Rich Greenfield, an analyst at LightShed Partners, said Paramount’s deal discussions were a reflection of the “complete and utter panic” in the industry.
“TV advertising is falling far short, cord-cutting is continuing to accelerate, sports costs are going up and the movie business is not performing,” he said. “Everything is going wrong that can go wrong. The only thing [the companies] know how to do to survive is try to merge and cut costs.”
But as the traditional media owners struggle, Netflix, the tech group that pioneered the streaming model more than a decade ago, has emerged as the winner of the battle to reshape video distribution.
“For much of the past four years, the entertainment industry spent money like drunken sailors to fight the first salvos of the streaming wars,” Michael Nathanson, an analyst MoffettNathanson, wrote in November. “Now, we are finally starting to feel the hangover and the weight of the unpaid bar bill.”
For companies that have been trying to compete with Netflix, Nathanson added, “the shakeout has begun”.
After a bumpy 2022, Netflix has set itself apart from rivals — most notably by being profitable.
Earnings for its most recent quarter soared past Wall Street’s expectations as it added 9 million new subscribers — the strongest rise since early 2020, when Covid-19 lockdowns led to a jump.
“Netflix has pulled away,” says John Martin, co-founder of Pugilist Capital and former chief executive of Turner Broadcasting. For its rivals, he said, the question is “how do you create a viable streaming service with a viable business model? Because they’re not working.”
The leading streaming services aggressively raised prices in 2023. Now, analysts, investors and executives predict consolidation could be ahead next year as some of the smaller services combine or bow out of the streaming wars.
Warner, home to HBO and the Warner Bros movie studio, has made a small profit at its US streaming services this year, in part by raising prices, aggressively culling some series and licensing others to Netflix. However, this has come at a price: Warner lost more than 2m streaming subscribers in its two most recent quarters.
The company, which merged with rival Discovery last year, has long been rumoured as a potential takeover candidate, with Comcast seen as the most likely buyer. But Zaslav in November hinted that his group wanted to be an acquirer instead of a target.
“There are a lot of...excess players in the market. So, this will give us a chance not only to fight to grow in the next year, but to have the kind of balance sheet and the kind of stability...that we could be really opportunistic over the next 12 to 24 months,” he said on an earnings call.
The terms of the Warner-Discovery merger barred the group from dealmaking for two years. That period expires on April 8.
Disney, the largest traditional media company, is in the midst of a gutting restructuring that has featured 7,000 job cuts and attacks from activist investors.
It lost more than $1.6b from its streaming businesses in the first nine months of 2023, during which its Disney+ service gained 8m subscribers. The company says it will turn a profit in streaming in late 2024.
Bob Iger, Disney chief executive, this year openly pondered whether some of its assets still fit within the company, prompting speculation that he was considering disposals. But no deals emerged, leading some investors to conclude there is little appetite among private equity or tech companies for acquiring legacy businesses.
Paramount’s shares have risen almost 40 per cent since early November as sale speculation mounted. The stock rose sharply after the Skydance talks were reported, but both Paramount and Warner shares fell after news of their discussions came to light.
Analysts said the two companies’ high debt levels were an immediate concern for investors. “We suspect investors will focus on pro forma leverage above all else,” Citi analysts wrote in a note last week. They estimated that an all-stock combination of Warner and Paramount could yield at least $1b of synergies.
But Greenfield said merging two companies with loss-making streaming services and large portfolios of declining television assets was not the answer to their problems.
“The right answer should be, let’s stop trying to be in the streaming business,” he said. “The answer is, let’s get smaller and focused and stop trying to be a huge company. Let’s dramatically shrink.”
Written by: Anna Nicolaou in New York and Christopher Grimes in Los Angeles
© Financial Times
