Q2 2021: media and entertainment consolidation in the spotlight

According to one Forum Interview, the latest wave of consolidation is far from over. “You’ve probably got now, roughly… 10 media companies all in this space,” a former SVP at Lions Gate Entertainment Corp said. “That’s going to whittle down to four or five in the end, is my opinion.” In an increasingly competitive market, it is difficult to predict what combinations of studios and streaming platforms will ultimately shape the landscape. For example, with a merger involving two studios that also own networks, “historically, you would have thought [that the] DoJ would have probably forced one of these entities to shed or divest itself of these networks, which has happened in the past, but these networks are not the same assets that they were 10 or 20 years ago”.  

Whatever happens, competing with the current leaders won’t be easy. In terms of overall eyeballs, Netflix, Amazon and Disney comprise the “big three” studios, according to the expert. Warner Brothers “used to be the largest” studio but now, along with Universal, needs to “bulk up” to compete, we heard. Emphasising the gravitas of these players, the specialist commented: “Warner Brothers, Universal, Paramount, Sony, Lions Gate… in order for any of these studios to compete with the big three or four, they’re going to have to have multiple rounds of mergers,” the expert said. “You’re going to have to have three of these studios combine to be competitive.”   

As noted by Deloitte, the landscape is undergoing “permanent and irreversible upheaval”. ¹https://www2.deloitte.com/us/en/insights/industry/technology/media-mergers-and-acquisitions.html/#endnote-sup-1 For independent studios, there will certainly be implications, including fewer opportunities to sell the same content multiple times. “Obviously because content costs are the number one expense of any streaming platform, there’s a real pressure, sometimes unwarranted, to buy from your O&O studio, so to speak, but it has historically been the case and I think will continue to be the case that there are always breakout hits that are produced by third parties,” a former EVP at Metro-Goldwyn-Mayer Studios Inc (MGM) said. “I think both from a consumer, because this is a hit-driven business, and potentially from a regulatory perspective, there will always be buying and selling from third parties. I just think the opportunities to do that are going to start to decline.”

The migration to streaming is impacting “every player in the business, whether it’s a large studio or a small or mid-sized studio like Lions Gate, or a smaller distributor”, the former Lions Gate SVP said. “The environment has radically changed, and this calls for, I think, studios to really rethink both their content creation and content distribution strategies.” Indeed, many have gone out of business in the past two years, we heard.

We also heard that fierce competition for premium content has sent price tags skyrocketing. Amazon bought MGM for some USD 8.5bn, well above the USD 5bn suggested when the studio was announced as for sale.²https://www.theguardian.com/technology/2021/may/26/amazon-buys-hollywood-studio-mgm-james-bond Generally speaking, streamers have “deep pockets” and expect to pay “top dollar” for quality content, as the market is “hyper competitive”, the former Lions Gate SVP added. The expert sees the value of libraries growing for the “next several years” against a backdrop of continued consolidation. “This consolidation that I see on the horizon, I do see that probably bringing some of these values down to maybe more where they should be.”

There are also advertising implications. “When you see WarnerMedia and Discovery, you see Amazon buying MGM, now what you’re seeing is that NBCUniversal, Viacom, Warner Bros, Discovery, they’ll control about 50% of the US TV advertising market. That’s a big chunk,” a former SVP at Meredith Corp said. “In the same respect, they own that advertising market, but they only own about 15% of the broader cross-platform ad market”, which is dominated by Facebook and Google. “That’s an area they definitely need to improve in.”

In our Interviews, experts also shared their thoughts on some of the deals that have taken place, highlighting some of the challenges that could lie ahead. The former Lions Gate SVP opined that Lions Gate would have been a better fit for WarnerMedia than Discovery, given the latter’s niche content. Whatever becomes of Warner-Discovery, the expert anticipates more acquisitions. “In order for them to be able to compete and become at the very top of the top tier of these streaming platforms, I do think they need other assets. That could be Paramount, that could be Lions Gate, that could even be, I don’t know if it’d ever pass the DoJ, but maybe merging with Universal.”

At the same time, a former VP at Warner Media told us that the now plethora of brands under one entity could mean that not all the networks survive. “When you could support 200 networks on a cable package, that was a good strategy. That’s not going to be the case in the future, so they’re going to have to pare those back.” They added that any synergies gained could be offset by secular industry declines. Indeed, the saying “content is king” has arguably never been so apparent. While sub-par networks might be able to survive in a 200-channel cable bundle, they will be hard pressed to do so in the world of streaming. 

The level of M&A indicates that scale is equally important today. To compete against the technology giants, media companies are increasingly seeking ownership of content and distribution. It will certainly be interesting to see how the landscape continues to evolve throughout the remainder of 2021 and beyond. Given the pace and scope of change hitherto, there could even be some curveballs. Indeed, something that’s gotten “lost in these conversations”, according to the former MGM executive, is “AVOD and the absolute goliath that is YouTube”. TikTok now sits in this category, and they believe it will “radically change young people’s content taste going forward”. There could be “true disruption” here, “even among the streaming giants”, we heard. 

*As reported by Deloitte.