Hollywood’s Crossroads: The Conundrum of Consolidation in a Shifting Entertainment Landscape

In an era defined by relentless competition and ever-evolving market dynamics, the entertainment industry finds itself grappling with existential questions about the future of content creation, distribution, and monetization. As 2024 dawns, Hollywood’s media conglomerates, battered by years of disruption in traditional TV and film, find themselves caught in a cycle of merger-and-acquisition (M&A) mania, seeking refuge in the notion that bigger is better. Yet, the question lingers: Is this the panacea for the industry’s deep-seated problems?

The Illusion of Bigger-is-Better

A growing realization is taking hold that the traditional M&A strategy of bulking up on content and distribution assets is no longer the cure-all it once seemed to be. The rise of streaming platforms has posed a dire and fundamental threat to Hollywood’s old ways of making money. Streaming services, the future of legacy media companies, are still hemorrhaging billions of dollars, raising concerns about their ability to deliver the kind of profits that studios once reaped from hit movies and TV shows.

“No rational business can continue to lose billions and billions of dollars,” declares a veteran media CEO, predicting a scenario where Paramount and NBCU will significantly scale back their investments in their respective streamers, Paramount+ and Peacock, regardless of whether a transformative merger takes place.

The news of informal discussions between Paramount Global and Warner Bros. Discovery (WB Discovery) has elicited a collective shrug from Wall Street and groans from insiders at both companies. The prospect of Comcast joining the fray as it considers options for NBCU has added intrigue but little excitement. Paramount Global, NBCU, and WB Discovery are all suffering from the same ailment: their once-reliable bedrocks—cable TV channels and box office receipts—are crumbling. In this scenario, it’s challenging to find a long-term rationale for merging loss-generating streamers with aging cable channels.

The Skydance Conundrum

The bigger-versus-better conundrum explains the stealth discussions between David Ellison’s Skydance Media and Paramount Global parent company National Amusements Inc. (NAI). Skydance, a smaller entity, isn’t burdened by legacy assets, but it’s unlikely to pay a premium for everything under the Paramount umbrella.

The industry’s weariness with the “media M&A merry-go-round” is palpable, especially after a series of high-profile mergers in recent years. Employees across Paramount and Warner Bros. Discovery brace for more corporate turnover and possible layoffs, barely four years after the formation of Paramount Global and two years after the WarnerMedia-Discovery merger.

The talk of M&A feels like a shell game to many, who question the logic of further consolidation when traditional entertainment giants are struggling against changing tides. They now directly compete with tech giants—Apple, Amazon, Netflix, and Google—with exponentially more resources and stronger balance sheets.

The Potential for a Transformative Deal

Despite the skepticism, some analysts believe another transformative deal between legacy Hollywood studios is possible. Jessica Reif Ehrlich, a senior media and entertainment analyst at BofA Merrill Lynch Global Research, encourages companies to explore all options, emphasizing that various combinations could yield interesting results.

Players across the spectrum have endured a challenging year, with major media conglomerates writing off billions in content costs that will never be recouped. In this landscape, every media company is “on the table at some level,” says Doug Creutz, TD Cowen senior media analyst, although he doubts a major M&A deal will materialize within the next 12 months due to a lack of buyers and the abundance of risks.

Big Tech has shown little interest in acquiring marquee Hollywood names, with Amazon’s $8.5 billion acquisition of MGM being a notable exception. Netflix, with its robust infrastructure for commissioning original content, doesn’t appear to need a studio or production company, but it could potentially pounce on bargains if the opportunity arises.

Paramount Global’s Crossroads

No media company faces a crossroads quite like Paramount Global. It derives most of its earnings from ad-supported linear TV channels, which are under immense pressure, while its broadcast network CBS faces challenges despite its strong NFL rights package. Paramount Pictures has struggled to find a balance between theatrical and streaming releases, with costly underperformers denting its bottom line.

Paramount Global’s investment in Paramount+ and its early acquisition of Pluto TV reflect its bet on streaming as a profit engine. However, the company’s stock price has plummeted, and its debt load has ballooned, putting pressure on CEO Bob Bakish and his management team to turn things around.

Disney and WB Discovery Under Scrutiny

Disney, too, is facing scrutiny. Activist investor Nelson Peltz has publicly criticized CEO Bob Iger’s moves, questioning the wisdom of Disney’s $70 billion acquisition of 21st Century Fox. Peltz argues that Disney has overspent on streaming, executive compensation is excessive, and the board of directors has been too cozy with Iger.

WB Discovery, burdened by a massive debt load, is also feeling the pain. CEO David Zaslav has assured investors that Max and HBO will break even this year, but rumors persist that the company may face pressure from activist investors pushing for strategic changes. Zaslav’s interest in Paramount Global could stem from his desire to make the company bigger and less vulnerable to a hostile takeover.

The Future of Consolidation

Speculation has also swirled around Zaslav’s courting of Paramount as a tactic to force Comcast’s hand in selling NBCUniversal to WB Discovery. This Machiavellian theory presumes that Comcast seeks an exit strategy from its ownership of NBCU. However, a knowledgeable source close to WB Discovery dismisses this rumor as “nonsense.”

WB Discovery’s improving financial situation, boosted by surprise hits like “Barbie” and “Hogwarts Legacy,” gives it some flexibility. It can afford to wait for the right price to emerge on potential acquisitions while generating healthy cash flow from its ad-supported cable channels.

The traditional media biz is ripe for consolidation, argues Kevin Westcott, Deloitte’s U.S. tech, media, and telecom leader. He predicts increased deal activity if interest rates continue to decline and the macroeconomic clouds lift.

Conclusion: Embracing Change in the Digital Age

As the entertainment industry navigates these turbulent waters, the question remains: Will bigger really be better? Or will the industry find salvation in a different path, one that embraces the changing landscape and redefines the rules of engagement in the digital age? Only time will tell.

The future of entertainment lies not just in consolidation but in innovation, adaptability, and a willingness to embrace the ever-changing preferences of audiences. The industry needs to find ways to monetize streaming while maintaining a healthy balance with traditional revenue streams. It needs to invest in original content that resonates with global audiences and leverage technology to create immersive and interactive experiences.

The entertainment industry is at a crossroads, and the choices it makes now will shape its destiny for years to come. Will it cling to the old ways of doing things, hoping that bigger is better? Or will it embrace the digital age, reimagine its business models, and find new ways to connect with audiences? The future of entertainment hangs in the balance.