2024 State of Creator x Media Economy M&A: Digital Darlings, Social Channels, MCNs, Live Commerce, Tools, Podcasts, et al
RockWater analysis to make you a better investor and operator. Today we publish the 2nd part of our annual letter, and discuss the key drivers behind creator and media economy consolidation, growing social channel M&A, combining of small digital pubs, the buzz behind MCNs, social commerce rightsizing, unsavory podcast headlines, and more.
RockWater Annual Letter, Part 2 of 3
Hi readers,
Below is part 2 of our annual letter, which discusses consolidation within the creator and media economies. Part 1 last week focused on consolidation amongst advertising and talent agencies, and part 3 next week will focus on the fundraising markets.
Our 2024 annual letter has two main goals; provide a reflection of 2023, and highlight market themes that will shape 2024. Our analysis will focus on capital markets (M&A and fundraising) for the media, agency, and creator economies.
The goal of this letter is to help founders and investors better deploy capital, grow their business, and earn good ROI.
Our findings are based on market research, client advisory assignments, and executive conversations. It is thus a mix of science and on-the-ground operator feedback.
I’m entering my 19th year of advising or building media-related businesses. I’ve experienced four business cycles, two up and two down. I believe we’re on the precipice of entering a new third bull cycle.
But I believe the markets still require rightsizing.
It’s the hangover effect from poorly allocated capital and misdirected growth strategies from the past few years. Further, sellers are stuck on old valuations while buyers remain risk averse. So layoffs and shut-downs will persist as companies transition to viable business models and while the bid-ask spread closes. Fortunately this transition is already happening.
In turn, our media and advertising communities emerge stronger. And I believe we’ll see more growth bets get made as we exit the low point in the cycle.
More on RockWater → we specialize in financial and strategy advisory for media, agencies, and creator economy. Recent client projects include running a sales process for an influencer representation company, a valuation and “diagnostic” for a social agency evaluating strategic options, a fundraise for a digital media rollup, a sales process for an influencer ambassador tech platform, and go-to-market strategy for a digital studio. Our full suite of services are here – DM me or email me at chris @ wearerockwater dot com if you need help.
Onward,
Chris, Founder of RockWater
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2024 State of Creator x Media Economy M&A: Digital Darlings, Social Channels, MCNs, Live Commerce, Tools, Podcasts, et al
Over the past decade private and public capital was used to fund numerous growth bets across the creator and media economies. We saw this across digital publishers, podcasters, streamers and OTT, creator tools, livestream and social commerce, esports, and ecommerce marketplaces.
The rationale was that digital consumption and spend was growing and taking market share away from traditional media and commerce models. And that new digital-native business models would enable more revenue per customer, with lower user acquisition and delivery costs vis-à-vis traditional models.
There was some good innovation. But over the past few years investors and executors were overly exuberant and got sloppy.
So missteps occurred in a growth-at-all costs approach, particularly that capital investment was larger than the market size, and that ROI expectations weren’t aligned with business models and market growth. Which then led to numerous market entrants with undifferentiated value propositions, leaders trying to do too much VS doing one thing well, reliance on outsized commercial deals that were unlikely to persist, upside down unit economics, and high staffing and fixed costs.
Which created a reliance on outside capital to keep the lights on.
But remember that in media-native business models, profitability is paramount. If there’s no path to profitability in the near term, it’s unlikely to be there in the long term. A different case VS technology-native businesses that can generate high margins at scale.
Now the media and creator markets are going through a correction. A few themes stand out:
👌Former Digital Media Darlings Become Available at Good Prices
Vice declared bankruptcy and sold to an investment group for $350M, or 6% of its peak valuation. I expect the investment group to sell off the parts. Just this week Rooster Teeth was just shut down by Warner Bros. Discovery — I’m curious who’s selling the assets since I know interested buyers (of note, the Roost Podcast Network will continue operating). Buzzfeed is trading for under a dollar per share / might get delisted / owes $150M in debt / just sold Complex for $109M to NTWRK. In its heyday Complex generated $300M+ in revenue and had 15-20% EBITDA margins. Depending on NTWRK’s integration and growth plan, it could be a good opportunity, though much work is needed to get Complex back on track, and the valuation feels high. I also believe CEO Jonah Peretti will lose control to the creditors in 1H 2024, and Buzzfeed will be sold off in pieces at bottom-of-the-barrel prices. Another good buying opportunity for those with cash, a profitable digital playbook, and the right relationships.
