Hollywood’s Merger Mania: Is Bigger Really Better?
As 2024 dawns, Hollywood’s media giants find themselves caught in a whirlwind of mergers and acquisitions, seeking refuge from the disruptions that have upended traditional television and film. But as the industry grapples with these challenges, a fundamental question arises: is bigger truly better?
The Allure of Consolidation
The charm of consolidation has long been a remedy for the industry’s woes, dating back to the 1990s merger between Time Inc. and Warner Communications. However, the advent of streaming platforms has posed a dire threat to Hollywood’s conventional revenue streams, rendering the old ways of making money obsolete.
The media landscape is abuzz with speculation about potential mergers and acquisitions, particularly surrounding Paramount Global, Warner Bros. Discovery, and Comcast’s NBCUniversal division. Paramount Global, under the leadership of Shari Redstone, faces a critical juncture that could trigger a domino effect of transactions.
Streaming’s Uncertain Future
The entertainment industry is undergoing a profound transformation in the way content is produced, distributed, and monetized. Streaming services, the future for legacy media companies, continue to incur substantial losses. Even if some streamers reach break-even, there is no guarantee they will deliver the kind of profits that once flowed from hit movies and TV shows.
The relentless losses have prompted industry experts to predict that Paramount and NBCU will eventually scale back their investments in their respective streaming platforms, Paramount+ and Peacock, regardless of a transformative merger.
The Paramount Conundrum
The prospect of a merger between Paramount Global, Warner Bros. Discovery, and NBCU raises concerns about combining loss-generating streamers and aging cable channels. Such a combination would lack a clear long-term rationale.
Paramount Global has also engaged in stealth discussions with David Ellison’s Skydance Media and Paramount Global’s parent company, National Amusements Inc. (NAI). Skydance, a smaller entity, is not burdened with legacy assets but may not be willing to pay a premium for Paramount’s entire portfolio.
Shari Redstone has consistently expressed openness to options that will position Paramount Pictures and its subsidiaries for long-term success in a rapidly evolving media landscape. However, industry experts caution that a merger between legacy media companies will not solve the endemic problems facing the industry.
Employee Apprehensions
The recent spate of mergers has left employees across Paramount and Warner Bros. Discovery bracing for more corporate turnover and potential layoffs. The industry rank and file question the logic of further consolidation when traditional entertainment giants are struggling against changing tides, particularly in light of competition from tech giants with exponentially more resources.
A Glimmer of Hope for Consolidation
Despite skepticism, some analysts believe another transformative deal between legacy Hollywood studios is possible. Jessica Reif Ehrlich of BofA Merrill Lynch Global Research suggests that various combinations could be intriguing, including mergers of some or all of a company’s pieces.
The past year has been challenging for media companies, leading to write-offs of content costs that will never be recouped. This has put every media company on the table for potential acquisition, although major M&A deals are unlikely in the next 12 months due to a lack of buyers and the risks involved.
Big Tech’s Disinterest
Big Tech has shown limited interest in acquiring marquee Hollywood names, except for Amazon’s acquisition of MGM. Netflix, with its established infrastructure for commissioning original content, does not appear to need a studio or production company.
Paramount Global faces a particularly critical crossroads, with the majority of its earnings derived from pressured areas of media, such as ad-supported linear TV channels. While broadcast network CBS is a stronger business, it cannot solely drive significant growth for the entire company.
Paramount’s Theatrical Struggles
Paramount Pictures has struggled to find the right balance of theatrical and made-for-streaming releases, with costly underperformers like “Transformers: Rise of the Beasts” and “Mission: Impossible — Dead Reckoning Part One.” The cooling of franchise fever further complicates matters for Paramount, which has relied heavily on derivatives of popular properties.
Streaming as a Lifeline
Paramount Global has invested heavily in its Paramount+ streamer and the ad-supported streaming platform Pluto TV, hoping they can become profit engines as linear assets decline. However, the company’s debt load has ballooned due to increased content spending, and the rising interest rates for long-term debt add to the pressure to turn things around.
Disney and Warner Bros. Discovery Under Scrutiny
Disney, under CEO Bob Iger, is also facing scrutiny from activist investor Nelson Peltz, who questions the company’s strategic direction and executive compensation. Peltz argues that Disney has overspent on streaming businesses and that its board of directors has been too cozy with Iger.
Warner Bros. Discovery, led by CEO David Zaslav, is also under pressure, with its stock price struggling to recover since the AT&T-WarnerMedia spinoff. The company carries a significant debt burden, which has become more challenging to manage in the current economic climate.
Zaslav’s Ambitions
Zaslav has assured Wall Street that Max and HBO have turned the corner on losses and will break even this year. However, there are rumors that WB Discovery may face pressure from activist investors pushing for strategic changes and management changes.
Zaslav’s interest in Paramount Global could be driven by a desire to make the company larger and less vulnerable to a lowball acquisition. Speculation also suggests that Zaslav’s courting of Paramount is a tactic to pressure Comcast CEO Brian Roberts into selling NBCUniversal to WB Discovery before Paramount Global.
A Glimmer of Hope for WB Discovery
WB Discovery’s improving financial situation, coupled with the success of “Barbie” and “Hogwarts Legacy,” has given the company some flexibility in the marketplace. However, any deal is likely to take some time to materialize.
The Road Ahead
Industry experts predict that consolidation activity will pick up if interest rates continue to decline and the broader economic outlook improves. Significant investment capital is waiting on the sidelines for opportunities.
The media industry is ripe for consolidation, but the bigger-versus-better conundrum remains. Mergers and acquisitions may offer short-term solutions, but the long-term challenges facing Hollywood require more than just combining assets. The industry needs to adapt to the changing media landscape and find new ways to engage with audiences in a rapidly evolving digital world.