Paramount Wins(?): The Good, The Bad and The Ugly

(Welcome to the “Most Important Story of the Week”, my bi-weekly strategy column analyzing the most important (but often not buzziest) news story of the last two weeks. I’m the Entertainment Strategy Guy, a former streaming executive who now analyzes business strategy in the entertainment industry. Please subscribe.)

For me, the most important story of the week is that Nielsen accelerated their release of streaming viewership ratings by two weeks. That means my weekly Streaming Ratings Report will come out much closer to when streaming shows, films, shorts and specials (dare I say…content?) actually debut. That’s going to make that already valuable report even more valuable (and timely).

But I get it. You’re thinking about another major news story, aren’t you?

Depending on your inclination—and you should know mine—this was either good or bad news that Paramount Skydance settled with the state Attorneys General. If you’re on the side opposing the merger, you should dislike this settlement, but if you wanted to see it go through, then you’ll cheer it. (All the folks predicting the industry will consolidate to just four or five players are obviously ecstatic.)

Instead of looking at whether the deal is good or bad in terms of society, I’m going to analyze the strategic impact of Paramount Skydance buying all of Warner Bros. Discovery. (I’m calling the new company PSWbD today.) That’s what the “strategy” guy should be all about, right? And combining this many assets into one entity—even if it has a few consent decrees it agreed to—will have a big impact. So I’ll trot out a version of one of my favorite business tools—the POCD framework—focusing on the opportunities that merging these two companies offers.

So let’s discuss it, with one big article devoted to this huge topic.

Most Important Story of the Week – Paramount Settles with the State AGs

If I had to make a “Mount Rushmore”—meaning top four list—of article set-ups/framing devices that I (and frankly other entertainment journalists) rely on, I’d have it as…

Nobody Knows Anything

A Tale of Two…

The End of… (or Death of…)

The last one would be “The Good, the Bad and the Ugly” (tGtBtU). And yeah, that’s what I’m doing today! I’ll be using an actual business framework, the venture capital POCD framework, which stands for “people, opportunity, context and deal”, which I just love as an analysis tool. Today, I’m looking at the opportunities and weighing the upside via the good and bad.

The great thing about a tGtBtU set-up is that it allows you to basically demean something twice, since most articles just make the “ugly” something really, really bad. In this case, I’m going to have two uses for “ugliness”:

• The way the deal went down and…
• …the debt accrued by the deal.

No matter how good the opportunity is, the “deal” determines what it actually costs, and that can often turn a great opportunity into a boondoggle. In this case, that would be the crushing debt load. It is ugly. (But I’ll be diving into that next issue.)

In this article, I’m going to review where this new entity will actually lead the market and where it will still follow across eight areas that basically encompass entertainment:

Broadcast

Cable

Premium Cable

Streaming

Theatrical

Kids

Sports

IP

Plus, I’d add the related lines of business that supplement entertainment’s core business, like experiential (theme parks), video games/interactive, and media/publishing and consumer products. (Dare I call these a “flywheel”? No! Because that word is horrifically used and abused.) I’ll also see if this new super-large entertainment conglomerate will have any upside there too.

So let’s start with the good!

The Good

Let’s start with this question: what does it mean to be “good” for this “good, bad and ugly” set-up? On the one hand, consolidating assets will lead to more market power almost by definition. If you have two different cable channels and combine their operations, they’ll have more negotiating power with buyers and suppliers by default.

(What’s that, you say? The agreement mandates that those two entities negotiate separately? Sure, on paper that limits the power, but we live in the real world and so we all understand how that will work—meaning, of course, not work—in practice.)

For me, this means the new company’s strengths, and the easiest definition for that is as a “market leader”. Call it a top three company in a given business or business unit. Of the eight entertainment categories above, I think the new PSWbD will have a strength in five of them.

Broadcast TV

In this case, CBS wins almost by default. I could find any number of ways to visualize this, but let’s just use share of the Nielsen top 25 lists:

I could have picked almost any year from the last 26 and it would have shown a similar result. So yes, PSWbD will have a strength in broadcast TV. Even as this distribution method shrinks, it will still throw off cash. And it still reaches a ton of people. If I ran this new company, I’d dual and triple-cast everything.

