If you’re anything like me, you were shocked to hear that Disney will buy YouTube Multi-Channel Network (MCN) Maker Studios for up to $1 billion. Yesterday, I could never have imagined a world where a YouTube network could be worth almost a billion dollars. Then I work up this morning to find that I’m living in one.

To an extent, I feel personally invested in Maker’s success. As a recovering YouTube Junkie, I watched as Maker launched its first collaborative channel ‘The Station’ in Summer 2009. I was there to witness Maker’s highs and lows. I watched Philip DeFranco‘s vlogs as he road-tripped from Atlanta to Los Angeles to join a motley crew of YouTube Creators attempting to make something worth more than the sum of its parts. And it seems they’ve done just that.

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But somehow, I still don’t understand how they could ever be worth $500 million – much less almost a billion dollars if they hit their performance targets.

Maker’s valuation is insane

On the surface, Maker looks like an incredibly attractive prospect for a large company looking to buy their way into an industry that generally looks down on ‘old media.’ Maker represents great talent, they’re one of the highest profile MCNs out there, and they have great vanity metrics – 340 million subscribers and 4.5 billion monthly views across all of their ‘partners.’ However, any YouTuber worth their salt will tell you: Subscriber counts don’t pay the bills! And that adage rings true for networks as well.

With a metric like 4.5 billion monthly views staring you down, it can be easy to forget that Maker (the fourth largest MCN after VEVO, ZEFR, and Fullscreen) has never seen profit, is operating on a core business model many believe is fundamentally flawed, and is completely at the mercy of Google’s whim.

From the outside looking in, it can be difficult to discern just how much of Maker’s billion dollar valuation is derived from Maker’s network, and how much arose from the skillful efforts of Maker’s investors. From the slow back down of Danny Zappin and other members of Maker’s founding leadership team as the public face of the company, through to the high profile headhunting of Endemol CEO Ynon Kreiz and former MySpace Music head Courtney Holt, and the increasingly ‘investor-friendly’ policies implemented over the past year, it’s clear Maker and its investors have been preparing an early exit for a while now. And while many high-profile companies and individuals have led Maker’s three rounds of funding, leading VC firms Upfront Ventures and Greycroft Partners were -by far- the largest individual shareholders in Maker at the time of the acquisition. These VCs have a lot of experience with exit strategy and an expertise in both recruitment and M&A, and that certainly worked in Maker’s favor on this occasion.

With so much going against it, this unlikely ‘big-money’ acquisition could never have happened with any other combination of companies. When you couple Disney’s deep pockets and liberal risk profile with the skill of well-connected and highly experienced investors the impossible can happen… And it just did. More power to them!

Disney has a Digital problem

Disney hasn’t had great luck with its past digital purchases. When Disney’s Interactive division bought social game developer Playdom in 2010, it was one of the hottest start-ups in Silicon Valley. Its biggest competitor Zynga went on to IPO at a valuation in excess of $7 billion. Disney paid a bargain $563 million for Playdom, and while it had (and still has) great vanity metrics, it hasn’t exactly been a financial blockbuster. The same can be said for Disney’s $350 million acquisition of children’s MMORPG Club Penguin in 2007.

Thankfully, Disney appears to have learned from its past mistakes by allowing Maker to operate as an independent entity reporting directly to Disney’s CFO Jay Rasulo.

“We’re doing this because the best value for Maker is to serve all of our business units,” Disney’s Executive VP of Corporate Strategy Kevin Mayer told THR; which means Maker gets to sidestep the financial black hole that is Disney’s Interactive division… For now, anyway.

That will certainly maximize Maker’s chances of success in the shadow of Mickey Mouse’s ears. It also has the added bonus of allowing Maker to operate outside of Disney’s ‘Family-Safe’ policies – So don’t expect Maker’s videos of twerking weather girls, uncensored interviews, and Snoop Dogg smoking weed to stop any time soon.

How To Solve A Problem Like Danny Zappin?

The answer is money… Probably…

You may remember that Maker’s scandal-ridden founding CEO Danny Zappin is suing Maker Studios, alleging that a few of Maker’s directors and investors participated in constructive fraud by ‘illegally issuing shares to themselves and diluting the common stock’ for their own personal gain and to the determent of other shareholders.

$500M is a lot of money, much more than Maker is currently worth if you believe my analysis above, and Danny has been -unusually- quiet about the issue. The deal isn’t likely to happen with pending litigation hanging over the very stock that Disney is looking to acquire. But if Danny was able to hold on to his Maker stock, a share of that $500M will surely be enough to make that lawsuit disappear. Then again, if he didn’t keep his stock, Maker should brace themselves for round 2…

Disney & Maker Need Each Other

Shortly after deal was announced, Kevin Mayer admitted the acquisition was a necessity because their younger audience has started spending more time watching YouTube than Disney’s televised programming.

“We’ve noted for some time now that a lot of our younger audience spends a lot of time on YouTube… We wanted to propel ourselves further in that arena in as quickly and as high quality a way that we could,” Kevin Mayer admitted to THR.

Pay-TV subscriber numbers also decreased for the first time ever in 2013; all while measurement company Nielsen reaffirmed that YouTube reaches more 18-34 year-olds than any cable network ever could. Buying a major MCN is an easy way to solve that problem and recapture their lost audience very quickly. But where do the two sides meet? Where will the synergy (and hopefully, some profit) be found?

