SMALL CAP SHARE IDEAS: Rightster leads the pack of emerging online video distribution firms

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Google knew it in 2006 when it paid what now looks like a bargain-basement $1.65billion for YouTube. It took a little longer for the penny to drop with the traditional media powerhouses.

But today it is generally accepted that video is and will continue to be part of the very DNA of the modern internet.

For the content owners and creators, the challenge these days is not technical; it is commercial.

Ones to watch: Companies such as Fullscreen, Rightster and Maker Studios are on the precipice of making serious dough from video content

The maturity of mainstream media means broadcasters can very accurately predict the watching audience at any given time or day of the week.

This makes it a relatively simple and transparent process charging prospective advertisers to access to this captive audience.

The challenge has always been to replicate this model on the internet where viewers have all the loyalty and predictability of a herd of cats.

However companies such as Fullscreen, Rightster and Maker Studios are on the precipice of making serious dough from video content.

The latter is the subject of a Disney bid that values the business at up to $950million and reveals the huge potential value of these businesses to mainstream media, advertising agencies, telecoms and tech firms. Private equity also sniffs a consolidation opportunity.

The second of the trio, Rightster, is probably of most interest to the UK private investors as it AIM-listed and therefore provides the easiest method of getting involved in this emerging sector.

In an arena where size matters, it is the largest YouTube multi-channel network outside the US and the fourth largest overall after its takeover of Base79. The content it releases to the ‘net’ receives over 1billion video views per month.

Its cloud-based service provides a single, 'upload once; commercialise everywhere' platform for content providers from the worlds of news, sports, fashion, entertainment and the owners of viral videos.

Video content: Rightster is the largest YouTube multi-channel network outside the US

Revenues are maximised on a licensed, ad-funded, direct-to-consumer or paid placement basis.

'YouTube is just one part of the puzzle – there is premium content, brand funded content,' says Rightster chief executive and founder, Charlie Muirhead.

'Our key insight was discovering how to replicate a TV audience in a fragmented online marketplace.'

As mentioned earlier, scale is the key. For Rightster, the £50million cash and paper acquisition of Base79 was crucial in catapulting it up the YouTube rankings and getting much more quickly to that magic figure of 1billion monthly views.

The share placing to fund the deal was interesting in that Chad Hurley, the YouTube founder, subscribed for shares, while Invesco, top stock picker Neil Woodford’s former employer and his new fund followed their money.

Costing the company rather less, but still important to Rightster’s prospects, was the purchase of Viral Spiral for around £4.1million, which enhances its expertise in 'social video management, licensing and brand engagement'.

'Scale is the key determinant of success and we looked at 50 deals before we decided on Base and VSG,' says Muirhead.

'The acquisition creates a leading player in space and means we now have scale, premium advertising sales in house software development, talent and brand expertise.

'We have de-risked the possibility of us not being a major player in the market. Whether we are going to be number one, two, three or four in the market is irrelevant. Only time will tell, but our goal is to be number one.'

The transformational nature of the two deals is revealed in a research note by the company’s broker, Cenkos.

While Rightster is still burning over £1million a month, Cenkos is predicting 2015 will be the breakthrough year, with net revenues expected to rise to £28.8million from £9million, giving pretax profit of £3.3million.

By 2016 net revenues are forecast to be £41.5million with pretax profits hitting £10.7million.

Brand funded briefs provide a benchmark for how Rightster is evolving. Pre-acquisition, it was receiving campaign worth £10,000 to £200,000. Since the deal it is now receiving briefs for £1-£3million, Muirhead revealed.

Ten months after listing it may be a little premature to start assessing Rightster’s ultimate exit from the market.

However Maker’s takeover by Disney suggests this is the fast-changing environment.

'It is a real game of musical chairs,' agrees Muirhead.

'We are just really focused to getting to profitability. The reason for that is the UK markets in particularly want to see that growth and see you self-sufficient.'