Ever have a sense of deja vu? That’s one of my takes following the “massive month of M&A”.
Because weren’t we just here? If I can take you back three years, to the summer of 2018. In the age before Covid, in June, a single judge in D.C. approved the Time Warner/AT&T merger.
And we all knew what was to follow:
That’s right, the floodgates were opened for M&A in entertainment. A tsunami was coming.
And for three years, what did we get? Viacom merged with CBS, in a deal that had been in the works for years, Disney closed its merger with 21st Century Fox, and the Tribune Company was actually prevented from buying Sinclair.
A tsunami this was not.
This historical context—not to toot my own horn—is the sort of reminder you won’t find in 95% of the coverage of the “May’s Massive Month of M&A” in entertainment. Since the news broke of May’s two “mega deals”—mega being anything over $5 billion—everyone is dusting off their headlines, rewriting the same narratives, and anticipating the next merger. Not just anticipating, but mandating that more deals will come!
Have no doubt, this month of M&A is a big deal. Probably the biggest news story in entertainment since theaters closed last March. But if everyone in the trades/entertainment media draws the same conclusion, they’re more likely collectively wrong than collectively right, unfortunately. The wisdom of crowds this is not, but the herding of opinions.
Previously, I called the Warner Media-Discovery merger the most appropriate merger for the streaming wars. Yesterday, I explained why Amazon bought MGM. Today, we tackle the future:
What happens next? Is more consolidation inevitable? And if so, when?
To do so, we’ll bring back our old rhetorical friend, The Hegelian Dialectic. Because frankly I don’t know what will happen, and am not smart enough to tell you with certainty what will. (Anyone who tells you they know they future is either much smarter than me, or much more over-confident.) When I am this uncertain, explaining both sides is the best way to unpack it.
Before we get to the “thesis”, it really is worth looking at this data I pulled back in 2018, but have not since updated. Essentially, the consultancy PwC releases a report with lots of data on M&A activity in “media, entertainment and communications” every year. I pulled as many of those reports or news coverage of those reports, and tracked the trends. Here you go:
(Yes, it is time to update these charts! I’ll work on that this summer.)
Without updated numbers, my gut is that for all the headlines about “waves” of consolidation, for the most part, M&A in entertainment and communication has been fairly steady. Yes, some deals happen close in time to each other, but that’s more noise than any signal. And this isn’t even counting the “Covid Caveat” which slowed all dealmaking with the pandemic-induced recession.
As I wrote in 2018, though, this is great context. M&A doesn’t seem to have huge spikes or drop offs, except during recessions. The logic that, because Amazon bought MGM, every streamer must buy the traditional studios just doesn’t show up in the data. Still, the logic of consolidation is sound, which is where we’ll start.
Thesis: An M&A Tsunami in Entertainment is Inevitable
Besides being the consensus viewpoint—especially among M&A bankers looking to profit off it—a few factors drive this thesis.
First, the rumor mill is simply insane. There were the rumors about Comcast buying/merging with Warner Media earlier this year, and then AT&T divested Warner Media wholesale. Sony is always in rumors, and I could put Lionsgate in there too. Not to mention, I’ve heard rumors that Viacom and Comcast are in talks too. If there is a lot of M&A smoke, presumably there is some M&A fire.
Second, the size of different streamers/distributors is definitely out of whack. This chart by Bloomberg puts it into perspective fairly well:
Here’s Axios with the same thing:
When you look at this, yeah it can seem impossible to imagine that AMC Networks and Lionsgate can compete against Apple, Amazon and Google when it comes to entertainment. Given the size discrepancies, it seems inevitable the Big Tech firms will gobble up smaller studios. Why not?
Like Amazon finally buying MGM or the rumors that Apple wanted to buy Disney or Netflix or Sony. And when you see $1.5 trillion dollar behemoths buying whatever they want, yeah an MGM or an AMC Networks or a Fox even seem like chump change. As I wrote over at Whats-On-Netflix, Netflix could buy Lionsgate for less than 2% of their total market capitalization. Even Disney, the largest traditional firms by market capitalization is only 15% of Apple’s size (though more if you count debt).
Third, the logic of consolidation makes sense, when everyone else is consolidating. Those giant firms and the huge entertainment firms will simply have much more pricing power, with both suppliers and customers.
Fourth, given the difficulty in “building” content studios, it may just make sense for the new tech firms to buy traditional studios.
That’s about the strongest case I can make for a tsunami. Given the volume of rumors, the gap between the haves and have nots and the logic of size, future M&A seems inevitable, and in that rush we may get our “tsunami”.
Antithesis: There Are Two Giant Seawalls In Front of Consolidation
There are two big problems, though, with the thesis that M&A is inevitable. As I laid out in my AT&T/Discovery/Warner Media article, the state of entertainment is really about traditional firms and Big Tech firms. And each has its own potential seawall preventing the M&A tsunami.
For traditional entertainment firms, that seawall is debt. In that they all have a lot of it. And they all had a lot of it three years ago when Comcast finished buying Sky, Disney finished buying 21st Century Fox and AT&T gobbled up Warner Media. Now the new Discovery/Warner Media will inherit a lot of AT&T’s debt. Viacom has lots of debt too. Again, Axios laid this out:
This will act as a natural brake on M&A. Not preventing all of it, but definitely making deals harder to pull off.