When most established brands try to make the jump to new media, many fail because they try to apply what works on television to the internet, and that’s a recipe for disaster. Disney will be able to leverage Maker’s deep expertise in what works and what doesn’t in new media as they attempt to bring their content to a new online audience. This endeavor is helped along the way by Maker’s attachment to the CFO of Disney, which allows them to service all of Disney’s business units – From feature films, to games, to children’s content.

Could Maker Become Disney’s Marketing Company?

Do you remember when YouTubers used to rave 24/7 about Taco Bell? – I’ll be the first to admit, some genuinely loved it. But no matter how awesome their social media team is, the fact remains a lot of ‘tubers were paid/offered perks to say those things, and the others were just bandwagoning for the promo. Could you imagine a campaign like that among every Maker partner whenever Disney releases a new movie? – Maker would become a content marketing powerhouse.

Disney only started experimenting with YouTube very recently. They posted the song “Let It Go” from their latest animated feature ‘Frozen,’ and it was a rousing success. Collectively, the official and fan videos for “Let It Go” have surpassed 500 million views. I imagine Maker will have some ideas about how to take that to the next level for Disney’s next feature film.

Does Disney Need Maker’s Talent?

Disney owes much its success to young stars like Lindsay Lohan, the Sprouse Twins, Miley Cyrus, and old Mickey Mouse Club members like Justin Timberlake and Britney Spears. As television’s influence continues to decline, it will become less and less able to define tastes for the younger generation; which is something this increasingly happening organically on YouTube, and other platforms like Vine (…or Nah). Many ‘Internet Celebrities’ have just as much influence and just as large a following as traditional film and television stars – Especially among younger audiences. 

The video above shows the doors opening for the first day of YouTube convention ‘Playlist Live.’ If these girls are reacting like that at the thought of being near their favorite YouTubers, they’ll certainly tune into any show that features their favorite internet personalities.

Also, I’m not the only one that can see one of the ShayTard kids with their own Disney Channel series, am I?

Could Disney’s Clout Allow Maker’s Flawed Business Model To Actually Work?

The association with Disney is sure to make Maker very popular with advertisers, possibly giving it the boost it needs make its flawed business model actually work.

Many of Maker’s competitors invested early and heavily in proprietary technologies and unique licensing and sponsorship opportunities that give them a competitive advantage in this space. While Maker’s tech team is supposedly 60-strong, they were late to the game and have very few meaningful results to show for their efforts at this early stage. Since they haven’t delivered yet, Maker is forced to stick closely to the ‘old YT network’ business model of collecting YouTube channels like Pokémon (mainly on their RPM sub-network) and expecting the costs to scale in their favor.

This business model has been attempted and abandoned many times long before Maker ever existed. Many of the sketchy proto-networks that existed before YouTube ever officially recognized the existence of MCNs tried and failed with this strategy, and were inevitably forced to cater almost exclusively to more successful YouTubers. However, with Disney’s clout propping up their sales books, maybe that can pull off the impossible and actually make it happen while boosting CPMs for their partners.

This deal makes A LOT of YouTubers rich.

Very rich… Maker has been known to throw in some stock options to sweeten the deal for their largest partners as well as a selection of their early employees, and they’re all going to seriously cash in from this deal. Like many, I’m especially happy for Maker co-founder ShayCarl. As well as being rather vocal about his excitement at the acquisition, he has shared his life by daily vlogging for the past five years. His subscribers have been with him on his financial climb every step of the way, from three of his children sharing a bed as he works multiple jobs to pay the bills in 2009, to him paying off his home mortgage in 2011. And now, at some point before September 2014 when the deal closes and the money hits the bank, he will be a multi-millionaire. All from a crazy YouTube business he moved from Idaho to Los Angeles to pursue.

It’s not financial sunshine and rainbows for everybody though. This deal will leave a lot of Maker’s early employees feeling shortchanged. Maker wasn’t quite as liberal with its employee stock options as other MCNs like Fullscreen and (surprisingly) Machinima, so many of their employees – From the people who edited their most popular videos, to the people who produced albums for Maker talent – get nothing from this deal.

Maker also held a series of “backdoor” layoffs between 2011-2012, and in 2013 reports suggest Maker laid off an additional 70 employees, with their animation departments being the hardest hit. Many of these employees had worked for the company since the beginning, and the few that were lucky enough to get stock options were laid off well before they vested, meaning they get nothing from this deal.

This changes the landscape for everyone

In any new industry, a single acquisition can have a major effect on the entire ecosystem. While it may not always be for the right reasons, Maker is one of the highest profile companies operating in this space, and one of the fastest growing companies operating out of Los Angeles. Regardless of whether the valuation is high or low, when a company like this gets bought out it shifts everyone’s perspective.

YouTube itself was acquired by Google for $1.65 billion, and the fact that a business built on top of the YouTube platform could be valued at up to $1 billion shows just how much this industry has evolved in a short space of time.

This deal affects everyone in new media, and its associated industries. VCs will have renewed confidence in bankrolling the next generation of networks and YouTube entrepreneurs as they build the future of news and entertainment. New advertisers will look in to our space just to see what the fuss is about, and hopefully begin to understand just how much value YouTubers can bring to their brands. More ancillary service providers like FanBridge will pop up to offer valuable services to creators.

And, most importantly, it gives renewed hope to creators. A re-affirmation, if there was ever a doubt in your mind, that the content you are creating has value*.

*Does not apply to everyone…

Do you agree with me? – Or do you think i’m completely wrong? – Let me know in the comments below! (I’d like to ask you to Rate, and Subscribe too but we’re in the wrong place for that…)