The theme of the week is “antitrust”. It didn’t start out that way, as Friday night’s leadership change at AT&T would have been the story of the week most weeks. (Though, I consider it less of a big deal than most, and that’s why it’s at the bottom of this column.) So which M&A story wins the crown?
Most Important Story of the Week – Ending the Paramount Dissent Decrees
Ending the decades old Paramount Consent Decrees isn’t simple to explain. Because it was also the core trend in regulation over the last 30 years, it took me about 1,700 words. Which I’ll put up early next week. (Just too much news this week.)
In this column, I’ll just focus on the question on everyone’s mind is what comes next. To guess at that requires answering the key trend in government regulation: will antitrust enforcement become more lax or strict over the next few years? Let’s try both scenarios.
Continued Lax Antitrust Enforcement
Starting with the likelier outcome: nothing changes. If there are any economic headwinds in January–and there probably will be!–industry leaders will tell President Biden that breaking up companies will hurt growth. (It won’t; it will hurt industry profit and those are two different things.) That will scare him from enforcing current law and thus, things stay the same.
That leaves these key facts:
– There are three big studios with lots of cash/success (Disney, Warner Bros, Universal)
– Three smaller studios with less cash (Sony, Paramount, Lionsgate)
– Lots of smaller distributors (A24, STX, Annapurna, etc)
– And the new digital titans with mountains of cash that make Smaug the dragon jealous (Netflix, Amazon, Apple, etc).
– There are only really three major theater chains: Regal, Cinemark and AMC Theaters.
If the big players with lots of money can buy a studio chain–and honestly the prices are so low in the Covid-19 economy, for some it’s a drop in their debt bucket–I think they will. Sure, theaters are a dying industry (kidding), but being able to collect all the theatrical rentals and own the entire relationship will be too big of an opportunity for at least one of these entertainment/tech giants to pass up.
Even if it isn’t a great business opportunity, when Comcast announces it is buying AMC Theaters, hypothetically, that will leave Warner Bros and Disney staring at only two remaining chains in the US. If Amazon or Apple sounds interested, then suddenly the land grab is on. If the remaining theaters get purchased by other studios, the remaining studios will be terrified their movies won’t get played. That’s their worry. Sure, Disney will probably be fine with its blockbusters, but would Paramount make that bet? Or Lionsgate?
Thus, tentatively, I think we see the theater chains get snapped up. When? That’s tougher to say, given that everyone’s cash flows are a mess right now. But once the race starts, it will end with all the theater chains under new ownership. I know I’m the outlier on this –the smart take is, “No Disney won’t buy a theater!”–but the logic feels inescapable: if there are three chains, and 10 potential buyers, they’re gonna get bought up.
In the meantime, you’ll see lots of block booking, licensing of films to theater chains and other practices previously held in check by the decrees. They were held in check because the big studios know they can extract rents from theaters with them. Since these practices benefit the bigger studios with blockbuster films, the independent distributors will definitely be hurt. Of course, the judge deciding the case said she didn’t see this happening, but judges tend to be shockingly bad predictors of future corporate behavior.
(Judge Richard Leon who approved the AT&T deal and, I believe, the Sprint/T-Mobile mergers takes the cake in this. He consistently believes that companies won’t raise prices after a merger, and then they always do! Funny how that happens.)
Renewed Strict Enforcement
On the unlikely side of the coin, potentially a President Biden and Attorney General Warren come out swinging at consolidation. In that scenario, everyone will be scared to start an M&A process. Potentially, the theaters could be candidates to get broken up! (Arguably, this would be great for the industry. With dozens of smaller theater chains, they would be more innovative and focused on their strategy.)
Moreover, an AG Warren would look at harmful vertical integration practices across the spectrum of entertainment. Everything from how licensing deals harm talent to price collusion by the entertainment conglomerates to platforms extracting rents as monopolists to, and this is is crazy, how price gouging by big tech to seize market share.
That said, I’m skeptical strict enforcement is coming. Guess what? Wall Street agrees. Which I’ll explain next week.
M&A and Antitrust Updates
Wow, what started as a quiet week in M&A news got fairly busy.
Sumner Redstone Passing Away Means More M&A around ViacomCBS
First, Sumner Redstone passing away is the end of an era, an era with old-fashioned media tycoons. He assembled his media empire by buying, buying, buying in an age that was just beginning to allow media consolidation. That’s sharp insight into the landscape. Of course, he also was described generously as a “brawler” and negatively as “thuggish”, so it’s not all a positive story for old-fashioned tycoons. He was also notoriously litigious, which again is less business acumen and more brute force.