🤝Smaller Digital Publishers Are Combining
Subscale media businesses are tough. Premium exits are few and far between. We saw Betches sell to LBJ Media for 6.1x EBITDA (13.8x if earnout hit), which was a strong result. And Doing Things bought meme publisher Overheard, which has been a successful acquisition for the new owners – deal terms weren’t disclosed, but I guess an OK exit for Overheard founders. Then there were cautionary sales of bad sell-side M&A, like the fumbled Jezebel sales process which eventually went to Paste Magazine for low 7 figures at best. And more recently, Brat Buying Crypt TV in an all equity deal, driven by overlapping cap tables and founders who had complementary passions (social and ad sales focus VS premium long form entertainment, respectively).
We expect a lot more subscale digital publishers to join forces to improve sales packaging and scale for advertisers, more audience cross promo, and cost cutting. Deals will include minimal cash, if any, and mostly be all-stock. Investors and founders will get diluted, and potential for liquidity will be pushed back to the future exit of the buyer. Earnout structures may be minimal if leadership doesn’t transition and operations are being integrated on day one, which we’d expect to realize synergies as soon as possible.
🆙Growing Social Channel M&A
More buyers and sellers are emerging for social channels, and YouTube channels in particular. There’s a few reasons why.
From the seller’s POV…many channel owners, particularly those who are also on-camera personalities, are burnt out from the past decade’s creator economy boom. They’re now looking to exit the game, or sell off some channels so they can focus on 1-2 core channels. Also, digital video aggregators and publishers who aggressively bought up channels over the past few years are now figuring out what works VS doesn’t in their portfolio, and want to exit social assets that are non core.
From the buyers POV…digital video aggregators like Electrify and Lunar X are scaling up fast. Each have been in the market for a few years, deployed tens of millions of capital, and are refining their playbooks quickly. In September 2023 Electrify raised an $85M war chest of debt and equity capital, and like Lunar X is now likely scouting their next and largest social brand acquisition. On the more emergent segment of the market, social channels are a new target for search fund-type buyers and modern entrepreneurs – they seek founder-owned and run businesses that are profitable and in growing markets, and social channels fit the profile. Many of these first-time owners are sorting through their buying criteria and are in education mode, but we expect them to become more active buyers by the end of 2024. Lastly, gaining access to audience and distribution are now the biggest challenges to any business, so operators are willing to pay a premium to meet their consumers where they are and accelerate their go-to-markets. This is happening across many industries, like fintech and sports betting to name just a few. We expect more marketing depts to be making asks to their corp dev teams around this trend going forward.
Of note, while there’s a growing M&A social channel marketplace being created (which RockWater is helping to facilitate and professionalize), a few things need to be sorted out. That includes a narrower range of valuation multiples and methodologies, which is currently a bit scattershot.
Further, the criteria for buying channels, and then transitioning to a new owner, is still evolving. Case in point is Lunar X’s acquisition of Theorist Media, which just announced that its longtime founder and on-camera host Matthew Patrick is stepping into a new role at the company. That plan was a year in the making, and all are watching to see how the channel performs going forward. There will be a lot to learn about the optimal transition playbook, which includes keeping audiences happy, yet also ensuring good ROI for the new owner. Companies to watch out for here are Electrify, Lunar X, LMJ Media, Doing Things, Electric Monster, and Made In.
🎉MCNs are Buzzy
I came from the original vintage of YouTube MCNs, dating back to my time at Big Frame and AwesomenessTV over a decade ago. The legacy MCN value prop and business model left a lot to be desired – thousands of network clients, little value added, and high fixed team costs. But as the video creator market has grown, there are more creator and publisher clients who require various content services, and the business model is more defined. MCN offerings now include digital rights management, syndication, production services, media sales, content localization, influencer sales, and more. There’s also new MCN commercial partnerships like the Buzzfeed-Culture Genesis deal.
