Inside Rhett & Link's $10 Million Deal for Smosh

Mythical Entertainment's agreement to acquire Smosh out of the Defy Media shutdown brings together two long-running YouTube channels.

There was a period of months in mid-2013 when YouTube comedy channel Smosh was on top of the world. Run by friends Ian Hecox and Anthony Padilla, it had 9.7 million subscribers, more than any other on the streaming video site. During that time, they appeared in a video alongside fellow YouTubers Rhett McLaughlin and Link Neal, who were described as an “older, less successful Smosh.”

Nearly six years later, when Smosh was in need of a lifeline following the abrupt shutdown of parent company Defy Media, it was McLaughlin and Neal who found themselves in a position to help. On Feb. 22, the duo’s Mythical Entertainment agreed to buy Smosh in a deal that would unite two long-running YouTube channels. Through the deal, Mythical has expanded its business to over 70 million subscribers and 250 million monthly views across 14 YouTube channels.

“Ten years ago, if you’d have told me we were going to own Smosh, I would have said, ‘OK, this is a Smosh sketch,’” jokes Neal, who has been hosting the digital talk show Good Mythical Morning alongside McLaughlin since 2012.

The size of the transaction, which one source values at less than $10 million in cash, pales in comparison to the sky-high deals that occurred just a handful of years ago in the digital space as Disney and DreamWorks Animation scooped up multichannel networks Maker Studios and Awesomeness TV, respectively, at valuations in the hundreds of millions. But the deal represents an alternate path for YouTube creators to build sustainable stand-alone companies amid the crumbling of the once-popular MCN model.

“This landscape changes so quickly,” notes McLaughlin. “People get investments and then go under and hire a bunch of people and then fire a bunch of people. We see all this chaos around us since the beginning. For us we’ve just [build our business] in a very practical way, focusing on creating a great product that people get excited about and then thinking of the next logical step for launching something out of that product.”

For a time, it looked like Smosh could have been the victim of the changing digital business. After several successful years on YouTube, Hecox and Padilla sold the channel to Alloy Digital in 2011. Alloy later merged with Break Media and became Defy Media, and Padilla eventually decided to leave the company and strike out on his own. Smosh had multiple channels and some 40 million subscribers in November when Defy suddenly announced that it would shut down and lay off almost all of its staff. Hecox tweeted Nov. 6 that while Defy was shutting down, Smosh was “already in the process of finding a new home.” A video posted to the main Smosh channel Nov. 12 informed viewers that although Smosh was “homeless,” it would continue to post new videos.

Behind the scenes, Hecox was looking for a path that would allow him to keep Smosh alive. He says McLaughlin and Neal texted him around the time of the Defy shutdown offering their help, but he didn’t think much of it. A few months later, as the bank that had assumed the Defy assets was nearing a potential deal to sell Smosh, they reconnected.

“We were considering good partners in the space,” Hecox reflects. “We had no idea that Mythical was even in this kind of place when they reached out to us. What I really admire about Mythical is that it’s not owned by a large conglomerate, so they’re in complete control of the destiny of the company. For me, that’s really exciting and really assuring. It makes me a lot more excited about the future than if we were to end up in the hands of a huge conglomerate that doesn’t really know or care about an Internet brand.”

For Mythical, which had grown into a 40-person company operating out of a 17,000-square-foot studio space in Burbank without raising outside capital, the opportunity to acquire Smosh came as executives were beginning to explore the next stage of growth. “Our next phase of growth it felt like there might be a question of build versus buy, and as we thought about buying, we weren’t sure which direction we would go,” says Mythical COO Brian Flanagan. “This was an unexpected opportunity. We were pretty distressed to see Defy go down so suddenly because we knew the business well and we knew Smosh was the crown jewel.”

Adds Mythical chief creative officer Stevie Wynne Levine, “They were wildly successful despite the failures of Defy. We’re talking about a brand that was trending on a weekly basis at the top of the YouTube charts. A small number of people have been around since the beginning of YouTube but a larger number of people and brands have completely failed in that amount of time. To remain as relevant and successful as a brand like Smosh has, it’s a real testament to their creative vision.”

Under the deal, Hecox has been able to bring back around 15 original Smosh onscreen and producing talent and build up a team of around 30 that now works out of Mythical’s headquarters. He says the company is giving him “a high level of autonomy” to build its own business plan. First up was a podcast, which launched Feb. 22 with an inside look at the journey Smosh took to Mythical. Next, there are plans to beef up the programming across Smosh’s slate of channels.

“Smosh and Mythical are incredibly aligned on where we want to go in the future,” notes Hecox. “We both want to attract and foster new talent and grow our brands from within. And we both have a lot of big ideas on how to grow the revenue outside of YouTube AdSense. We couldn't have landed in a better place.”