The other side of the coin is Big Tech gobbling up entertainment studios. The seawall here is antitrust.
And this is where making predictions gets really hard. Since the 1980s, Borkian antitrust has ruled the land with its “consumer welfare” standard. Meaning, if an M&A deal touted lower prices for customers—real or not—it was approved. And the governing bodies in the US—the FTC, FCC and DoJ—never looked backwards to see if prices really did lower or even if their “consent decrees” were followed. Indeed, it was notable that the DoJ under President Trump sued to block AT&T’s Time-Warner merger mainly because Trump didn’t like CNN’s coverage of him, but he liked Rupert Murdoch’s Fox News coverage, so let through the equally consolidating Disney/Fox merger through.
If you’re simply following the trend lines, then, it seems like a good bet to that future mergers & acquisition will continue to be approved with little scrutiny or push back.
That would require, though, ignoring how the entire conversation about consolidation in industry and Big Tech has evolved over the last few years. The highlights being…
– Facebook’s Cambridge Analytica scandal tarred their reputation and privacy violations.
– The House subcommittee on antitrust released a strong report on Big Tech’s monopolization efforts.
– Facebook and Google are being sued for antitrust violations.
– Epic Games sued Apple for antitrust violations.
– Washington D.C.’s attorney general is suing Amazon for antitrust violations.
– A fierce antitrust critic, Lina Khan, was appointed to the FTC.
– New York may pass a new, updated antitrust law targeting additional enforcement.
– EU and UK looking into Amazon and Facebook too, among many other efforts.
And when Amazon announced it was buying MGM, lots of elected officials spoke out against the deal. The key is whether all these words lead to actions. Because, of course, actions speak louder than words.
That’s why future consolidation has much more downside risk than not. All it takes is one failed deal to put a chill on all future consolidation. That’s why folks predicted the AT&T deal would unleash a tsunami: if the government had won, even the Disney-Fox merger was at risk. If the DoJ can block the Amazon-MGM purchase, then you’d assume that Apple, Google and Facebook (and maybe Microsoft, who gets an exception from Big Tech conversations for some inexplicable reason) would suddenly back off any and all M&A discussions.
Would I bet on the DoJ stopping Amazon from buying MGM? Or even trying to stop Discovery/AT&T merger? No. But it is just likely enough that if it happened it would send a huge chill.
(I should mention that Netflix is “Big Tech”, kind of, but they don’t really have an antitrust problem. They have a “cash on hand” problem. They could buy lots of firms by issuing more shares, but that would dilute current shareholders and could impact their share price.)
(There is also the Big Tech break up scenario, in that the result of any of these antitrust actions could, hypothetically, lead to the government breaking up Amazon, Google, Facebook and/or Apple. That could mean Amazon spinning off AWS and Google spinning off Youtube and more. But that’s much more speculative and could take years to unfold. But would, if it happened, have unclear impacts on future M&A.)
Synthesis: The Pressures on Consolidation Will Lead to More M&A, but not a Wave
Put the thesis and antithesis together, and the conclusion feels fairly simple: M&A will continue, probably at the rate it always has.
The likeliest outcome, in other words, is that the next huge M&A deal won’t come for a while, maybe later this year or next, and probably won’t be accompanied by a deluge. And I see a few reasons for this.
First, there are always M&A talks/rumors
These big companies all have “corporate strategy” teams that have valuations on all their potential competitors and acquirers. And there are always talks of mergers and acquisitions.
Second, the logic of consolidation is sound, which is why companies will try it.
The math makes sense. The bigger you are, the more power you have over customers and suppliers. Fans of competitive and free markets may not like this, but it is true and the main driver of consolidation across industries since the 1980s.
Third, companies will be worried about the renewed antitrust, even if it hasn’t happened yet.
Failed mergers are expensive and bad for business. Ask Sinclair about that. Increased government scrutiny raises the costs of M&A considerably, and while we may question the sincerity of government regulators, it’s hard to deny that the climate has shifted considerably in the last couple of years.
Fourth, M&A still isn’t a great strategy. Great strategy is great strategy.
This was the morale of my latest articles on Netflix and M&A last month. The most notable feature of the Discovery-Warner Media-AT&T deal is that it confirms how often M&A deals go wrong. For all the logic of M&A, sometimes two companies don’t work together and everyone loses their shirts.
Conclusion: Predictions of M&A are why “narratives” are so fraught.
More than any example since MoviePass—a company widely hyped to be the future, which was not—the experience of so many folks predicting a media merger tidal wave that never came should give us oodles of pause.
As one journalist wrote, folks have been predicting that Big Tech would buy a traditional studio all through the 2010s, and we’ve only had Amazon buy MGM. Or as another cautioned: folks have confidently claimed the Apple buying Sony deal was a done deal dozens of time. And yet it hasn’t happened.
As the streaming wars move into the next phase, the number of players will definitely shrink. Does this mean some future consolidation is inevitable? Surely.
Does it mean a tsunami is going to wash out? Probably not.