Sony Joins Apollo's Bid For Paramount... for Under-Monetized "Communities of Interest"?
Good morning!
The Medium delivers in-depth analyses of the media marketplace’s transformation as creators, tech companies and 10 million emerging advertisers revolutionize the business models for “premium content”.
For anyone following Sony’s streaming-era business strategy, it is surprising news that they—alongside its production partner Legendary Entertainment—are joining Apollo Global Management’s bid for Paramount Global. To date, Sony Pictures Entertainment has zigged where its legacy media competitors have zagged. It mostly gave up on streaming in 2019 when it sold a majority stake in ad-supported streamer Crackle, now betting on Crunchyroll, which is part of a larger flywheel business for fans of anime, and BRAVIA CORE, a video service included with its smart TVs.
In this light, Sony’s participation in Apollo’s bid for Paramount reads like a rethink of this strategy. Why would Sony be rethinking "zigging"? There is little reason for Sony to get back into the global streaming business: Netflix has clearly “won the game” (as IAC Chairman Barry Diller stated back in 2019). Paramount+ is growing slowly at 25% of Netflix’s global scale (67.5 million subscribers to Netflix’s 269.6 million). The 1 billion subscribers benchmark is unreachable.
Sony has no strategic need for Paramount’s cable networks in the era of cord-cutting—last decade it sold off international channel holdings in the U.K., Eastern Europe and Asia—and private equity is the business of extracting cash flow from declining businesses. I wrote last December in “Imagining Paramount Global's Future Post-Skydance Acquisition” that private equity ownership of the cable networks business seems inevitable. Federal regulations prohibit foreign ownership of U.S. broadcast stations, so Sony may be prohibited from owning CBS and its affiliated television stations.
One answer seems to lie in the partnership between Sony Pictures and Legendary for “ongoing commitment to theatrical distribution as a driver for other ‘downstream’ windows and the theatrical window’s long-term value for films.” Paramount Studios would complement that strategy.
The other answer lies in what Sony Pictures Entertainment CEO Tony Vinciquerra has called “communities of interest” or “niche markets that lend themselves to fervent fan interest that itself can be monetized.” Crunchyroll is one example, and theatrical franchises like “Jumanji,” “Ghostbusters” and “Spider-Man” are others.
The challenge to both answers is that, as I argued last week, “the media conglomerate model of the 20th century is no longer capable of generating the same value for shareholders and consumers in the 21st century.” Sony seems to be making a counterintuitive bet that it can extract value from IP where Paramount could not, and at a time when its fellow media conglomerates increasingly are struggling to do so.
Key Takeaway
Sony sees opportunities in Paramount IP that Paramount has not realized. But, its bet emerges at a time when media conglomerates may be best off pursuing a range of models that put the IP in the hands of the fans.
Total words: 1,500
Total time reading: 6 minutes
Mixed Signals from Sony
Crunchyroll is a niche media business within Sony Pictures Entertainment. It monetizes over 13 million fans of anime via theatrical releases of new anime content, sales of home entertainment products (e.g., DVD box sets), merchandise licensing and secondary distribution. Streaming is only one arm of that business model, but core to the business model is a centralized database of passionate fans of Japanese anime and manga.
I have argued since January 2023 that the “flywheel” around Crunchyroll’s streaming service is a consumer-first, retail-first model that more media companies should be imitating. And yet, to date, none have. Crunchyroll has also hit some limits with its model: Last October, it announced a partnership with Amazon Prime Video.
The partnership effectively means that Sony and Crunchyroll no longer exclusively own the consumer relationship because Amazon handles all billing, and all Crunchyroll content is consumed within the Amazon Prime Video app. The Verge argued this partnership is “a good thing” for Crunchyroll because “its app available for smart TV and set-top platforms can be buggy and annoying to navigate.”
Last month, I highlighted an interview with Crunchyroll president Rahul Purini by The Verge’s Nilay Patel that included an update on the deal:
“So we just launched Crunchyroll as an a la carte channel on Amazon Prime, as an add-on to Amazon Prime. And we are not only finding that we are attracting a set of audience that we weren’t able to reach before, but we are finding that audience prefers that experience because they have one place they can go to get all of their entertainment subscription services. It’s easy, convenient. So I think that will continue to play out because it’s not working for the consumer either. And I think all of us will have to figure that out.”