Plus, as a bonus, a lot of very famous CBS shows were actually made by Warner Bros., and they’ll now live under the same corporate entity.

(Listen, if this consolidation/control gives you the ick, I agree. Having lots of buyers and sellers benefits workers, and the advantage I’m describing here is the opposite of that. So I won’t repeat that in the text throughout, lest it feel repetitive, but I agree with you!)

Cable Channels

This category is a bit of a pyrrhic victory for PSWbD, but they will be a clear leader in the remaining cable universe between their slew of cable channels. Disney and Fox are tied for first; Disney has ESPN, and Fox has Fox News. But Paramount Skydance Warner Bros. Discovery passes Versant with this merger. They’ll control something like 50 cable channels.

In cable, the negotiating power will drive most of the value. Frankly, they’ll have more channels and, as long as those channels have some viewership or value, they’ll extract that benefit. And yeah, owning CBS helps with those negotiations. (I know I just had a footnote that I wouldn’t mention repeatedly when this shrinks the market, but “negotiating power” is really “market power” driven by consolidation.)

Theatrically-Released Films

Just like how owning CBS makes PSWbD a market leader in broadcast television, just by owning Warner Bros., PSWbD becomes a market leader at the box office. No matter how you cut it, Warner Bros. is usually a top three movie studio, so having Paramount Pictures supplement even a little bit will make this new entity clearly a top three distributor in theatrical film distribution.

Though, again, most of the value comes from Warner Bros. Here are the top films of the last four years by movie studio:

See, that’s a lot of Warner Bros; not a lot of Paramount.

Skydance Animation does provide PSWbD some additional upside, though. They recently left their deal with Netflix (which would have been the story of the week, and may be next issue) and if they shift to theatrically releasing their films, they might actually build a valuable new tentpole with kids content.

I should address the elephant in the room, though, which is that I doubt the PSWbD actually distributes thirty full-fledged movies per year. The whole word “distribution” leaves a ton of wiggle room for how many theaters movies debut in to how much it actually costs. I’m sure the AGs tried to negotiate it very carefully, but yeah, it’s tough.

Sports

This new company will control a lot of football, both NFL and college, a lot of college basketball (including uniting March Madness games in one place), the NHL, some MLB and, of course, UFC. They paid too much for that last one, but still you can’t say they don’t have a lot of sports in one place. Plus, as an added benefit, they managed to avoid one of the worst sports deals, the uber-expensive NBA media rights deal that so far isn’t delivering big ratings for the new buyers.

That all said, sports media rights aren’t really a durable advantage, given that they have to be renegotiated every so often. And right now, the worry is the NFL believes that they’re undervalued. New mergers give them the opportunity to renegotiate, so we’ll see if we see that here.

IP

Sometimes, it’s just easiest to list all the brands someone controls. And the new entity here will control1 a lot:

WB: Harry Potter, DC, Game of Thrones, Friends, The Big Bang Theory, Looney Tunes, the WB library

Discovery: Discovery Channel, Food Network, HGTV and the library content

Paramount: Star Trek, GI Joe, Mission: Impossible, Top Gun, Sonic the Hedgehog, Teenage Mutant Ninja Turtles, Nickelodeon, SpongeBob SquarePants, the CBS/Paramount TV library

Skydance: Jack Ryan, co-production on a number of Paramount films

And that’s honestly just touching the surface. Regardless, this new company controls a ton of IP. Yes, some folks dislike non-originals, but when it comes to making money, IP keeps winning.

Other Lines of Business: Media/Publishing and Consumer Products

Given how many brands they control, I do think we’ll see some strength in consumer products in this new entity. Though, as I often try to remind folks, that can mean very low single-digit billions in revenue. Disney is the unmatched leader in merchandise and even they only make a few billion per quarter. Indeed, Paramount doesn’t control some of their film and TV properties’ merchandise rights. (Like Paw Patrol.)

CBS also has some publishing assets, though notably they divested Simon and Schuster (in a merger that was blocked at trial), a move I disliked.

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The Bad

Let’s just keep going, listing the various business units that I think even the combined Paramount Skydance Warner Bros. Discovery won’t be a market leader.

We’re just getting started with this issue, but the rest is for paid subscribers of the Entertainment Strategy Guy, so if you’d like to find out…