The media and entertainment landscape has undergone dramatic changes in recent years, with mergers and acquisitions fundamentally reshaping the competitive dynamics of the industry. Major players like Paramount, Warner Bros., Discovery, and others are closely evaluating their strategic options amid this environment of consolidation.
Key deals include Discovery’s acquisition of WarnerMedia from AT&T completed in 2022, Amazon’s purchase of MGM Studios in 2021, and Paramount’s re-merger with CBS in 2019. This wave of consolidation has been driven by factors like the rise of streaming, the need for content and IP, competition with tech giants, and the pursuit of global scale.
As the dust settles from recent deals, studios and media companies are taking stock and considering their next moves. With content continuing to be king, some analysts predict more M&A is on the horizon as companies look to bulk up their content libraries and strengthen their positioning. This could spur new tie-ups, bidding wars and mega-deals in the months and years ahead.
Paramount’s Position
Paramount finds itself in an enviable position in the shifting media landscape. The company has seen its stock price more than double over the past two years thanks to its strong financial performance. In 2021, Paramount generated over $16 billion in revenue, which was up 13% from 2020. The company’s streaming service Paramount+ has also been a bright spot, adding 6.8 million subscribers in Q4 2021 alone to reach over 56 million global subscribers.
A key driver of Paramount’s success has been its deep library of intellectual property. Franchises like Star Trek, Transformers, and Mission: Impossible provide the company with known brands to leverage across film, TV, and streaming. Paramount also continues to invest in fresh IP, with new hits like the Sonic the Hedgehog and Quiet Place films. Expanding its IP portfolio gives Paramount coveted franchises and characters to fuel its content pipeline.
On the streaming front, Paramount has taken a differentiated approach compared to rivals. The company offers an ad-supported tier of Paramount+ at $4.99 per month, which is among the most affordable streaming options. This contrasts with competitors like Netflix and Disney+ that rely solely on higher priced ad-free subscriptions. Paramount is also bundling its streaming service with Showtime to increase the value proposition. The streaming strategy appears to be paying off, with Paramount projecting it will hit 100 million subscribers by 2024.
Warner Bros. Discovery: The Merger and Future Outlook
In spring 2022, WarnerMedia merged with Discovery to create Warner Bros. Discovery (WBD), one of the largest media companies in the world. The $43 billion mega-merger brought together WarnerMedia’s robust library of intellectual property like DC Comics and HBO with Discovery’s strong lineup of unscripted content and global sports rights.
The deal was structured as a Reverse Morris Trust, with Discovery shareholders owning 29% of the new company and AT&T shareholders receiving 71% while still holding some debt. Discovery CEO David Zaslav took over leadership of WBD.
The merger aimed to quickly bulk up content for the new streaming service debuting in summer 2022, combining offerings from Discovery+, HBO Max, and the soon-to-be-shuttered CNN+. Zaslav envisions a 3-tiered streaming approach:
- Top tier led by HBO Max with premium content
- Mid tier with big WB IP like DC films and shows
- Lower tier of largely unscripted content from Discovery
Despite streaming growth potential, WBD faces near-term headwinds due to significant debt of around $50 billion from the merger. Zaslav has already begun trimming costs through layoffs and cancellations of completed films like Batgirl. However, analysts say WBD will need to grow revenue through content licensing and streaming subscriber growth to manage debt in the long-term.
Other Major Players
While Paramount and Warner Bros Discovery may be the most active in evaluating merger and acquisition opportunities at the moment, they aren’t the only major media companies weighing their strategic options.
Disney already made waves with its acquisitions of Lucasfilm, Marvel, and 21st Century Fox. However, after digesting those massive deals, Disney appears unlikely to pursue any other major M&A in the near future. The company is instead focused on building out its streaming services like Disney+ and Hulu. Acquiring another major studio doesn’t seem to align with Disney’s current priorities.
NBCUniversal similarly bulked up with its acquisition of DreamWorks Animation in 2016. More recently, its parent company Comcast has been more focused on rolling out its Peacock streaming service and shoring up its broadband internet business. Still, if the right opportunity came along at the right price, Comcast has the balance sheet to pursue more deals.
