May was truly “media merger madness month”.
On May 17th, Discovery announced they were merging with Warner Media. (I was on vacation.) On May 26th, Amazon announced they were buying MGM. (Then it was Memorial Day weekend.) Then last week I had a consulting gig I couldn’t say no to. (And I had a trip to the Happiest Place on Earth.)
In short, we had two insanely big stories in media and entertainment, and I’ve only written about them once.
This doesn’t mean I’ve forgotten the “May of M&A”, a month which will set the tone for the streaming wars in the decade to come. Taken together, these two mergers are clearly the biggest story since Covid-19 shuttered theaters.
And I have a plan to catch up. Two weeks back, I explained the context for these mergers. Today we’ll tackle why Amazon bought MGM. Tomorrow I’ll analyze if more M&A is coming en entertainment. Then, in future articles, I’ll analyze who won or lost, the ramifications of these deals, and other odds and ends.
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Most Important Story of the Week – 28 May 21: Why Is Amazon Buying MGM?
Let’s start the “Many Musings on May’s Media M&A” with a simple question:
Why Did Amazon Buy MGM?
I’ve only just started reading all the takes out there, but so far I’m a pinch dissatisfied with the narrative. Not that this is the first time the “entertainment business narrative” machine has let me down. It can be hard to come up with unique takes, so just repeat what everyone else is saying. You don’t get fired for reiterating the conventional wisdom.
Unfortunately, the conventional wisdom loves simplifying complex rationales down to “one big idea”. Unfortunately no complex decision is driven by one overriding reason. Especially when many, many people are involved.
So I’ll give you the reasons I think Amazon is buying MGM. Some you’ve definitely heard, some you may have missed, and one you definitely haven’t.
The Simple Reason: Amazon Wanted the IP and Library
MGM has brands like Robocop, Rocky and Lara Croft: Tomb Raider that it owns outright. It has shows like Vikings and The Handmaid’s Tale that it either owns and will control a few years after they go off the air. And it has rights to James Bond, subject to the agreement of the Eon Company, which owns James Bond. (As for reality TV through their Mark Burnett deal? It’s complicated.)
While Amazon Studios has done okay over the last five or six years, the number of huge IP hits it has spawned is minimal. Further, of its two biggest hits—either Jack Ryan or The Boys—it doesn’t control the IP. Those shows are co-productions with studios like Paramount or Sony. Meaning at some point, Amazon is paying for other folks to build their IP. Owning MGM solves that problem.
(I’d note that both head of Prime Video Mike Hopkins and Amazon CEO-for-now Jeff Bezos both said IP was the reason for this deal.)
This deal also expands Amazon’s film and TV library by thousands of titles. While Amazon spent heavily in the last decade to make new shows and films, Amazon still doesn’t truly own a lot of library titles. In feature films in particular, Amazon doesn’t really own a lot of big budget films and shows. Amazon Studios has mainly invested in prestige/independent—which means smaller and less popular—awards contenders. Big budget blockbusters are much more valuable than those. MGM has a few of those.
MGM also has some additional production companies, studio lots and other assets (such as Epix, the premium film channel/subscription) that Amazon could either utilize or rebrand. So the simple reason is that IP is valuable and so are film and TV libraries.
(As for whether these are good investments (i.e. meaning worth the cost) I’ll tackle that in a future article.)
The Cliched Reason: Amazon Wants to Sell More Socks
After IP, the other go-to narrative for why Amazon bought MGM was that Amazon wants to “sell you more socks”. But…don’t we all already know that? Isn’t that what Prime Video and Amazon Studios were doing anyways? I feel like I’ve written about that for years.
To make this slightly more charitable, the argument is that because Amazon has a complex business model—they sell more Prime subscriptions because of Prime Video, and those Prime members buy more stuff on Amazon—they can extract more value from MGM then MGM could extract by selling films and shows to other streamers.
A variation on this argument is also that because Amazon is so confused about how it distributes video—er, diversified, if you’re an Amazon fan—it can choose to monetize MGM in all sorts of ways from Prime Video to IMDb TV to selling via Amazon to even Twitch!
