On Hunt for Content, AT&T Closes Deal for Chernin’s Otter MediaLOS ANGELES — Jesse Jacobs, president of the Chernin Group, felt defeated.
It was July 12, 2013, and Mr. Jacobs had just found out that a crucial deal — the independent media company’s proposed purchase of Hulu, in partnership with AT&T — had collapsed. Hulu’s owners had decided not to sell after all.
“It was like Lucy pulling up the football from Charlie Brown at the last second,” Mr. Jacobs said.
Still convinced that streaming services like Hulu were Hollywood’s future, Mr. Jacobs and his boss, the longtime media executive Peter Chernin, started acquisition talks the next day with Crunchyroll, a little-known streamer of anime videos. They bought it for $75 million, nurtured it, added other new media start-ups around it in a holding company called Otter Media — and sold the collection to AT&T on Tuesday. Analysts valued the deal, which had long been expected, at more than $1 billion.
With the purchase, Otter Media ranks as one of the most valuable media upstarts of the last decade, said Brett Sappington, senior director of research at Parks Associates, a firm that focuses on emerging consumer technology. Others include Twitch, which streams video game sessions and sold to Amazon for $970 million in 2014.
“Otter is certainly a win,” Mr. Sappington said, noting that other new media companies have imploded — the most recent being AwesomenessTV, which was valued at $650 million in 2016 and sold to Viacom last month for about $50 million. “The challenge ahead for Otter is staying hot,” he added. “It’s not easy, as we just saw with Awesomeness.”
Mr. Chernin predicted that AT&T would accelerate Otter’s growth by combining it with its new entertainment empire. Earlier this summer, AT&T finalized its $85.4 billion purchase of Time Warner, which includes HBO, Warner Bros. and the Turner cable networks.
John Stankey, chief executive of WarnerMedia, as Time Warner has been renamed, will oversee Otter. Mr. Stankey said in a statement that AT&T planned to “harness Otter’s expertise” to strengthen its own digital assets. He did not say which ones, but Warner Bros. owns niche video companies like Machinima, which focuses on gamers, and Boomerang, which offers episodes of classic cartoons like “The Flintstones” and “Scooby-Doo.”
In addition to Crunchyroll, Otter owns Fullscreen, a studio and advertising agency for YouTube stars, or “online creators,” as Otter calls them; and Rooster Teeth, which makes video aimed at gamers, operates a streaming channel and has a growing events business. VRV, pronounced “verve,” is another Otter-owned video service. It bundles and delivers 11 niche online channels, including Cartoon Hangover and DramaFever, which focuses on Korean soap operas.
Otter’s streaming services have more than two million paying subscribers in total, on par with CBS All Access.
Otter also owns stakes in Gunpowder & Sky, a digital studio led by Van Toffler, who ran MTV during its “Beavis and Butt-Head” heyday; and Hello Sunshine, Reese Witherspoon’s production company, which has sold multiple series to Apple for its upcoming streaming service.
“They look at Otter as strategically key to several things they are trying to do, including serving customers with every type of content delivered through every possible distribution channel,” Mr. Chernin said of AT&T, which has been a minority investor in Otter since its founding in April 2014.
It had long been anticipated that AT&T would buy Otter from the Chernin Group, whose investors include Providence Equity and Michael Bloomberg. AT&T delayed the purchase last year after the Justice Department sued to block AT&T’s takeover of Time Warner. AT&T won that case in June and closed the acquisition, although the federal government has since mounted a new court effort that could dismantle the deal.
Tony Goncalves, Otter’s chief executive, declined to say whether Otter was profitable. But he did give a hint about what AT&T has planned.
“You’ll see a good amount of cross pollination, where some of that really wonderful Warner intellectual property and content will find its way into the businesses that are part of the Otter portfolio today,” said Mr. Goncalves, who was previously a senior AT&T executive overseeing digital initiatives, including the introduction of DirecTV Now, a streaming offering.
AT&T, with its vast data on cellphone and broadband subscribers, plans to tailor ads on the Turner networks, which include CNN and TNT, based on who is watching. Otter will give AT&T more digital advertising inventory to sell the same way.
Mr. Chernin, 67, and Mr. Jacobs, 42, began to aggressively invest in streaming at a time when Hollywood was hesitant to embrace the technology. Four years ago, some media executives were publicly scoffing that cord-cutting fears were overblown. Hulu’s owners could not decide what to do with the service. Netflix only had about 12 million subscribers — it now has 130 million.
But the Chernin Group had a theory. “With every new wave of technology, great new brands emerge, and we wanted to own those brands,” Mr. Jacobs said. “They certainly weren’t going to be incubated inside the large media companies,” where they would have to compete for resources.
The men focused on niches with hyper-passionate fan bases. “Fans willing to pay for video, buy merchandise, buy tickets to live events, engage with advertisers associated with the brand,” Mr. Jacobs said. About 100,000 people paid to attend Rooster Teeth fan conventions last year, for instance. Rooster Teeth-branded merchandise (hats, shirts, socks, beer mugs) generated millions of dollars in sales.
Not every bet has paid off. Otter bought Creativebug, a maker of arts and crafts videos, in 2014 for about $10 million. Creativebug’s fan base never solidified, and Otter sold it for a loss last year. An effort to develop a site called Soompi into a destination for fans of Korean entertainment failed. Otter also had a setback with Fullscreen, which introduced and then shut down a subscription on-demand platform.
For Mr. Chernin, the Otter sale raises the question of what he will do next. There has been speculation in Hollywood that he is planning to raise at least $500 million to invest in a new generation of media start-ups.
Mr. Chernin declined to comment on the speculation. He said, however, “I think we will continue to do a version of what we do, which is make movies and television shows, and we will look to continue to invest in consumer technology brands.”
The Chernin Group owns other digital businesses, including Barstool Sports, whose reputation is so toxic that ESPN canceled a partnership with it after 10 days, and Headspace, which sells meditation via an app. Mr. Chernin, who previously ran Rupert Murdoch’s entertainment empire, also has a movie division — hits include the “Planet of the Apes” series — that supplies 20th Century Fox.
About six years remain on that deal, Mr. Chernin said. Asked what would happen when Disney completes its $71.3 billion acquisition of the studio, he said, “I’m going to be a proud member of the Disney family.”