NEW YORK (The Deal) -- With the purchase of Maker Studios for $500 million, and additional payments of up to $450 million, Walt Disney (DIS) is making a substantial bet on one of the larger YouTube video networks.
Disney is wagering that it can develop earnings, brands and content in the back yard of Google (GOOG), which owns YouTube. The company said Monday it would buy Maker Studios, which produces video for 55,000 channels on YouTube. The service gets 5.5 billion views per month from 380 million subscribers.
Disney CEO Bob Iger in a statement said the deal puts Disney at the center of short-form online video, a niche he described as "growing at an astonishing pace."
Maker Studios features content such as the fashion show "The Get Up" in its Women network. The company's Polaris group of programming, which Maker described as "the #1 destination for geek culture," has talent such as famed gamer and YouTube star PewDiePie.
Cowen & Co. analyst Doug Creutz wrote in a Tuesday report that Disney had reaffirmed its reputation for "paying top dollar" for content.
"We note that Disney has a checkered acquisition history with new media companies, most notably the Infoseek deal in 1999 and the $563 million acquisition of social gaming company Playdom in 2010 right as that business was peaking in users," he wrote. "Until the recent success of the video game Disney Infinity (an organically-developed idea), Disney's Interactive segment had been generating losses for years."
Disney said the purchase would help the company produce short-form videos using some of its existing brands.
Wells Fargo Securities analyst Marci Ryvicker wrote that the deal would be mildly dilutive through the close of fiscal year 2017. "From a qualitative standpoint, [Disney] has always been at the forefront of delivering content on new technologies and this deal certainly fits that bill by providing [Disney] more options in shortform online video," Ryvicker wrote.
The analyst said she would like "a better grasp of the long-term financial objectives as well as the opportunities management sees, which we expect to hear more about in the near future."
DreamWorks Animation (DWA) made a similar deal in May 2013, agreeing to purchase YouTube producer AwesomenessTV for $33 million in cash and contingency payments of up to $117 million.
"Disney appears to be paying a lower multiple on subscribers, but a higher multiple on video views, if those metrics have any meaning," Cowen's Creutz wrote.
The analyst also questioned the value proposition of creating content for Google. "The YouTube platform remains in Google's hands; Disney owns the shows, but not the talent behind them, and the talent (which in most cases is the show) can always walk or lose popularity," he wrote.
Disney said it expects to close the deal by June 30.
Still, in the outside scenario, with maxed-out contingency payments, Disney is on the hook for $950 million, which is a fraction of its roughly $140 billion market cap. If Disney makes the full payment, Maker Studios will cost about a quarter of the $4 billion that Disney paid for LucasFilm Ltd.
Backers of Maker Studios include Time Warner Investments, Greycroft Partners LLC and GRP Partners.
PewDiePie episodes such as "Unkool Koopas," "Stupid Monkeys" and "So Much Drowning" may have transient appeal compared to the Star Wars trilogies.
Disney is also obtaining technology and skill to develop short-form videos. The real magic of Disney has been its ability to funnel its brands and characters into new conduits, whether they be movies, amusement parks or merchandise.