The popularity of online media streaming is increasing rapidly due to a change in people's preferences. The increasing number of tablets and smartphones with limited storage capacity and the ease of availability of high speed Internet both play a vital role in the rising popularity. Over the years the online media streaming market has seen tremendous growth and generated strong revenue margins.
DreamWorks Animation acquisition deal:
Recently, DreamWorks Animation SKG Inc. (NASDAQ:DWA) acquired a YouTube teen network, AwesomenessTV, for about $33 million in cash as it looks to tap into the popularity of online content. The deal includes the probability of additional cash payments of up to $117 million if certain earnings targets are reached in 2014 and 2015. AwesomenessTV is one of the most subscribed-to teen networks on YouTube. DreamWorks said that the innovative deal distinguishes the growing value of digital content creation and consumption.
The deal is one of several big media bets on YouTube, which is owned by Google Inc. (NASDAQ:GOOG). Last year Time Warner Inc. (NYSE:TWX) invested in the YouTube network Maker Studios, while Bertelsmann AG invested in the fashion and beauty online video network StyleHaul in March 2012.
Another benefit that DreamWorks will get from the deal is that the AwesomenessTV brand has recently extended its reach beyond the mobile platform into television and film, signaling continued cross-platform expansion plans.
Brian Robbins, the founder and chief executive officer of AwesomenessTV said in a statement that he will continue the role of executive at the firm to develop a DreamWorks Animated-branded digital family channel.
According to DreamWorks Animation Chief Executive Officer Jeffrey Katzenberg, Brian Robbins has an amazing track record in creating family content both for traditional and new platforms, and his expertise in the TV arena will be invaluable as it expands its presence in that platform.
AwesomenessTV features talk shows, scripted and reality programs and sketch comedy. The company also has released a movie with AMC Theaters and expects to have a television show on Nickelodeon. Its network has more than 57,000 YouTube channels with more than 14.4 million subscribers. According to the company, reported figures show more than 1 million videos on the network have been seen 809 million times. AwesomenessTV offers programs like "In My Opinion," a teen girl talk show, as well as comedies, dramas, music, and videos such as "How to Be the Perfect Babysitter."
How AwesomenessTV adds value to DreamWorks:
AwesomenessTV provides a network platform to help people to grow views and revenues on their YouTube channels in exchange for a small fee. This platform will help people to generate revenues using Google AdSense and YouTube direct sales advertising and charge a small fee in return. Usually the revenue transactions channel through the AwesomenessTV network. It pays 70 percent of net revenue it received, only in linking with users' Channels and retains the 30 percent of revenue as its fee. This means that it charges $30 per $100. Beside the revenues derived from sponsorship and brand integration opportunity, it will also charge an additional 15 percent "Sales Fee."
For better understanding I created a scenario on AwesomenessTV provided figures of 57,000 channels. After assigning the weights and revenue per month, based on pure judgment, I ended up with $9.81 million revenues per year for AwesomenessTV. With this per year revenue, DreamWorks will be able to reach the acquisition amount in just 3.6 years (assuming zero growth), which seems to be a very attractive deal.
According to the Insight Research Corp., it is estimated that the streaming media business segment will generate more than $78 billion in revenues in the United States over the next six years. It classified streaming media as the transmission of digital audio and video files over an IP network or wireless network in real time or on-demand, while prohibiting users from storing the files locally. Insight Research predicted that over the next 5 years, revenues from streaming media will grow 27 percent per year as more and more people will shift to online streaming of audio and video. That means over 135 percent growth through 2014. Robert Rosenberg, Insight Research president, mentioned another reason for the growth in the online streaming business is that traditional television advertising dollars are being pushed into online ads, which is also the fastest-growing billion-dollar industry.
First, AwesomenessTV is one of the fastest-growing channels on the Internet and it will bring incredible thrust to DreamWorks' digital strategy. With this acquisition both companies can use each other's resources and technology to boost performance and strengthen their product portfolios. Second, online streaming content viewers are growing faster than previously expected because of increased viewing on smartphones and tablets, Internet-enabled TVs, and greater content availability. Though this acquisition will put some downward pressure on DreamWorks' earnings per share for a while, its long-term prospect is quite bright. So I would recommend for investors to invest in this stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.