Yay. Mergers. My favorite topic.
Yeah, I just dropped a “not”. (What is this 1998?) Still, despite my dislike of this topic, even I can’t ignore the big news of the last few weeks.
The Most Important Story of the Week – Discovery/AT&T Merger Will Go Through
The story of the week—really say the first two weeks of February, since this article has moved to roughly bi-weekly—was that the Department of Justice (DoJ) and Federal Trade Commission (FTC) won’t move to stop the Discovery-Warner Bros. merger. And really that opens up the most important question: what will the new stock ticker be?
WBD. (Short for Warner Bros. Discovery.)
Two things on this piece of trivia. (I know, this not really news worthy.) First, I don’t think I mentioned it at the time, but I like that the “Bros” is back in Warner Bros. WarnerMedia sounded so clunky. Also Warner Bros. going before Discovery makes sense, doesn’t it?
Strategically—and you probably don’t need me to tell you this—this is good news for both Discovery and the business unit formerly known as Warner Media. They can now get past the uncertainty and start jockeying in earnest for a place in the post-merger hierarchy. (You may have noticed this already started…) As for the competitive landscape—will they dethrone Netflix? Compete with Disney?— I wrote some on that last year (here, here and here) and will write more when this deal closes.
Today, instead, I want to focus on the merger landscape, both why this merger happened and how it could influence future mergers.
To start, this deal closed. That’s no small feat when other deals have been stopped and several Senators and members of the House of Representatives asked the FTC to conduct an inquiry into this deal.
Yet that doesn’t mean this deal “opens the floodgates”. Especially when Amazon’s acquisition of MGM, announced at the same, hasn’t yet closed. (See next section.) Instead, this was an issue of prioritization for the two antitrust enforcers. Do you spend time and capital fighting a merger that could go through anyways to make arguably the third or fourth largest media company in America? Or do you fight Big Tech and mega-mergers, like in software, airlines or video games? Not to mention, the DoJ didn’t like it when AT&T bought Time-Warner in the first place! They sued to stop that deal at the time, so why not let them unwind that very deal?
But the real question everyone wants to know is, “Who will merge next?!?!?!?” Does this mean Lionsgate will get bought tomorrow? Does Comcast spin off Universal? What about Viacom? TELL ME NOW!?!?!?!?!?!?
I mean, if I had answers I would, but M&A can just be sort of random. Would anyone have bet on Discovery getting Warner Bros? I wouldn’t have. (And admitting that violates entertainment opinion maker rule #7: Always pretend you predicted every major deal ahead of time. It pairs with rule #2: Always say you heard about every deal ahead of time too.)
Comcast-Universal – Doubtful buyer or seller
Could Comcast sell Universal to the highest bidder? Before the Discovery deal, that was the Wall Street speculators’ dream. Could they still do it? Unlike AT&T, who never really had a big foothold in distribution/telecoms, Comcast does. They sell a lot of Pay-TV, even now. Toss in device capabilities and overseas Pay TV/streaming assets, and Universal means much more to Comcast than Warner Media ever did to AT&T.
Could they be a buyer? Maybe, but for the same reason the DoJ tried to stop the AT&T takeover, they could try to fight Comcast. (Especially since Comcast basically ignored the consent decrees when they bought Universal.) Like AT&T, they also loaded up on lots of debt in the 2010s. They could always buy much smaller production houses and studios, but those don’t really move the needle.
ViacomCBS – Potential seller
The key question here: To who? I still think ViacomCBS doesn’t really fit with other entertainment conglomerates. Disney and Comcast own broadcast channels, so they’d have to spinoff CBS in a merger. While regulators let WB-Discovery happen, I doubt they’d let ViacomCBS join that party. Netflix could buy it—probably should have back in the day—but joining these two entities would be culture shock of the highest order. And Shari Redstone would have to accept nearly all Netflix stock to make it happen. Plus, what would happen to Paramount+? Frankly, I think ViacomCBS is just too expensive to make a deal easy. But not impossible.
Sony-Sony Pictures – Maybe a seller
At some point, everyone assumes Sony will, at a minimum, spinoff their filmed entertainment business. It just doesn’t really fit with the Japanese device giant’s business. Then Spider-Man 3: Into the Profit-verse grosses $1.6 billion and the studios buy themselves another year. Of these candidates, this is the likeliest purchase, because it has fewer entanglements than ViacomCBS.
Lionsgate – Likely seller, wildcard buyer?
Now here is a juicy little minnow I could see the larger fish swallowing. I mean, couldn’t Netflix use a library of titles? Like the owner of Orange is the New Black? Sure they could. And at $10 billion, give or take, lots of folks could buy Lionsgate. (Why $10B, when their market cap is currently $3B? Because if Hello Sunshine and LeBron James’ production company, the SpringHill Co, are worth billions, then Lionsgate, who actually makes movies and TV shows, is worth way more.) On the flip side, Lionsgate is trying to buy STX Entertainment right now. Could they try to reverse merge with some slightly larger companies to move up the value chain? Don’t count it out.