Despite all its successes with “communities of interest”, Sony is still on a learning curve. “Ghostbusters: Frozen Empire” has grossed only $103.6 million domestically and $73.4 million worldwide on a $100 million budget, to date. It also has a 44% rating on Rotten Tomatoes. It has had more success with recent titles from the “Jumanji” and “Spider-Man” franchises, which have grossed nearly $1B each in the box office.
Vulturing Paramount Titles...
The Paramount Pictures library of content offers plenty of pickings for Sony to improve its batting average, including franchises “Mission Impossible”, “Star Trek,” “The Godfather” and “Indiana Jones”. It also has childrens’ titles like “Paw Patrol” and “Spongebob Squarepants”.
On this point, it is worth noting that Paramount’s linear business seems to be closer to Sony’s “communities of interest” strategy. Its cable channels target “communities of interest”: Nickelodeon targets families, BET and VH1 targets black audiences and Logo targets LGBT audiences. If that is the case, the business logic for Sony’s participation becomes more complicated: the cable networks without cable library assets will be less valuable to Apollo. It is the type of hair-splitting that more often happens behind the scenes of a deal in the works. Meaning, this is a feasible scenario and we have no way to rule it in or out.
That said, in the cases of either outcome the challenge for Sony reflects something I wrote in “Investors & The Unsentimental Media Consumer”: “Consumers seem increasingly more sentimental for the intellectual property of media companies more than they are the formats.” Meaning, Sony’s opportunity with Paramount Studios’ intellectual property is broader than theatrical or streaming.
Mario Gabelli, the largest holder of Paramount voting stock after the Redstone family, tweeted a positive take on Apollo’s bid for this reason. In sum, he wrote that Sony “brings” gaming, music, theatrical content, distribution scale, and global reach to the table. He noted the gaming opportunity compared to Microsoft’s acquisition of Activision, which brought a large library of major intellectual properties titles in-house, including “Call of Duty”, “Crash Bandicoot”, “Guitar Hero”, “Tony Hawk's Pro Skater”, “World of Warcraft”, “StarCraft”, “Diablo”, and “Candy Crush Saga”.
The rationale for that $69 billion deal, according to former Activision CEO Bobby Kotick, emerged “after he realized Microsoft had the technology to push Activision forward in the burgeoning competition between tech companies to build the metaverse.” Microsoft wanted to attract more people to its Xbox consoles and Game Pass subscription service and to also break into the $90 billion market for mobile games.
For Sony, the business opportunity is a bit riskier. Paramount has not been active in the gaming space. Sony's bet seems to be that Paramount IP can be arbitraged within Sony’s PlayStation ecosystem of consoles and its PlayStation Plus subscription service. But, high-budget, high-profile games (known as “AAA games”) that could emerge from Paramount’s library of untapped or under-valued IP would also require enormous budgets (in the hundreds of millions of dollars). There is a compelling counterargument—made recently by Shawn Layden, the ex-head of PlayStation—that “the economics of scale for distribution no longer make sense with the limited PS4/5 install base."
We are also in a downcycle for AAA games following a glut of pandemic-delayed releases over the past two years. AAA games typically take two-to-seven years to develop: Last November, Sony announced it had delayed six of 12 AAA live service and multiplayer games it had slated for release before March 2026.
There are no guarantees in solving for Paramount's missed opportunities in gaming. Therefore, the future return on investment for games built with Paramount IP will be inevitably be lower than in Sony's past.
For Unsentimental Customers
Last Thursday I argued:
“by taking IP from within the walls of media conglomerates and putting it in the hands of creators creating media businesses to drive awareness for memecoins, the possibilities for that IP seem endless. That may undermine the rationale for a media conglomerate, but that rationale is already being undermined by conglomerates’ growing list of failures to adapt to a retail-first, consumer-first world.”
So, Sony may have a steeper hill to climb with Paramount’s marquee titles than its inclusion in the Apollo bid implies. Despite marginal successes with Pluto TV and international growth of Paramount+, Paramount has struggled and ultimately failed to reorient itself in a retail-first, consumer-first world. User intent outweighs user sentimentality or nostalgia on the internet, as I argued in “Investors & The Unsentimental Media Consumer”, and consumers seem increasingly less nostalgic for Paramount’s IP.
Sony’s ultimate challenges with Paramount after a successful Apollo bid will be two-fold:
To identify the library titles with ”communities of interest” that can thrive within the Sony traditional and digital media ecosystems; and,
Execute on their strategy much better than it has with the Ghostbusters IP.
If it fails at either or both of these challenges, those failures will be more evidence to my argument that a media conglomerate may be best off pursuing a range of models that put the IP in the hands of the fans.