Hollywood’s Merger Mania: Is Bigger Really Better?
The entertainment industry, particularly Hollywood’s media conglomerates, is in a state of flux. The rise of streaming platforms like Netflix, Amazon Prime Video, and Disney+ has posed a significant challenge to traditional TV and film revenue streams. This has led to a flurry of merger and acquisition (M&A) activity, as legacy media companies seek to consolidate and compete in the rapidly changing landscape. But the question remains: is getting bigger really the answer to the industry’s problems?
The End of the Dealmaking Era?
Many believe that the era of dealmaking to solve the industry’s problems is coming to an end. The threat posed by streaming platforms is too fundamental, and the streaming services that represent the future are still racking up billions of dollars in losses. Even if some of these services reach break-even, there’s no guarantee they will deliver the profits that studios once generated from hit movies and TV shows.
The Paramount Crossroads
Paramount Global, in particular, is at a crossroads. The company faces financial strain due to losses incurred by its streaming service, Paramount+, and a weak advertising climate. This has led to speculation about a potential sale or merger. However, a merger with another legacy media company, such as Warner Bros. Discovery or NBCUniversal, may not solve the underlying problems facing the industry.
The Skydance Discussions
Discussions between Paramount Global parent company National Amusements Inc. (NAI) and Skydance Media have also surfaced. Skydance, a smaller entity, is not burdened by legacy assets, but it’s unlikely to pay a premium for Paramount’s entire portfolio.
The Problem with Bigger-Versus-Better
The bigger-versus-better conundrum is evident in the industry’s struggles. Legacy media companies are grappling with shrinking cable TV channels and box office receipts, and a merger between them would simply combine loss-generating streamers and aging cable channels.
The Media M&A Merry-Go-Round
The recent wave of M&A activity, including AT&T and Time Warner, Disney and 21st Century Fox, Viacom and CBS, and WarnerMedia and Discovery, has left employees bracing for more corporate turnover and layoffs. The rapid pace of rumors has created a sense of uncertainty and skepticism among industry insiders.
The Need for New Strategies
Simply merging legacy media companies won’t solve the industry’s endemic problems. A merger may improve cost structure, but it won’t help companies enter fast-growing markets. The real challenge lies in adapting to the changing media landscape and exploring new revenue streams.
The Financial Landscape
The financial strain on legacy media companies is evident in the billions of dollars written off in content costs over the past 18 months. This has led to a cautious approach to M&A, with analysts believing that a major deal is unlikely in the next 12 months. Big Tech companies have also shown limited interest in acquiring Hollywood studios.
Paramount’s Crossroads
Paramount Global faces particular challenges due to its reliance on ad-supported linear TV channels and the struggles of its film division, Paramount Pictures. The company’s debt load has also ballooned, putting pressure on CEO Bob Bakish and non-executive chair Shari Redstone to address the situation.
Disney’s Scrutiny
Disney, too, has faced scrutiny from activist investor Nelson Peltz, who questions the company’s streaming strategy, executive compensation, and board composition. Peltz’s campaign highlights the challenges facing legacy media companies in the face of changing consumer behavior and the rise of streaming.
Warner Bros. Discovery’s Debt Burden
Warner Bros. Discovery, formed from the merger of AT&T’s WarnerMedia and Discovery, is also grappling with a massive debt load. CEO David Zaslav has assured investors that losses on Max and HBO are turning around, but the company may still face pressure from activist investors.
The Speculation Game
Rumors of Zaslav’s interest in Paramount Global and NBCUniversal have emerged, with some suggesting it’s a strategy to force Comcast, NBCUniversal’s parent company, to sell. However, WB Discovery’s improving financial situation gives it some flexibility in pursuing potential acquisitions.
The Future of Consolidation
Despite the challenges, the traditional media biz is still ripe for consolidation, according to Kevin Westcott, Deloitte’s U.S. tech, media, and telecom leader. He predicts increased deal activity if interest rates decline and the macroeconomic outlook improves. Investors are waiting for the right opportunities to emerge.
Conclusion
The media industry is at a crossroads, with legacy companies facing significant challenges from streaming platforms. While mergers and acquisitions may seem like a quick fix, they may not address the underlying problems. The focus should be on adapting to the changing landscape, exploring new revenue streams, and embracing innovative strategies to survive and thrive in the digital age.