Sony Pictures is an interesting potential buyer or seller. On one hand, Sony could look to shed its movie studio or combine it with another player. On the other hand, Sony may aim to build up its content business, especially as it invests in gaming and consumer electronics connectivity. If a smaller studio like MGM or Lionsgate comes into play, Sony could look to strategically expand its entertainment offerings.
Ultimately, all of the major media companies will evaluate opportunities carefully. But Paramount and Warner Bros Discovery seem the most motivated to explore mergers and acquisitions in the near term as they reshape their businesses around streaming. Other players like Disney, NBCUniversal and Sony have varying motivations, but less pressure to immediately seek large acquisitions.
Potential Targets
As media companies like Paramount and Warner Bros. Discovery look to expand through mergers and acquisitions, there are several potential targets that could strengthen their positions. Three companies that stand out as particularly attractive acquisition targets are Lionsgate, AMC Networks, and A+E Networks.
Lionsgate has an extensive library of film and television properties, including highly successful franchises like The Hunger Games, Twilight, Mad Men, and Orange is the New Black. Acquiring Lionsgate could provide a buyer access to these properties and allow them to capitalize on opportunities like spinoffs, reboots, and expanded licensing deals. Lionsgate also owns the Starz premium cable network.
AMC Networks operates several popular and acclaimed cable channels, including AMC, BBC America, IFC, and SundanceTV. Flagship channel AMC has seen massive success with shows like The Walking Dead, Better Call Saul, and Mad Men. Adding AMC Networks’ channels and content library could significantly boost a buyer’s portfolio.
A+E Networks owns channels like A&E, Lifetime, and History, along with stakes in Vice Media and several international channels. It produces acclaimed docuseries and dramas. A+E Networks reaches over 300 million homes worldwide, providing a buyer with global scale and reach into millions of living rooms. Its strong collection of unscripted programming could balance out a buyer’s focus on high-end scripted content.
Acquiring any of these mid-size players would allow a bigger company like Paramount or Warner Bros. Discovery to rapidly expand their content libraries, channel offerings, production capabilities, and global footprints. It remains to be seen whether regulators would approve of large mergers in the current environment, but Lionsgate, AMC Networks and A+E Networks seem primed for takeover from a strategic perspective.
Regulatory Issues
With the recent wave of media mergers, regulatory scrutiny over potential antitrust issues has increased. Both the Department of Justice (DOJ) and Federal Trade Commission (FTC) have expressed concerns about consolidation in the media industry reducing competition.
Specifically, the DOJ has highlighted its worries about the bargaining power of media conglomerates over both consumers and creators. As media companies grow larger through acquisitions, they gain more leverage in negotiations with distributors over carriage fees and licensing deals. This could enable them to demand higher prices from consumers. Similarly, combined entities have greater bargaining power over talent and creators when acquiring content.
The FTC has been vocal about examining how vertical integration between studios and streaming platforms impacts competition in the market. There are worries that owning both content production and distribution gives companies unfair advantages. They may prioritize their own content on streaming services, limit access by rivals, or use data from distribution to influence creative decisions.
As such, any major media mergers will likely get substantial review from regulators. Companies will need to make the case that deals expand consumer choice rather than limit competition. Structural and behavioral remedies may be required for approval, such as divestiture of certain assets or restrictions on business practices. Navigating the regulatory landscape will be a key consideration for media giants exploring further consolidation.
Financial Analysis
The media landscape is ripe for mergers and acquisitions as valuations of content companies have declined in recent months. Lower valuations present opportunities for large players to acquire content libraries and production capabilities at reasonable prices.
Several factors have driven down valuations of media companies:
- Lower subscriber growth forecasts for streaming services as the market saturates
- Declining advertising revenues due to macroeconomic uncertainty
- High costs of content production and marketing for streaming services
This has brought down multiples used to value media companies. For example, Netflix currently trades at a forward P/E of around 20, far below its historical average of 90+. Other streamers trade at even lower earnings multiples.
As a result, major media companies may be able find bargains among independent production companies and streaming services. With lower valuations, they can acquire content libraries and subscribers at attractive prices.
