for the business, is it likely that Disney's bet will prove beneficial for its shareholders? Or is the entertainment giant making a giant mistake?

Maker Studios is a heck of an operation!
Founded in 2009, Maker Studios has grown to become a YouTube success story. Currently, the organization has 380 million subscribers. This is nearly double the 200 million registered users (76.2 million of whom are active per month) that Pandora Media (NYSE: P  ) boasts. No matter how you dice that, it's hard to argue that their numbers aren't impressive.

At $500 million, with an additional $450 million in payments that are contingent on the performance of Maker Studios going forward, it represents a significant cost for Disney. Assuming that Maker Studios is capable of meeting Disney's expectations, the deal could reduce Disney's cash hoard by 22% from the $4.4 billion it currently holds.

Through the use of over 55,000 channels, the company garners 5.5 billion views per month. Using some of the newest statistics from 2012, this implies that Maker Studios comprises around 4% of YouTube's views per month. On a subscriber/registered user basis, the deal could cost Disney up to $2.50 per subscriber.  What this means is that, for every subscriber Maker Studios has, Disney will be paying $2.50 as opposed to how much it might pay if it started up and ran its own equivalent channel.

Although this may sound costly, it's only a fraction the cost of the $30.85 per user that shareholders of Pandora are paying by investing in its shares. Excluding the paid subscribers that comprise 18% of Pandora's revenue, this cost comes down to $12.61 but is still world's apart from the price Disney is dishing out for Maker Studios.

Is Disney too late to the game?
Based on the data provided, it looks like Disney is making a fairly inexpensive investment compared to other alternatives like buying Pandora. However, the company isn't the first to buy a major YouTube content provider. In 2013, DreamWorks Animation (NASDAQ: DWA  ) announced plans to buy AwesomenessTV for $33 million, with contingent payments that may amount to a total purchase price of $117 million.

  Maker Studios Pandora Media AwesomenessTV
Investment cost per subscriber $2.50 $12.61* $8.36

*Excludes paying subscribers

Source: Disney, Pandora, and DreamWorks

With 14 million subscribers and over 800 million aggregate views at the time the deal was made public, the transaction could ultimately cost DreamWorks $8.36 per subscriber. Admittedly, the company's smaller base could allow DreamWorks to grow the subscriber count immensely, and the deal is still cheaper than Pandora, but is still a huge premium compared to the possible purchase price of Maker Studios.

Foolish takeaway
As we can see, Disney is paying a lot of money for Maker Studios, but the deal is just pennies on the dollar when compared to other content providers. Moving forward, it will be interesting to see if the transaction can create value for Disney and its shareholders, but early indications from the company suggest that it could prove slightly dilutive to earnings through 2017.

In the long run, however, the deal has the potential to create a great deal of value if management can leverage its resources optimally. For this reason alone, shareholders should watch what transpires next very carefully, but should not base their sole investment decision on whether or not to buy Disney's shares on it.

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12/19/2014 4:00 PM
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