Why Disney’s Maker Studios Acquisition Is a Mistake

Disney (NYSE: DIS  ) was all over the press during the most recent business news cycle for buying something called Maker Studios. In a nutshell, the asset is a multi-channel network collection of thousands of Google's (NASDAQ: GOOGL  )  YouTube users. The purpose of this purchase is to gain exposure to the clip-content culture. It's also an exercise in the venerable American tradition of keeping-up-with-the-Joneses; both DreamWorks Animation (NASDAQ: DWA  ) and Time Warner (NYSE: TWX  ) have made investments in this area. (Time Warner has, in fact, invested in Maker Studios.)

Should a Disney shareholder be pleased with the $500-million upfront payment, which could turn into a $950-million total payout given an earn-out success?

Absolutely not.

Does Disney really need to buy a YouTube presence?
What puzzles me tremendously is the apparent incessant need for media companies to get on board the whole YouTube multi-channel concept. What exactly is the company looking for on that platform that can't already be cloned with one of the company's other assets?

Here's something the business press has focused on: the so-called "farm team" aspect. The theory goes that Disney can mine the world of Maker Studios to scoop up nascent talent that has finally found an outlet that makes it easy to communicate a creator's value. If you want to cold-call agents in Hollywood to get noticed, best of luck to you (I've tried that – it isn't fun.) If you really think you're good, just get a cheap camera, upload to YouTube, and voila: you too can potentially earn millions of dollars and become an obnoxious Justin-Bieber-like entity.

I have two problems with this argument. First, Disney already has a talent incubator in place: the Disney Channel. Second, Maker Studios has well over 50,000 creators in its portfolio. That's too noisy a number for my taste. How will Disney make sense of it all?

There's another angle as well: if a media company wants to hire people from YouTube, all the media company needs to do is have some of its human resources check out popular videos on YouTube. Simplicity at its best, not even a dime required.

YouTube just doesn't strike me as a platform that requires an acquisition for exposure. Disney could simply create its own multi-channel presence for an investment amount that my gut tells me wouldn't approach a billion bucks. I'd have to imagine that the Disney name would work in terms of attracting willing participants to the point where the velocity of scale would be relatively rapid, although I'm sure that many would take issue with that point.

Maker Studios isn't just about content
From what I've read and gathered, Disney isn't just after content creation or content synergy. Sure, Disney could use its Maker Studios buy to program some of its company's movies and television shows, I suppose, but the company is also intrigued by the idea of capturing data about the demographics that primarily access entertainment through the web and through YouTube in particular. The youth aren't as totally enthralled by premium cable channels any longer – they use mobile devices and tablets and x-screens to watch all kinds of genres distributed in all manner of methods.

I get this, to a point. In the quest to reduce the cost of marketing the next big Disney/Marvel collaboration, access to data and platforms that might lessen the reliance of placing pricey spots on broadcast networks multiple times before a release date could offer clues into the minimal amount of investment necessary to launch a franchise and generate the highest possible, best-in-class ROI.

Disney shouldn't necessarily be making splashy buys to bolster its data collection, however. Plenty of other sources can be exploited for a lot less money to purchase, analyze, and exploit data-mining practices. Reading between the lines of the press release that announced this acquisition, it's my opinion that Disney is intrigued by the insight it can glean by being close to the books of Maker Studios. That's just not an acceptable reason to me for spending $500 million, especially when shareholders could always use another batch of dividend payments.

Maker Studios doesn't impress me
I think I was aware of Maker Studios in only the vaguest of senses before Disney announced its purchase. I therefore checked it out.

Look, I'll be the first one to admit that I'm not a hip individual who has the ability to create viral media. Still, I just don't see how the content collection Disney purchased access to would be attractive at all to a conglomerate that already owns Lucasfilm, Marvel, and Pixar.

As far as I can tell, there's really no solid cohesiveness to the network (at least, not in the way I'd like to see as a shareholder). The example that is oftentimes mentioned as one of the best Maker Studios has to offer, something called PewDiePie … well, it's just not of interest to me.

I have no doubt some of the talent on Maker Studios will possibly go on to reap millions of dollars in other media someday, but Disney simply can't switch its prime strategy now. The company has already made its bets on big franchises the likes of which only a Pixar or a Lucasfilm can deliver. It can't go small with an investment that may or (more likely, to me) may not pan out.

Disney needs to think harder on its next purchase
I know Disney will always be on the lookout for smaller business models that it might benefit from years later. Looking at the Maker Studios buy a different way, Disney is simply trying to invest in a growth stock, it isn't necessarily looking for complete vertical integration.

Disney abandoned trying to go after less-than-mainstream audiences when it got out of the Touchstone/Hollywood Pictures/Miramax-type of films and instead sharpened its focus on superheroes, pirates, and fairytales set in frozen lands. It needs to likewise adjust its penchant for buying stuff like Club Penguin and Playdom, investments that didn't really impact shareholder value to any discernible degree. Maker Studios seems like a similarly ill-advised decision. 

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 01, 2014, at 7:49 PM, msorrentino wrote:

    If Disney is smart they will use Maker Studios as a way to experiment with new show ideas that at first glance may not be deemed worthy enough for a huge investment.

  • Report this Comment On April 02, 2014, at 10:09 PM, gideonblaze wrote:

    This piece is so ignorant it's hard to know where to start. But, here's a quick tip: Look at Disney's core demographics and their consumption trends. Then look at Maker's reach and engagement against that demographic. It's really a simple connect-the-dots.

  • Report this Comment On April 07, 2014, at 8:35 PM, polymathiae wrote:

    I had started writing a lengthy response to this article, but after reading through "Maker Studios isn't just about content" I realized Mr. Mallas used all of the arguments I was outlining... almost as if proving himself wrong.

    He self-professes he knows little about MCNs, Maker Studios specifically, and new media ("viral" as he calls it) in general. Thus, I find it odd Mr. Mallas would write an article outlining the reasons why he thought poorly of a purchase without doing the appropriate amount of research -- watching one YouTube content creator is not enough. To be fair, I'm sure there were a couple hours of "Googling." However, he does make a great point: he didn't enjoy "PewDiePie's" content. At the time of this writing, almost 26 Million subscribers disagree with Mr. Mallas, not to mention the fact that he's probably a few decades past the demographic.

    Sorry Steve, I prefer fact-based articles, not emotionally-driven opinions. You just happen to be the person I make my case to. If you'd prefer to offer opinions, please do APPROPRIATE research first. If not, start out with your investment strategy and YoY ROI so we know whether or not to take you seriously.

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