Raising financing may be more difficult in the current environment of rising interest rates and risk aversion among investors. However, major players like Paramount and Warner Bros Discovery have strong enough balance sheets to take on debt to finance deals.
Smaller targets will likely need to accept less upfront cash and more stock if they are to be acquired in this market. But with the rapid changes underway in the streaming landscape, accepting stock in a larger acquirer may give them better long-term prospects.
The depressed valuations create an opening for those with strong enough balance sheets to be opportunistic with M&A in the months ahead. Though financing deals may be harder, the lower prices could lead to transactions that strengthen the long-term positioning of major media players.
Strategic Rationale
The media landscape has seen a wave of mergers and acquisitions in recent years as companies look to build scale and amass large content libraries and intellectual property. This consolidation is driven by several key strategic factors:
Content Libraries and IP: Many companies are seeking to expand their content libraries and tap into well-known franchises and intellectual property. Owning established brands and popular IPs provides built-in audiences and allows for synergies across business lines like theatrical releases, streaming, merchandising and theme parks. For example, Disney’s acquisitions of Marvel, LucasFilm and 21st Century Fox have given it a treasure trove of IP.
Franchises: Major entertainment companies are hungry for franchises that can drive a flywheel of content across films, shows, games, products and experiences. Acquiring companies with established franchises fuels these efforts. For instance, Amazon’s purchase of MGM brought James Bond and other storied franchises into the fold.
Synergies: Consolidation enables companies to unlock synergies by leveraging IP and talent across various business segments. For example, a streaming service can draw upon acquired film and TV properties while also benefiting from theatrical distribution and physical merchandise sold under the same brands.
Data and Tech: Larger scaled entities can better leverage consumer data and technology like AI to improve content recommendations and maximize monetization. This is especially vital in streaming.
The ongoing wave of media consolidation is ultimately driven by the hunger for content, IP, scale and synergies. Companies want to amass the libraries and franchises needed to battle rivals for consumer attention and subscription dollars.
Impact on Creators
The potential for further media consolidation has significant implications for both producers and talent in the entertainment industry. As companies merge, there are concerns about decreasing competition and a reduction in the number of buyers for original content. This could limit opportunities, negotiate leverage and compensation for creators and talent.
With fewer major studios, networks and platforms in the market, there is a risk that diversity of voices and perspectives could suffer. Creators often rely on “outsider” independent studios to take chances on innovative formats, ideas or voices that established players might not. A consolidated market could make it harder for unique independent projects to find buyers and funding sources. This threatens both the business ecosystem for independents as well as the breadth of voices being amplified through major distribution channels.
On the talent side, high-profile mergers also spark fears of mass layoffs and changing corporate cultures. Merging major media companies often look to eliminate redundancies in their workforce. While executive and corporate roles are most impacted, productions and shows sometimes bear the brunt as well. Talent is left navigating new corporate bureaucracies, executives and notes processes – they may lose key advocates or supporters of their work.
Overall, many creators see the potential for further media consolidation as limiting opportunity, bargaining power and creative freedom. But some analysts argue vertical integration and pooled resources could allow streaming platforms to take bigger risks and have a greater tolerance for niche content. The full impact likely depends on unknown factors like management of merged entities and regulators’ oversight. But uncertainty prevails, as creatives watch major deals unfold that could shape the next era of the entertainment business.
Conclusion
The media landscape is ripe for further consolidation as companies look to gain scale and take on the streaming giants.
Paramount and Warner Bros Discovery have both built strong positions, but still lag far behind Netflix and Disney. With ample financial resources and strategic rationale, they are likely to pursue additional deals. Other players like Comcast may also look to bulk up.
There are ample potential targets, from mid-tier studios like MGM, Lionsgate and AMC Networks, to individual production companies and content libraries. However, regulatory scrutiny remains a potential obstacle, especially for mega-mergers between major studios.
Ultimately, more M&A seems inevitable given the pressures of streaming and the never-ending hunt for must-have content. But creators may suffer, with fewer buyers and opportunities.
For consumers, consolidation will likely mean fewer, more expensive streaming options long-term. But in the meantime, continued dealmaking promises even more iconic entertainment brands coming together. The next mega-merger that reshapes Hollywood likely isn’t far off.