Due to the growing market, we’re seeing an uptick in buyer and investor interest in MCNs, particularly around media sales and direct-sold opportunities – a growing and high margin revenue line. The higher-performing MCN businesses will become the capital-backed consolidators, while underperformers that need a lifeline, or who simply struggle to scale, will become the targets. I also believe there are CMS assets stuck within traditional media companies from acquisitions over the last decade – opportunistic corp dev teams may be able to unlock these at good prices if you have the right rolodex. Consolidation will happen most amongst MCNs that align on audience and creator focus, and we expect to see more cross-border deals in what we believe to be a very fragmented and nascent global MCN market, particularly in Asia.
👁️Creator Tools and Analytics Face UA Realities
These companies span link-in-bio, creator education, personalized tokens and subscriptions, merch, payment advancers, etc. Many upstarts here launched to support the growing needs of creators, and raised funding back in 2021. But many offerings were undifferentiated, creator willingness to pay was lower than expected (the long tail of creators make under the poverty line), and thus many of these upstarts couldn’t scale users and generate meaningful revenues. And now VCs don’t want to write them new checks to extend their runway. So remaining players are consolidating with peers or shutting down. A good case study is VidIQ buying Creator Now in January in an all-stock deal (my valuation analysis here). Creator Now had raised $2.8M in funding, achieved $1M in 2023 revenue, and still had $1M in the bank. But leadership felt future growth was capped and couldn’t deliver VC-type returns, which would have meant getting to over $10M in run-rate ARR. Expect more of these all-stock combinations as cash runway lessens and investors put pressure on founders to find a way to salvage their equity value. And if no strategic combination is available nor future viability, good founders will make the hard decision to shut down and return at least some capital to investors.
👍Live and Social Commerce Rightsizing
Livestream shopping is an exciting and growing market in the US. It’s forecast to be over $50 to 60 billion by 2026. Which explained why many new livestream upstarts collectively got 9 to 10 figures of VC funding between 2020 and 2022. But the US live and social commerce market is still only a fraction of that of China. Case in point, the US market is only 10% of the Chinese video commerce market, and US consumer online shopping behaviors differ materially from their Chinese counterparts. This creates challenges in user acquisition, brand adoption, and sell through.
So in 2023 we saw live and social commerce consolidation, with CommentSold buying Popshop Live ($25M raised) in what was likely an asset sale, and integrating its technology into its marketplace. Also, Supergreat ($31M raised) shut down and directed its users, and staff, to WhatNot. And online commerce is just highly competitive considering incumbents like Amazon and Shein, and massive new entrants like Temu. The result is shut-downs like Zulily in December, and the reduced valuations in Amazon seller aggregators.
The takeaway is that the live and social commerce market is attractive, but still nascent and with strong incumbent competition from the likes of WhatNot and TikTok. There’s headroom to grow into, but it will take time. The ratio of newco bets and funding amounts need to match market size, and this ratio got out of whack. Expect more consolidation ahead, with fewer but more viable players to emerge.
🎙️Podcasting Faces Unsavory Headlines, But Data Signals Better Future Ahead
Podcasting is going through a cycle many other early media markets have faced. Too much capital prematurely flooded the market, and from the wrong types of investors. What drove this was the hope that Spotify / iHeart / SiriusXM would keep buying at over 7x revenue multiples, and that IP licensing and co-production deals would continue in both high volume and high prices. But content distributors got bludgeoned with growing streamer competition, writer and actor strikes, and pay TV cash cows falling off a cliff. And in turn, podcast buyers and capital pulled back. So companies that made IP bets / outsized talent MGs / big staffing hires with VC dollars saw their P&Ls get upside down. The result was endless headlines about layoffs, shut-downs, and asset sales.
But there’s a key angle missing from these stories – podcasting continues to show signs it’s a new media mega market. Podcasting generated $3 billion in 2023 US revenue, 37% growth from 2022. And 31% of the US population listens to podcasts, up from 7% in 2013. That’s in stark contrast to social video consumption, where there are signs of market saturation and social incumbents are now focused on growing consumer market share VS market size. Further, podcast ad revenues are less than 25% of the radio market, but growing at 10x the rate. The Euro podcast market is growing at a CAGR of 28%. iHeart reported 17% YoY growth in podcast revenues, up to $132M. And in just the past month, there was the $250M Joe Rogan / Spotify re-up, Smartless went to SiriusXM for $100M, and over $16M was invested in podcast AI businesses like Podcastle and Wondercraft.
