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There was a good article last week in IndieWire on the growing significance of April 8th, 2024. That is the date when U.S. tax law permits Warner Bros. Discovery to sell off any unwanted assets from the merger with WarnerMedia without incurring tax obligations on the gains from those sales. The article speculates about the traditional financial and regulatory reasons why mergers may or may not happen between legacy media companies.
Last Thursday’s essay “Disney, MGM Resorts, Flywheels, Brands & Changing Customer Demand” offered two additional lenses that the article does not consider that are worth discussion. The first is whether any M&A transaction can deliver a more consumer-savvy outcome and improve the strength of the consumer relationship with a brand. The second is whether any M&A transaction can solve for tech-savvy and deliver more consumer-centric products.
Key Takeaway
After April 8 2024, it is hard to imagine how mergers across any legacy media companies will result in a more agile consumer-savvy model like Universal’s with gaming IP, or a more agile tech-savvy model like EA’s or DraftKings or even Netflix where “the heart and soul of the organization is product and technology.”
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Total time reading: 5 minutes
A More Consumer-Savvy Outcome
In Thursday’s essay, I wrote that Disney's position as “an incumbent business model with strong customer relationships” seems vulnerable to “competitors who are savvier about evolving consumer demand towards IP related to games.” Gaming intellectual property distributed as movies like Universal’s “The Super Mario Bros. Movie” and “Five Nights at Freddy’s” have outperformed and therefore evidence stronger, deeper ties with consumers than recent box office flops from Marvel (“The Marvels” which has grossed $189 million million on a budget of $273 million) or DC (“Black Adam” which grossed $393 million on a budget of $190 to $260 million). The question is posed by the April 8th, 2024 date is whether mergers could deliver more of Universal-type outcomes.
Universal does not own video game IP. “Super Mario Bros.” is the organic product of Nintendo's work with Universal Parks & Resorts over the past decade to create Mario-based attractions and Super Nintendo World at Universal Studios theme parks. The film adaptation of“Five Nights at Freddy’s” began in development at Warner Bros. Pictures in 2015, ended up at Blumhouse Productions in 2017, started production in 2022, and then found distribution and streaming service Peacock in 2023. It was announced by NBCUniversal as “the most-watched entertainment Peacock title (film or TV series) of all time in the first five days of its release” (and without data, as is customary).
The lesson in both stories is how unimportant owning the actual IP was to Universal’s box office success. Instead, the Universal studios and theatrical ecosystem seemed to be more conducive to the success of the IP. We do not yet have a sense of the inner workings of NBCUniversal as to why both properties succeeded. We can guess, though.
There is obvious executive-savvy involved and Jason Blum of Blumhouse is one of the savviest movie producers out there (I wrote about him back in August 2021 in The Medium’s pre-The Information days as PARQOR on Substack). The moral of the story for both Universal movies seems to be that the video game IP needed to be shepherded by the right creative talent, and that talent did not necessarily need to be owned by the conglomerate. In other words, both properties seemed to benefit from agility in the pre-production processes that IP at the likes of Disney or Warner Bros. studios simply do not have.
That agility arguably reflects a smaller burden from the strategy of world-building around IP, which seems to have burdened both Disney’s content spend and its ability to monetize its IP across theatrical and streaming. Mergers like the one Disney pulled off with Fox to expand its library seem to be mistakes in the streaming era. Bigger isn’t better. Instead, NBCUniversal has found wins by rethinking audience demand beyond the parameters of Universal IP, and without mergers or acquisitions.
It might be able to figure angles with Warner Bros. IP like "Mortal Kombat" in a merger. But Universal's success with gaming IP did not require ownership. Any upside to ownership of IP seems less important than agility to produce content that consumers want or need.
A More Tech-Savvy Outcome
As I wrote in “The Plumbing & The Poetry vs. Balance Sheets”, the “content savvy” plumbing of an ecosystem needs the types of content libraries that can be consistently updated to attract fans. But “tech savvy” plumbing also needs to keep them engaged across platforms, and that requires solving for the plumbing of engagement in streaming and gaming, like a single user login for both platforms.
A more tech-savvy merger after April 8th should deliver better competencies in the “plumbing” product development and customer acquisition. A core point of The Medium and my Medium Shift columns for The Information is that legacy TV and Hollywood executives have proven they do not have the competencies to build the “plumbing” to solve that problem
Last week’s example of sports betting insurgent DraftKings highlighted how its tech-savvy success reflects a strategy where “the heart and soul of the organization is product and technology.” By contrast, all legacy media companies have taken on billions of dollars in debt to expand their libraries, assuming content-savvy could compete with Netflix’s, Apple’s, Amazon’s and Google’s tech savvy. Their strategies have been proven wrong, both in consumer churn rates and also in depressed stock prices.
Any merger after April 8th, 2024 is unlikely to solve for tech-savvy unless a tech company like Amazon or Netflix or Google buys a studio. Paramount Studios seems to be the lowest hanging fruit, though as the IndieWire article noted: “Selling the Paramount studio could ultimately be a death sentence for Paramount+. Because then what’s left? CBS and MTV?” The rationale for Paramount management or its owners National Amusements is not there.
Alternatively, Warner Bros. Discovery (HBO’s “The Pacific”) and NBCUniversal (“Suits”) are seeing lesser-known titles become hits on Netflix. It is a model that works without all the risks of technological development or a merger. Warner Bros. Discovery understands those risks well, having seen subscribers dip by 2 million in Q2 after the relaunch of HBO Max as Max and 700,000 in Q3. Revenue from licensing deals at Warner Bros. Discovery more than tripled in the second quarter, from a year earlier, to $410 million, and has served as a cushion against subscriber losses. Licensing may ultimately offer the best of both worlds for tech companies and legacy media IP libraries.
Ambiguity After April 8, 2024
The IndieWire article suggested that mergers inevitably may be the path forward in the long term—something Liberty Media Chairman John Malone predicted to CNBC earlier this month—but the best bet is “one major entertainment company may not buy another next year”. Cable channels could merge and default to more private equity-type businesses, ruthlessly cutting costs while riding out steadily declining reliable revenues from bundles of affiliate distribution fees from cable companies. The big question is whether the long-term uncertainty in the legacy media advertising marketplace is permanent. Up to 50% of revenues for those cable channel models would disappear, either making mergers all the more necessary or making the rationale much riskier than the current model.
In that instance, the alternatives could and arguably should be content-savvy and tech-savvy mergers or partnerships. I discussed a possible outcome for gaming company EA and Disney’s ESPN in July’s “Imagining An EA Sports-ESPN Partnership”. The challenge in that outcome was that EA CEO Wilson's vision for EA “suggests ESPN’s retail-first, consumer-first value to EA in any partnership would be defined in terms of marginal engagement”, or both consumer-savvy and tech-savvy. On the other hand, Disney CEO Robert Iger has framed any deal “in terms of Disney needing to get more content or distribution for ESPN's retail-first, consumer-first future.” Of the two, only Wilson is thinking more broadly about the value of video to consumers beyond traditional distribution. That is a significant disconnect in 2023, and all signs point to it existing after April 8, 2024.
In other words, it is hard to imagine how mergers across any legacy media companies will result in a more agile consumer-savvy model like Universal’s with gaming IP, or a more agile tech-savvy model like EA’s or DraftKings or even Netflix where “the heart and soul of the organization is product and technology.” Fundamental change towards more consumer-savvy, tech-savvy models seems to be only possible with changes to management teams. In this light, April 8, 2024 is shaping up to result in some boring transactional outcomes.