Why YouTube Giant Fullscreen Sold to AT&T, The Chernin Group

Fast-Growing YouTube Network Still Benefits From Old-Media Resources

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Fullscreen's network of 50,000-plus YouTube creators include musical-centric AVbyte.
Fullscreen's network of 50,000-plus YouTube creators include musical-centric AVbyte.
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The companies that were expected to be the digital heirs to Disney and Warner Bros. are instead becoming their digital extensions.

Six months after the largest YouTube network Maker Studios agreed to sell to Disney, Maker's biggest rival, Fullscreen, has sold a majority stake to Otter Media, a joint venture between AT&T and The Chernin Group that is focused on internet-delivered video services.

Fullscreen and Maker Studios aren't the only YouTube networks to cozy up to larger media companies this year. Defy Media sold a minority stake to Viacom. Machinima struck a similar deal with Warner Bros. And Big Frame was bought by fellow YouTube network AwesomenessTV, which itself was acquired by DreamWorks Animation in 2013.

Spurring these deals has been the combination of what the digital media companies and their traditional counterparts are respectively lacking. The online video networks have the young audiences the older companies covet, but they lack their forerunners' established businesses and significant revenue. That dynamic -- which is compounded by YouTube's typical 45% cut of channels' ad revenue and high production costs for advertiser-friendly "premium" content -- has led to some of the recent deals, said Fullscreen CEO George Strompolos.

It seems that in order to become the next great entertainment company, you might need to be backed by one. Fullscreen tried to find a deal, however, that let it keep a large degree of autonomy.

"We want to compete with the biggest players there have even been," said Mr. Strompolos, a former YouTube executive who launched Fullscreen in January 2011. "To do that we need major resources on our side. This gave us the right opportunity to secure those resources while retaining an ownership stake in what we create."

Fullscreen will operate as an independent company under Otter Media. "We didn't want to be in a situation where we get sucked into the vacuum of a megacorp overnight," Mr. Strompolos said, adding that Otter Media and its parent companies provide Fullscreen "collective resources without the massive overhead and potential bureaucracy that comes with big media."

The Chernin Group already had a stake in Fullscreen along with previous investors Comcast's venture arm and WPP. Comcast has exited, but WPP will keep its strategic hold on the online video network following the sale.

"They don't have to think about fundraising anymore," said Chernin Group President Jesse Jacobs. "They don't have to think about an exit. They have all the capital they need and all the support they need."

After Maker Studios' sale, Fullscreen became online video's next big acquisition target and had its pick of buyers. Relativity Media had been in acquisition talks with Fullscreen, as had Yahoo and AOL.

"We did meet with several companies," Mr. Strompolos said. "Some of them wanted to turn Fullscreen into their digital marketing department. Some wanted Fullscreen to build a YouTube competitor. None of those options were interesting to us. We wanted to evolve Fullscreen into a global media company."

Fullscreen has spent the past couple years trying to become more than a company that sells ads across a collection of YouTube channels. It started that way, but the video network has grown to also host live events, is beginning to produce original shows and has a talent management arm like a traditional Hollywood agency. "All these things require resources and capital," Mr. Jacobs said.

Fullscreen is reportedly building a subscription-based video service to give its creators a home outside of their YouTube channels and its business a revenue stream independent of YouTube. That off-YouTube video service would make sense considering Otter Media's focus on internet-based video distribution, though Mr. Jacobs and Mr. Strompolos declined to comment on the company's plans.

Fullscreen's network spans more than 50,000 creators, whose videos notch 4 billion views each month. The networks' channels attracted 34.3 million U.S. viewers in August, according to ComScore. It trailed only Maker Studios at 45.3 million and Vevo at 42.2 million.