The addition of MGM is aimed at keeping Amazon's Prime Video competitive against Netflix and Disney+, which are spending billions to dominate the streaming wars. It remains to be seen if the price being discussed includes MGM's US$1.8b of net debt. Either way, the deal would not be cheap. Amazon would be paying the equivalent of 31 times last year's ebitda for MGM, according to data from Capital IQ.
For this price, Amazon will not even have full control over the James Bond franchise. 007 is arguably the crown jewel in MGM, having generated tens of billions of dollars in ticket and merchandise sales. But MGM owns only half of it. The remaining 50 per cent is held by Barbara Broccoli and her brother, Michael G. Wilson.
Still, scarcity drives up value. MGM — along with Lionsgate — is one of the few large standalone studios left. Disney acquired 21st Century Fox. Paramount is owned by ViacomCBS and Universal Pictures is controlled by Comcast. AT&T, meanwhile, is spinning off WarnerMedia and combining it with Discovery.
Amazon does have the benefit of sitting on a mountain of cash. It raised US$18.5b on the bond market just last week. The company took in US$386b in revenue last year and generated US$31b in free cash flow. The latter is projected to more than double to US$74b by 2023.
The economics of buying MGM also makes more sense if you consider how Amazon's entertainment strategy has evolved. Although Amazon Video already has 200m subscribers, having a steady supply of must-see content is now seen in the industry as the key to subscriber retention. Amazon spent US$11b on video and music content in 2020 — including a reported US$80 million for Borat 2 and US$125m for Coming 2 America.
Paying US$9b for 4,000 films works out at just US$2.25m a film, with thousands of hours of TV and a cable channel thrown in. It is an incremental investment that Amazon can afford to absorb.
- Lex is a premium daily commentary service from the Financial Times.
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