Both of these reasons strike me as more aspirational than real, but I do think the heads at Amazon believe in it. My gut is that Amazon simply loses money on their complex model and many of the distribution channels. Having too many distribution methods means Amazon isn’t focused on any actually working. Unlike Netflix, who is super focused on streaming and crushes Amazon in engagement, Amazon’s attention is split in all these ways. If they succeed in anyway, its because giving away free (or heavily discounted/subsidized) stuff is easy to do.
The Financial Reason: MGM Desperately Wanted to Sell Itself
Desperately might be too strong, but it is clear that MGM’s owners—particularly the hedge funds—were ready to sell the distressed asset they had bought in 2010.
This stands in contrast to most of the other smaller studios generally bandied about as potential acquisition targets. They are either publicly owned or have ownership teams that would want a significant pay out to let their asset go. (That’s my take especially for Lionsgate. If MGM went for $8.5 billion, I bet the Lionsgate folks think they can get twice that. And they’ll wait it out.)
Don’t underestimate how much having a willing seller can ease making a deal.
The Insane Reason: [I Won’t Even Write It]
I’ll let Stephen Colbert explain and let your unverified and probably not accurate fever dreams take hold…
The Complicated Reason: Amazon Is Disappointed in Amazon Studios
When you look at most of the reasoning above, you don’t find a ton of compelling reasons for why Amazon had to buy MGM as opposed simply investing more in Amazon Studios. The Financial Reason explains why Amazon Studios sought out MGM specifically, but they don’t explain why they felt like they needed to bring a new studio in house when they had been building one since 2010. (That date is according to Wikipedia. It’s tough to pin down when it actually started.)
Indeed, that’s the most striking thing about this deal. After James Bond, the IP is mostly a bundle of “meh” that surely a lot of smaller deals could have handled.
There has to be a better explanation.
This leads me to a complicated reason, but honestly the one that explains why Amazon would pay such a premium for mostly meh IP and a disappointing film library. Since 2017, Amazon Studios has gone through a series of executive changes. It hired Jen Salke to replace Roy Price. But then it hired Mike Hopkins last year to oversee Prime Video and Amazon Studios, in a seeming demotion of Salke. (And it was recently leaked that Prime Video had gone after Jason Kilar instead of Hopkins.)
Then just two weeks before the MGM deal, in a quiet move, it was announced that Jeff Blackburn would come back to Amazon to oversee all entertainment and media, including Twitch, Prime Video, Amazon Channels, Amazon Music, video games, Audible, you name it. In other words, Jeff Blackburn is now the “Jason Kilar” of everything in Amazon involving entertainment.
Now here is where the tea leaves get interesting. According to the coverage of Blackburn I’ve read, Blackburn used to be Bezos’ deal architect. The corporate strategy guy. The guy who orchestrated the Twitch and Whole Foods mergers. Basically any deals Amazon did.
So two weeks before Amazon closes the MGM deal, they hire a new head of all entertainment and media. And he says to buy MGM?
Despite all of Amazon’s praise and selected at a point, you have to wonder if Amazon is overall disappointed in Prime Video. For all their touted success, in the last two years they’ve watched Disney+ zoom past them in cultural resonance (and likely subscribers) and they’ve never gotten close to Netflix. And it is only getting more competitive with HBO Max, Discovery+ and Peacock. Sure Prime Video has had hits here and there—The Boys, Them, we’ll see about Underground Railroad—but their film hits are all acquired titles: Borat 2 and Coming 2 America.
Honestly, I wonder if this an entertainment version of an old technology practice of “acqui-hiring”. Maybe Bezos, Andrew Jassy and Blackburn on some level think that if they buy all of MGM, maybe they’ll find a lot of new development talent. Sure, the MGM of today is a far cry from the MGM of the 1930s or even 1970s. But it is a full-fledged production house. Mark Burnett’s hit rate is really strong (though he has tons of other issues). You have to wonder if Bezos sees James Bond films making billions and wonders, “Why can’t my studio do that?”
This is the type of explanation a studio would never say on the record. And if it were true, you’d only hear Amazon executives admit it off the record after being plied with a lot of drinks. But it makes a lot more sense to me than “IP, IP, IP”. Whenever you have a company—or business unit in this case—constantly shuffling and reshuffling leadership, it doesn’t mean things are working. The MGM acquisition may be the biggest reshuffle yet.
In other words, folks are right that Amazon’s plan is make money off MGM because of reboots.
But the biggest reboot could be Amazon Studios.