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Disney and Maker Studios' Big Deal May Be Smaller Than They Thought

More than a year later, the biggest M&A deal in Web video has hit a rough patch.

Peter Kafka covers media and technology, and their intersection, at Vox. Many of his stories can be found in his Kafka on Media newsletter, and he also hosts the Recode Media podcast.

It looks like the honeymoon is over for Disney and Maker Studios.

In May 2014, Disney surprised the digital video world by spending $500 million on Maker, a video network that generated billions of views a month on YouTube. The deal kicked off a series of similar — but smallertransactions that saw big media companies acquire Web video startups. It also dangled a valuable carrot in front of Maker employees and investors: If all went well, Disney would pay out up to $450 million more in bonuses through 2015.

But industry sources say both sides of the transaction now seem less enthusiastic about each other, and there’s lots of speculation that Maker CEO Ynon Kreiz and other top execs will leave Disney at the end of this year — the same time that Maker’s earn-out period wraps up.

And while Maker has continued to grow since the Disney acquisition, it doesn’t look like it will hit all of the “strong performance targets” Disney laid out at the beginning of the deal. People around Maker who thought the company would get the majority of its earn-out money now think Disney may end up paying half of the total by the time the deal ends.

If that happens, it would still mean that Disney would have paid out some $700 million to acquire Maker, making it the biggest Web video M&A deal by far. But it would be well short of the $950 million Maker’s backers thought they might get.

Disney hasn’t responded to requests for comment.

When Disney bought Maker, skeptics argued that it had overpaid for the money-losing business, since it didn’t own its own audience but was dependent on Google’s YouTube to help distribute stars like Felix “PewDiePie” Kjellberg.

But Disney CEO Bob Iger said Maker knew how to reach digital video viewers that Disney couldn’t get to on its own, and that Maker could help push out Disney properties like Marvel, Pixar and Lucasfilm to younger audiences.

“We see it first and foremost as a distribution platform and a very successful one,” Iger told investors in May 2014. In February of this year, Iger told Wall Street that “Maker’s results in terms of consumption, number of videos streamed since the time that we bought them, [have] been up substantially. Just huge growth.”

Maker and Disney have worked together to promote Marvel franchises like its “Avengers” movies, and Maker will be involved in Web promotions for the new “Star Wars” installment later this year.

But privately, Maker executives have complained that integrating with Disney has taken longer than they expected, and that they haven’t received the access to Disney’s brands and intellectual property that they expected. “They’re frustrated about how difficult it is to penetrate into the Disney creative community,” said a person familiar with Disney. “They thought they would have an unimpeded way to create new material with Disney assets.”

One obvious issue for Disney and Maker is that Disney has much bigger issues to worry about, especially right now: Last week Disney threw Wall Street into a frenzy by conceding that its ESPN unit, which had been its primary growth engine, had started to sputter.

Industry sources say Maker executives are also upset about a change in Disney’s corporate architecture. When Disney first acquired Maker, the company wasn’t folded into Disney’s interactive unit, which was run by James Pitaro, an Internet veteran who had been skeptical about the Maker deal. Instead, in an unusual arrangement, Maker CEO Kreiz and his team reported to Disney’s chief financial officer Jay Rasulo.

But in June 2015, Rasulo stepped down, and after a series of executive shuffles Maker is now supposed to be reporting to Pitaro. Maker executives say while they’ve read about the re-org in the New York Times, they have yet to receive official confirmation. Another way of interpreting that stance is that they refuse to believe they’re reporting to Pitaro.

The most significant issue for Kreiz and other Maker executives and investors will likely come down to money. There’s no dispute about the fact that Maker has continued to grow under Disney, but it appears that Maker hasn’t hit goals it thought it could clear in May 2014 (I don’t know how the specific earn-out goals are structured).

It’s not unusual for acquired companies to miss earn-out goals — it may be more common than not. But at the time of the deal, Maker backers seemed unusually confident about their ability to get all or most of the extra $450 million Disney might pay out.

One problem for Maker and the rest of the video industry: While the advertising income Maker generates has increased, so has the overall inventory for Web video views, which means the amount of money Maker and its partners have generated per view has decreased. This isn’t a new phenomenon — video makers have been complaining about it for years — but Maker and Disney executives may not have factored it into their projections in 2014.

Disney has told investors it expects to pay Maker shareholders beyond the original $500 million purchase price. In SEC filings, Disney says it has recorded a $198 million liability for additional bonuses “determined by a probability weighting of potential payouts” to Maker.

Disney first reported that number last fall. The company’s most recent 10-Q, filed this month, has the same figure.

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