Collectively, I see the near term correction plus long term tailwinds as an exciting moment to bet on podcasting. Particularly for family offices and other funding sources who have more flexible investment criteria, longer-term hold horizons, and want exposure to media. And who have media assets for commercial partnerships (e.g. offshoring, IP development, subscription models). Two good investor data points here include Podx, which made 6 podcast acquisitions since 2021 and is backed by Swedish investment group Qarlbo AB, the majority owner of entertainment brand maker Pophouse. And then there’s Podimo, which raised 44M Euros in Dec 2023 from the Danish Investment Fund and Chr. Augustinus Fabrikker, a foundation-owned investment company that invests in the Danish business community (yes, the Scandinavians like podcasts).
But overall, podcast investors remain cautious, and are very focused on entry and exit prices. And still question if they should wait till 2025 before getting in the market. I get it. But I do see a unique entry window in 2024 that won’t last – deals will exist in 2025, but they won’t be as good.
To enter in 2024, I recommend valuations in the low single digits of revenue, 1-2x. Though this is a market where we still see sellers stuck in 2021 expectations. That being said, showing up with capital, and the right vision including other planned acquisitions, should get deals done. Good exec teams warrant a premium, and deals must have earnouts and rollover equity to incent continued growth and offer future paydays – that will help founders get over the emotional hurdle of not selling during the 2019-2021 heyday. I also recommend a diversified business model that includes widely distributed ad-based content that brings in cash flow and cultivates new talent relationships. This enables a content marketing engine as well as the development of new IP projects and fan experiences from network relationships. And these extension projects should be funded by cash from operations, and once validated, can be accelerated with growth capital.
That feels like a good balance of cash generation plus enterprise-value building. I could go on and on, but better yet read this podcasting whitepaper for more data-based market POV.
💥Traditional Media Faces “Generational Disruption”
This was the quote from Warner Bros. CEO after 3Q earnings in 2023. The major studios are at a breaking point from new digital and social-native viewing behaviors. As a result, all studios are suffering from pay TV viewership falling off a cliff, launching expensive streaming platforms leading to billions of losses per year, and being saddled with too much debt from previous M&A. So the result is further industry consolidation. Case in point, Paramount Global is up for sale, and top buyers include Skydance, Warner Bros. Discovery, and Allen Media Group. I do like the new sports streamer move that brings together Disney, FOX, and Warner Bros. Discovery – working together to create bundled and differentiated offerings for consumers feels better than trying to carve out mini streamer fiefdoms with bad viewer experiences. That’s a road to irrelevance quickly when competing against the likes of Netflix and YouTube TV. I’m not going to opine much here since so many industry analysts already cover these players. I’ll save my oxygen for under-covered market segments.
🎮Esports Falls Out of Gaming and Digital Media Hype Cycle
Read my post on Faze Clan’s fall from grace and sale to Gamesquare to understand why the sector’s growth didn’t pan out. TLDR there are fundamental differences in the esports ecosystem VS traditional sports, which makes monetization more difficult. And viewership and engagement didn’t grow as expected due to smaller market size VS predictions. What’s noteworthy is that our team is seeing many agencies and influencer rep firms built during the esports craze, now meaningfully pivoting their focus away from servicing esports talent and the brands that want to get in front of esports audiences. I’m curious how these pivots will shake out. We’ve seen some successfully evolve into servicing creators and brands in sports / gaming and lifestyle. But other leadership teams are burnt out and seek an exit, though it’s unclear what the M&A appetite will be – will more industry consolidators emerge like Gamesquare? Will larger agencies who seek young and hungry talent and brand reps come knocking for rapid acquihires? Or will these legacy agencies just end up closing up shop?
That wraps part 2. Next week part 3 will focus on the fundraising markets, and reminder that part 1 last week focused on the state of ad and talent agency M&A.
I’m the founder of RockWater Industries. We do financial and strategy advisory for media, agencies, and creator economy. From M&A and fundraising to consumer research and go-to-market planning.
DM me on LinkedIn or email me chris @ wearerockwater dot com
