Discovery Communications announced last week its intention to buy online video content producer Revision 3 for an undisclosed amount. The seven-year-old San Francisco-based startup produces 27 episodic and personality-driven channels, ranging from software programming to consumer electronics to computer games to food. It boasts more than 23 million monthly unique viewers.
The deal comes at a time when digital media players have been mimicking television producers by pitching their platforms to the New York advertising community in the so-called “Digital Upfronts.†Last week, the rap musician Jay Z appeared at a You Tube-sponsored upfront partyheld at the Beacon Theatre on the Upper West Side. You Tube has committed more than $100 million to fund 100 original channels, and now plans to spend another $200 million to promote them.
Revision 3’s revenue is undisclosed. Investors have sunk at least $10 million into the venture, and the purchase price is reportedly in the $30 million range, a figure that Discovery is neither confirming nor denying.
“On the one hand, I’m sure that’s a huge multiple,†said Bernstein Research Senior Analyst Todd Juenger in an email. “On the other hand, it’s a lot cheaper than Discovery trying to build something themselves to become involved in the space.â€
Discovery used the word “immaterial†in Tuesday’s earnings call to describe the Revision 3 investment and associated earnings or loss, according to Juenger, who remains bullish on the cable network despite a 6 percent drop in its stock apparently linked to the earnings call news of a large equity write-down in the Oprah Winfrey Network (OWN).
Juenger said he thought the spooked investors were overlooking two of Discovery’s strong growth drivers: “a structurally superior and sustainable cost advantage, and superior operating leverage in fast-growing international markets.†In buying Revision 3, Discovery is entering the even lower budget digital world. The question is what that buys them.
In an interview with Peter Kafka of the Wall Street Journal’s All Things Digital, Discovery executive JB Perette said that Discovery produces content in the $500,000 to $750,000 per hour range. “Producing something at a tenth of that cost has to be very different,†Perette said.
To date, Revision 3’s low-cost content has drawn a number of marquis advertisers. Its formula of mixing content that appeals to a predominantly young male demographic with attractive and geeky female hosts (see GeekBeat.TV, Annie’s Bits, OS.ALT, Nixie Pixel) appears to be a winning proposition for sponsors such as Proctor & Gamble’s Old Spice deodorant brand. (Go figure.) So Discovery is acquiring some revenue streams. There also is potentially synergistic overlap between those online shows and of some of Discovery’s existing content, such as MythBusters, the popular science program that typically features explosions.
But on another level, the media giant that reaches more than 1.5 billion cumulative subscribers in more than 200 countries and territories through more than 140 worldwide television networks (Discovery, Animal Planet, Science, TLC, etc.) could be simply running its own little experiment.
“I believe Discovery’s motivation is primarily to get involved firsthand and understand the online video space, much like the broadcast nets did with Hulu,†said Juenger. “(Discovery) doesn’t know whether this is going to be a big deal or not, but now they have a front row seat at the table with an organization that seems to share the same low-cost approach to programming, for little risk.â€