Harvest season has arrived for a crop of local YouTube channels and online video production houses as strategic buyers have come to town to make acquisitions and equity investments.
At least four companies have been bought this year, according to an informal tally by the Business Journal. Two other local companies that produce content for YouTube recently received major investments from large Internet companies and venture capital firms. Several analysts believe more such transactions are in the pipeline.
The driving force behind the movement is a fundamental shift in media consumption, said Matt Diamond, chief executive of Alloy Digital, a New York advertising firm that just purchased Internet production company Clevver Media in Hollywood.
“The days of appointment television are long gone,” Diamond said. “Consumers want shorter-format, on-demand digital video. That trend is here to stay, so we see this as the first inning of a nine-inning game.”
The most recent deal was the purchase two weeks ago of Clevver by Alloy Digital. It was Alloy’s third local acquisition. Clevver TV produces short entertainment news segments and celebrity video clips for its own websites and YouTube. Financial terms of the deal were not disclosed.
In May, Google Inc. in Mountain View led a $35 million investment in Machinima, the Hollywood-based producer of online video for gamers. Besides Google, Westwood-based Redpoint Ventures and Santa Monica-based MK Capital participated in the deal.
Also in May, PlaceVine, an agency that sells product integration advertising for online videos, and was based in New York and Los Angeles, was acquired by San Francisco-based video syndicator Alphabird. In March, Hallmark Cards in Kansas City, Mo., acquired SpiritClips, an L.A. firm that makes inspirational videos.
In February, StyleHaul, a fashion and beauty video producer in Los Angeles, secured $4.4 million from Newport Beach-based RezVen Partners.
In January, Alloy acquired Generate, a Santa Monica talent agency and production company that makes web series. That was Alloy’s second local buy. In July 2011, Alloy purchased Smosh, another Santa Monica firm that makes comedic short videos and cartoons.
Growth strategy
Clevver was co-founded in 2006 by USC film school graduates Michael Palmer and Jorge Maldonado, and has made a profit for the last five years. The partners decided to sell because joining a larger organization would give them resources to grow.
“What happened 10 to 15 years ago when the Internet exploded on the scene is now happening with online video,” Palmer said. “We were looking for ways to grow Clevver tenfold, and we found a fit with Alloy on advertising sales and the demographics of our audience.”
Allen DeBevoise, chief executive at Machinima, said investors are looking for companies that can become household names, much the way HBO, MTV and ESPN did during the cable TV boom in the 1980s. He sees venture capital investments in local online video companies on the near horizon.
“I expect announcements in the next few weeks that some of these YouTube-based companies will be funded with VC money,” he said. “The amount of capital going to these groups will only increase.”
Online video is a volume business. Clevver Media cranks out 40 to 50 videos a day; Machinima, a gaming channel on YouTube, has produced more than 100 videos in a single day. Most of them last two to five minutes.
Economies of scale and resource-sharing lead to lower production costs, explained Barry Blumberg, president of Smosh.
Importantly, a holding company such as Alloy can act like a traditional TV network and secure advertising agreements from major brands.
“As independents, we have tried to promote our products to brand advertisers with some success,” Blumberg said. “But a company on a larger scale can offer more opportunities to small companies like us.”
Video producers that target a similar audience can show their products on each other’s sites. For example, all of Alloy’s acquisitions focus on the youth demographic. So a cartoon on Smosh could also be displayed on Clevver’s YouTube channel.
Diamond at Alloy noted that ad rates have increased along with the size of the online audience. Clevver operates seven YouTube channels that generate more than 70 million video views per month. Machinima reports more than 23 million views a month, with a focus on young males. Nearly all the videos are preceded by a short commercial.
“If the analogy a few years ago was TV dollars to Internet pennies, it’s now dollars to quarters,” Diamond said. “Larger ad agencies now have video buyers who buy time on both TV and online, so there has been a merging of the prices.”
For advertisers, the price to show a video ad to 1,000 viewers online typically falls in the $10-$20 range, while the cost for broadcast and cable TV shows are around $20 to about $30.
Machinima’s DeBevoise believes the online video industry represents the third phase of a global TV evolution. The first was created by broadcasters who moved from radio to TV in the 1950s. Then came cable TV in the ’80s. The third phase is Internet TV, which will be available to consumers at their convenience and will make broadcast schedules obsolete.
Los Angeles will play a prominent role in the development of the third phase, he said.
“This industry is a sweet spot for Los Angeles,” he said. “A lot of the emerging brands on YouTube are here. This is a growth sector and very exciting for the Los Angeles business community.”
