Hollywood’s Merger Mania: A Critical Examination

The Illusion of Scale in a Streaming-Dominated Era

The entertainment industry is undergoing a seismic shift, propelled by the meteoric rise of streaming platforms and the subsequent disruption of traditional revenue streams. In response, legacy media conglomerates are resorting to a familiar strategy: merger and acquisition (M&A) transactions. However, this knee-jerk reaction fails to address the fundamental challenges posed by the streaming revolution.

The belief that “bigger is better” has long been a guiding principle for Hollywood studios. By acquiring rivals, companies aim to consolidate content and distribution assets, thereby gaining a competitive edge in the market. However, the streaming era has fundamentally altered the rules of the game.

Streaming services, with their vast libraries of content and global reach, have upended the traditional distribution model. This has led to a decline in revenue from traditional sources such as cable TV subscriptions and box office receipts. As a result, the industry is grappling with a new reality where scale alone is no longer a guarantee of success.

The Perils of Legacy Assets in a Digital Age

The legacy assets that once formed the bedrock of Hollywood’s success are now becoming liabilities. Cable TV channels, once a cash cow for media companies, are facing a steady decline in viewership as consumers migrate to streaming platforms. Similarly, the theatrical release model for films is under threat from the convenience and affordability of streaming.

The combination of declining revenues from traditional sources and the high costs associated with producing original content for streaming services has created a perfect storm for the industry. Streaming services are still racking up billions of dollars in losses, and there is no clear path to profitability in sight.

In this scenario, merging loss-generating streamers and aging cable channels, as would be the case for any combination among Paramount Global, WB Discovery, and NBCU, seems like a recipe for disaster. It is akin to throwing good money after bad, further exacerbating the financial woes of the companies involved.

A Deeper Dive into Paramount Global’s Crossroads

Paramount Global, in particular, finds itself at a critical juncture. The company’s earnings are heavily reliant on ad-supported linear TV channels, which are facing increasing pressure from streaming services. Its broadcast network, CBS, is a relatively strong performer, but it cannot single-handedly drive the company’s growth.

Paramount Pictures, the company’s film studio, has also struggled to find consistent success. While it has had some hits, such as “Top Gun: Maverick,” these are few and far between. The franchise fever that has dominated Hollywood in recent years is also cooling off, which is bad news for Paramount, which has heavily relied on derivatives of popular properties.

The company’s investment in its streaming service, Paramount+, and its acquisition of Pluto TV were seen as strategic moves to adapt to the changing media landscape. However, these ventures are yet to yield significant profits. Paramount+’s subscriber growth has been modest, and Pluto TV’s ad-supported model faces challenges in generating meaningful revenue.

The Looming Threat of Activist Investors

The financial struggles of Paramount Global and other legacy media companies have attracted the attention of activist investors. These investors, who own significant stakes in companies, often push for changes in strategy and management to improve shareholder value.

Nelson Peltz’s recent campaign against Disney is a case in point. Peltz, who owns about $3 billion worth of Disney stock, has criticized the company’s spending on streaming businesses, executive compensation, and board composition. He is pushing for strategic shifts and the installation of new board members.

Similar pressures could soon be brought to bear on Paramount Global and WB Discovery. Activist investors may see an opportunity to force changes that could potentially unlock value for shareholders.

The Role of Tech Giants and the Future of Hollywood

In the face of these challenges, some analysts believe that Hollywood’s salvation may lie in partnerships with tech giants such as Apple, Amazon, Netflix, and Google. These companies have exponentially more resources and stronger balance sheets than traditional media companies.

However, Big Tech has shown limited interest in acquiring marquee Hollywood names. Netflix, in particular, seems content with its current strategy of commissioning original content from producers around the world. Amazon’s acquisition of MGM was a relatively small deal, and it remains to be seen whether the company will make any further major purchases in the entertainment space.

The Need for a New Paradigm

The traditional media industry is in dire need of a new paradigm, one that embraces the realities of the streaming era and finds innovative ways to monetize content in a digital world. Mergers and acquisitions, while tempting, are not a panacea. They may provide a short-term boost, but they do not address the underlying problems facing the industry.

Instead of doubling down on legacy assets and engaging in a futile game of scale, Hollywood studios need to focus on creating compelling content that resonates with audiences, developing sustainable business models for streaming services, and finding new ways to generate revenue in the digital age.

The industry needs to embrace innovation and experimentation, learning from the success of streaming pioneers like Netflix and Disney+. It needs to explore new distribution models, such as hybrid releases that combine theatrical and streaming premieres, and find ways to monetize content through advertising, subscription fees, and merchandise.

Conclusion

The Hollywood merger mania of recent years is a symptom of an industry in crisis. The rise of streaming has fundamentally changed the rules of the game, and legacy media companies are struggling to adapt. Merging with rivals may provide a temporary respite, but it does not address the underlying challenges.

The industry needs to embrace a new paradigm, one that focuses on creating compelling content, developing sustainable business models for streaming services, and finding new ways to generate revenue in the digital age. Only then can it hope to thrive in the face of the streaming revolution.