The biggest, more important question, is the larger one facing all mergers…
M&A Updates – Does This Mean a Wave of Mergers for Entertainment? Not So Fast.
The last few months have been bad for the EntStrategyGuy’s banging of the “Hey, watch out for antitrust regulators” drum. Instead of mergers slowing, they accelerated, leading to articles about booms and peak dealmaking. Indeed, the charts do show increased dealmaking:
(Source: The Economist)
If mergers are booming, then entertainment get on the bus!
But maybe mergers are—or should I say were—booming, because everyone is worried about antitrust regulators? (On both sides of the Atlantic.) That’s why, even as Discovery’s purchase was approved, we saw…
– Lockheed Martin’s deal for Aerojet ended after antitrust scrutiny. (A $4.4 billion merger)
– Nvidia’s takeover of ARM was stopped. (A $40 billion merger)
– The DoJ will try to stop Penguin from buying Simon-Schuster.
– The DoJ will investigate the CAA/ICM Merger.
That’s a lot of stopped deals. And Hollywood is waiting for the dust to clear on the Amazon-MGM merger, which remains in investigation limbo. The EU has set a date to rule on the purchase (March 15th), but we haven’t heard from U.S. investigators in a while. While I think this particular investigation has more to do with Amazon than the entertainment industry, the longer it takes, the more it could scare off potential suitors.
So if you think mergers in entertainment will happen, the biggest wildcard, in my view, isn’t the economics or strategy of any given deal, but the likelihood that a renewed emphasis on antitrust comes for the next big entertainment merger.
Last wild card: Netflix. In an update to their Annual Report, they added a risk factor that acquisitions may impact cash flow! This could mean huge deals like Lionsgate, or even IP deals like the rights to Lord of the Rings (see below). Interesting!
Almost Most Important Story of the Week – Disney Finished 2021 On a High Note
If we have one other contender for the story of the week, it would have been Disney’s stellar earnings report. They added 11.8 million global subscribers, including 4.1 million domestic (Canada and the U.S.) subscribers, which they broke out for the first time. Together with strong theme parks revenue, and they generally beat estimates.
Some folks asked me, basically, “Why?” Or better, “How?”, as in “How did Disney add 4 million subscribers in the U.S.?”
Well, that’s a good question, but devilishly hard to answer with anything approaching certainty. When in doubt, I default to “content” as the explanation. Between two good shows (Hawkeye and The Book of Boba Fett), a buzzy show (The Beatles Get Back) and Encanto plus Shang-Chi and the Legend of the Ten Rings, they had a good-to-great run of content, especially compared to Q3, where they had no tentpole shows.
More likely, though, this was just the trend lines. The last week of the year often has a lot of folks installing new apps on smart TVs, iPhones and iPads and Disney could have benefitted from that.
Now, does this mean, “Streaming is back”? As in all the worries about streaming being a bad business are assuaged? Worries I agree with?
Uh, no. If you’re judging the future of streaming on one good or bad quarter by one company, you’re doing it wrong. I’ve been worried about the total size of the streaming market for a while now. And Disney justified those worries with their growth over the last year. Netflix justified those worries for a few years now. Plus, the fact that no one had made money in streaming yet.
So yes, Disney had a great quarter…and I’m still worried streaming may not be a good business. (Or at least not as good as theaters, DVDs and cable was in the 2000s.)
Other Contenders for Most Important Story
The Marvel Series are Leaving Netflix
Obviously, this is big for Disney+, though the series are old, so the impact isn’t that huge. (Imagine, if Disney released these series weekly as if they were brand new. How many customers would notice? In 2015, Netflix only had 43 million U.S. subscribers. So there honestly might be a larger market here than you’d guess.)
I do want to address one of the economics mistakes of the streaming wars, encapsulated by this kerfuffle. Disney admitted on its earnings call that forgoing licensing fees will “cost” them something like $200 million in direct cash. I put cost in quotes, though, because presumably the growth of Disney+ makes up for that. Right? Or why else would they do it? Really, the upfront cost is “opportunity cost” of pursuing their own streamer.
What’s funny is that opportunity cost is pretty basic principle of economics. Presumably every stock analyst out there understands it, right? And yet, I never read folks worrying about Netflix forgoing licensing revenue.
That’s right, Netflix is forgoing licensing revenue! Costing them hundreds of millions per year!
The bias of some journalists/analysts for Netflix/tech blinds them to this hypocrisy. If you think it’s smart for Netflix to own exclusive content it doesn’t license to anyone, then presumably its smart for Disney to do the same. The opportunity costs are the same.
Indian Premiere League (Cricket) Has Its Rights Up For Sale
This came up on Disney’s earnings call as well, and it’s a big risk. Their Indian streamer Hotstar currently has the top cricket rights in India…rights that are up for sale. With Amazon, Netflix and others competing fiercely in India, where these rights end up could be huge in that market.
Lots of News with No News – Movie Pass is Back!
Cheers to MoviePass for inspiring all-you-can-eat subscriptions run by theaters. Jeers to them for funding such a cash-incinerating model themselves. The news is that MoviePass has new life, with a new model, but I’m as bearish as before.