Monday AM Briefing: Imagining Paramount Global's Future Post-Skydance Acquisition
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The drums are beating louder for Paramount Global to be the first legacy media conglomerate to bow out of the shift from wholesale to retail (and before April 2024). Ben Mullin of The New York Times yesterday confirmed recent rumors that Shari Redstone, President of National Amusements, “has held talks with Skydance, the media and entertainment company founded by David Ellison.” The news emerged almost a month after Liberty Media Chairman John Malone predicted “we’re going to see very serious distress in our industry by companies that didn’t leverage prudently”, and offered Paramount Global and cable network Altice as examples.
A research analyst asked me last month, “What is Shari thinking?” I think the answer is clear: The reasons for a potential sale, now, are that “a serious suitor has expressed interest” and National Amusements and Paramount are “facing some economic pressures” like the debt challenges Malone outlined. Both advertisers and creditors (who lowered Paramount’s credit rating from BBB to BBB-) are telling her that her “mountain of entertainment” strategy—a bet that CBS and Viacom assets would be more valuable than the assets being split up—has failed. There is also “an unreliable advertising market” for linear channels and the uncertain future of the theatrical distribution (National Amusements owns over 1,500 cinema theaters throughout the United States, the United Kingdom, and Latin America).
Redstone's ownership of both National Amusements and Paramount Global has reached a crossroads, and her options are now limited. The safe bet is that Skydance—one of the leading independent studios in Hollywood— is interested in owning Paramount Studios and its library of IP and franchises (“Mission Impossible”, “Indiana Jones”, “Teenage Mutant Ninja Turtles”). The least likely bet is that it is also interested in pivoting into the cable networks business and/or the streaming business. Private equity ownership of the cable networks business seems inevitable. The thorniest question is what will happen to the streaming business.
Key Takeaway
After a sale, Skydance may become an “arms dealer” for Paramount’s library. Private equity may buy and “arms dealers” for Paramount's linear cable channels and their libraries, as a growth model for additional cash. Everyone seems incentivized to shut down Paramount+.
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Potential Deal Terms
The most notable detail is that Skydance would not be buying Paramount Global but rather National Amusements, which directly or indirectly owns about 77.4% of Paramount’s voting class A common stock and 5.2% of the Class B common stock, constituting about 10% of the overall equity of the company or $1.1 billion of its $11 billion market capitalization.
This move is an end-around buying Paramount Global. Skydance can offer a multiple on this ownership stake in Paramount Global that, even at 10X, would be around 40% of Paramount’s current enterprise value of around $25 billion. The challenge will lie in dismantling the business.
As I wrote in “The Agony (of Debt) & The Synergies”, the objectives of managing a linear business in distress and growing a direct-to-consumer (DTC) model are contradictory. Paramount’s cable channels are now “more private equity-type businesses, ruthlessly cutting costs while riding out steadily declining reliable revenues from bundles of affiliate distribution fees from cable companies.” Whereas, growth in the DTC model requires “both a consumer first, retail first relationship with the consumer and the resources and abilities to evolve that relationship in real time.”
That would suggest a second safe bet would be for the channels to be sold to private equity firms. Two of Skydance’s biggest investors are KKR and Redbird Capital, both of whom participated in a $400 million strategic investment round in October 2022. That seems like a reasonable outcome for all parties and a reasonable return on their strategic investment. And, if that does not happen for some reason—unlikely, but never can be ruled out—the cable networks will still remain appealing to the likes of Warner Bros. Discovery or Comcast. In the last case, there would be regulatory issues with Paramount's CBS—U.S. regulators are unlikely to allow one company to own two broadcast networks—though John Malone argued regulators may ultimately offer “regulatory relief” to ease consolidation.
Paramount+’s Thorny Future
If the streaming business has no value to Skydance nor to KKR or Redbird Capital, then what would happen?
Paramount+ has 61 million subscribers as of Q3 2023. But, they have reached that out in large part by relying on “hard bundles" worldwide. Those exist when a streamer works with a local provider to give their customers immediate access to a streaming service as well as direct-to-consumer and à la carte distribution or sometimes a hybrid of all three" to achieve growth. Paramount+ also was built on “The Storytelling Moat”, or a strategic bet on the storytelling expertise and libraries of Paramount Studios, CBS and Viacom’s cable networks. It has no competitive technological moats.
Paramount was reported to be in discussions with Apple about bundling their services together at a discount, but those discussions are in the early stages. Apple TV+ only had 0.24% of U.S. TV viewing time in November, according to Nielsen’s The Gauge, down from its high of 0.34% in June. Paramount+ was 2.6x higher at 0.9%. It is not clear what Paramount believes it may achieve with the deal, but Apple TV may triple its usage with a richer offering of Paramount's library to its subscriber base of over 1 billion Apple device owners.
The real challenge is that a partnership does not solve either service’s lack of “The Distribution Moat”: The technological expertise behind the algorithms for personalized recommendations, the dynamic user interfaces and operational back-ends for content distribution over the internet. Apple TV+ will stick around because it seems to be both a service that brings a subset of its users delight and also serves as a vanity vehicle for its executives. Shows like ”Ted Lasso” and “Severance” have been both crowd-pleasers and award winners. Otherwise, it is an afterthought in both the corporate structure and Income Statement of Apple. There is no strategic alignment beyond trying to reduce churn for their respective services through cheaper pricing.
61 Million Global Subscribers… Disappear?
The lenses of “The Storytelling Moat” and “The Distribution Moat” present the most difficult question for Paramount+. Once Skydance owns the studio, it will become an “arms dealer” for Paramount’s library. Once private equity owns the linear cable channels and their libraries, the “arms dealer” model will be a growth model for additional cash. As Warner Bros. Discovery has been proving recently, revenue from licensing deals to competitive streamers more than tripled in the second quarter, from a year earlier, to $410 million. However, that quarterly revenue dropped year-over-year by 17% in Q3.
Paramount+ could survive by licensing that content with most-favored-nation-type economics, or be shut down altogether. However, the licensing path also may lead towards shutting down, as licensing third-party content can be prohibitively expensive and especially if churn rates are high. Paramount+’s churn rate (near 8%) was the fourth highest among Premium SVODs in the U.S. as of the first half of 2023, according to research firm Antenna. Without “The Distribution Moat”, Paramount+ is struggling to generate lifetime value from its subscribers. The lifetime value that it does see from its customer base seems to be more from “hard bundles”.
If Paramount+ ever finds a home, the answer is more likely to lie more in the value of its consumption data. Assuming Paramount+ has good data on the consumption behaviors of its 61 million subscribers—which range from NFL games, UEFA Champions League matches, Taylor Sheridan universe shows like “1923” and Paramount moves—some third party will want to own that data and better serve customers with it.
In one sense, the owner of that data will be a consumer savvy licensor to Skydance and private equity. In another sense, Skydance and private equity may not want that data to see the light of day. The history of Paramount+ is also that audiences valued its "mountain of entertainment" less thanRedstone and Paramount executives had imagined. Audiences simply may not value Paramount's library or IP as much as Redstone assumed they did, and Skydance and private equity assume that they will.