What comes next for ViacomCBS? The scuttlebutt is something, but what we don’t know what. Both ViacomCBS finally being sold (Current market cap is around $16 billion.) is an option and so is ViacomCBS buying more (MGM? Discovery?) to then be sold to a bigger buyer. Or it holds the course as it tries to boost its stock price.
Epic Games Sues Apple for Anti-Competitive Practices
In a week that doesn’t see the end of the Paramount Consent Decrees, this is the clear number one story of the week. So important that I’ll save it for next week in case we have a slow news week. The story is that Epic Games–maker of Fortnite–is upset at having to pay Apple’s 30% pass-through tax/fee/rent on in-app purchases. So they just stopped, Apple kicked them off the app store, and now they’ve gone to court. Google then followed suit. (That last part is good news, since it means this story is far from over.)
This will have ramifications for video games, technology and entertainment. Consider Disney+: Right now, they’d have to pay Apple $9 for every $30 rental of Mulan (unless they negotiated another split). If in-app purchases go away, Disney gets to keep that for themselves.
I won’t even bother to forecast how this ends, but we’ll be paying attention.
AT&T Wants $1.5 billion for CrunchyRoll
This is a bananas story–that’s a technical term–in The Information, the outlet that seems to get all the scoops. AT&T thinks CrunchyRoll is worth 10% of all of ViacomCBS? My how things have changed.
If I were Sony, I’d point out just how low the barriers to entry are to buy anime content. Every streamer has their M&A vertical from Netflix to Amazon to Hulu. It’s just not a point of differentiation, and definitely not a $1.5 billion point of differentiation.
Data of the Week – BBC Global Audience
I’m a sucker for global data numbers, so the number of the week is BBC reaching 486.2 million folks around the globe, an increase over last year’s record of 438 million. Of course, like any number defining reach is always tricky. This seems to include folks who simply visited any BBC website over the last year, which is valuable, but not quite the same as regularly watching BBC News.
Still, the 400 million reach number is a good stand in as well for global English language total attributable market. Meaning, if you were Netflix, you could point to that as the upside scenario.
Other Contenders for Most Important Story
No College Football
This is bad news for ESPN, Fox, Fox Sports, ABC, NBC and CBS. Less live sports means less lucrative revenue for the traditional businesses. That’s a pretty simple case. And in other weeks could have been the story of the week. (Though its impact is lessened by the chance the season moves to the spring and that other sports are going full bore.) Rick Porter has the good read this week. Anthony Crupi too.
NCAA Alston Case: Supreme Court Helps College Athletes
The Supreme Court refused to allow an injunction in the Alston Case, the ruling that says NCAA players can get paid to play. While this isn’t the final word, it makes it much more likely to actually go into effect. If, of course, there are sports to be played.
Sky World News shuttering
Comcast bought Sky from Fox during the Disney merger time, and one of their big initiatives was to launch a global news service. Well, those plans are on hold.
Lots of News with No News – AT&T Friday Night Change in Leadership
Oh yeah, this happened.
Notably, this isn’t a “massacre”. Let’s save such extreme language for bigger changes. Instead, Jason Kilar is consolidating control at AT&T’s Warner-Media, with the narrative that this will allow him to focus on streaming, streaming, streaming. Let’s go best case/worst case.
Best Case: The strategy is more focused.
A good strategy is a focused one. Arguably, Kilar is eliminating his direct reports who don’t share that focus. So if you were wondering if AT&T would “burn the boats” for HBO-Max, Kilar has forced them to. A simpler org chart should help drive HBO Max growth.
Worst Case: He’s eviscerated his content side.
Not completely, he had five creative types before, he’s down to three now. Did he pick the right ones? We don’t know. (I don’t have enough data to prove it.) But none of them are guaranteed hit-pickers like a Les Moonves at his peak. The further worry is that Kilar is NOT a content guy and “content is king”. When he was at Hulu, Kilar was was more focused on the algorithm than the content, right as Netflix went all in on the content. Vessel was Quibi before Quibi was Quibi, with the same lack of detail for content.
Meanwhile, my sympathies go out to the hundreds of folks losing their jobs at Warner Media in this consolidation. That’s never good to hear.