Motley Fool Hidden Gems Investing - Paramount + Warner Bros.: The $110 Billion Bet That Could Reshape Streaming

Starting point is 00:00:01 The streaming wars just took another big turn. Motley Fool Hinton Jems Investing starts now. Welcome to Motley Fooling, I'm Travis Hohy. I'm joined today by Lou Whiteman and Matt Frankel. Guys, the big news for the day is that Paramount has officially closed its merger or acquisition of Warner Brothers Discovery, $110 billion deal for context. That's about half the value of Disney, but they don't have the parks, which is the profit driver of Disney.

Starting point is 00:00:32 So, Matt, when you look at this deal, also $80 billion worth of debt, which seems like a notable amount of money, when you look at this deal and all the competition that's happening in the streaming space, everybody's raising their prices, does this merger, does this new company have a chance to thrive in a world where you have YouTube with actually the number one market share in streaming? You have Netflix, there's Disney, and then a whole bunch of other players. Is this going to work out? I mean, my short answer is yes, with a big asterisk on it. I mean, this instantly makes the combined company a major player, for sure. It gives the combined HBO Max and Paramount Plus services a little more than 200 million subs.

Starting point is 00:01:13 It's essentially tied with Disney Plus when you consider the Hulu and ESPN Plus subscribers as well. And when it comes to screen time, the combined company is actually the instant number two. Only YouTube has more watch hours than the combined company. way ahead of Disney, way ahead of Netflix even. Oh, really? But that must include cable, too. Right. Well, that includes, yes, that includes all their linear stuff as well.

Starting point is 00:01:39 But it includes, you know, Disney's linear as well. So, you know, it's a pretty impressive combination. They have a pretty stacked content library. They've, in my opinion, a sports library that even Netflix couldn't touch right now. You know, of the three you mentioned, you know, Netflix looks the most disruptible by deal. But you mentioned the debt. And when you say, can they thrive? Can they win? That all depends on cost savings and being able to eventually pay back that debt. They want to achieve $6 billion of cost savings in three years. David Ellison had said that's not going to come from job cuts.

Starting point is 00:02:15 So where is it going to come from? And so debt-fueled mergers have a bad track record in the media space. Think of like when AT&T bought DirecTV, for example. They don't have a great track record And so, yes, they could be a success here. It instantly makes them a contender, but it's not a given. Lou, do they not only do they not have a good track record taking on this much debt, but also this company, Time Warner, has a long track record of sort of odd and arguably failed mergers. So let's game plan this out, okay? And let's try and figure out how they win here, right?

Starting point is 00:02:53 Consumer price, there's a lot of talk about bundling HBO Max and Paramount. plus or bundling the non, you know, premium services. But they need cash to service that debt. That debt is the biggest thing. If you're bundling, you're bringing down the cost versus having the two of standalones. You, that only works if you substantially grow the pie. And I am not convinced right now that there are a lot of people that would have HBO Max, if only it was like, you know, a buck cheaper. So I don't know how much, if you can substantially grow the pie by just bundling here, which makes me skeptical about their ability to bundle. Look, I do think that this is a pretty powerful group of assets in the streaming world if they can survive the initial stage,

Starting point is 00:03:42 if they can pay down the debt and go from treading water to actually investing in the business. But in the near term, I don't think the landscape has changed that much because I don't think on the revenue side, they're going to be able to bundle and do synergies the way they'd And on the cost side, like Matt says, if they're not going to take out jobs, you know, maybe a little less server space combined. I don't know. You know, I don't know where that's coming from. Lou, do you think that there is a possibility that this bundle would actually make it attractive enough for those of us who maybe don't pay for Paramount or HBO Max, whatever they're calling that right now, by the way, that naming configuration?

Starting point is 00:04:22 They've got to figure that out. But is it possible that they are able to say, you know what, if we put both? of these things together, put all of our assets in one, for $15 a month, that's going to be a bigger pie overall than two of these services separate for, let's say, $10 a month. I'm not getting quite the subscription number is correct. But, you know, having more people paying even a little bit less than the sticker price for the individual services could be a good thing. And maybe you don't have as much churn? Maybe. But again, how much? I mean, I am assuming here that the primary goal is going to be to service that debt.

Starting point is 00:05:01 And you need a lot of additional subscriptions to make that just break-even or advantageous to you from a just cash coming in perspective. So yeah, maybe over time, but again, right now, does it serve their biggest need to bundle these things? I think there's a risk there. You could end up with just less revenue if you have someone paying 20 right now going to 15.

Starting point is 00:05:25 So, you know, it's all about just how, Again, Travis, how many people out there do you think are just like, man, I don't know if I can justify $10 a piece for these, but man, if I can get both of them for 15, that's a deal. I'm sure there's some out there. I just don't know if it's enough to really move the needle. Yeah, you're right. I don't know exactly what the incremental number of people is. The other thing is they have done some bundles. These companies have done some bundles in the past. The bundle that I'm on is through Disney, but it includes HBO Max. So I don't know. to get that taken away and then am I going to re-sign up for the Paramount Max? It's all going to be very complicated, which seems to be the trend for streaming in general.

Starting point is 00:06:07 When we come back, we're going to talk about the potential winners outside of Paramount in Warner Brothers Discovery. We'll be back in a moment. Welcome back to the show. I wanted to talk about who the potential winners are in this streaming landscape as we have some more consolidation happening. And, you know, Lou, there's a lot of moving pieces. here, but you now seem to have kind of four, maybe

Starting point is 00:06:35 five power players in the market. Who are they going to be, who's going to ultimately be the winner? Is it going to be one of those companies? It's going to be one of the companies that's now focusing on selling content. Where does your mind go when you're looking for opportunities, either in streaming or adjacent to streaming? So we've got to do the gold star.

Starting point is 00:06:52 The big winner from this deal is David Zaslov. And the rest of the Warner Brothers executive team, look, they had a losing hand. They didn't know what to do. And now suddenly, they and their shareholders get a nice premium. And I think management gets like an $800 million payout. So if there is a big winner from this deal, it is a management team going from, guys, I don't know if this is working out to Eureka.

Starting point is 00:07:18 So giving credit there. Look, as far as the overall winners, I don't know if I see a real change in the landscape here. I mean, I think there's a few. And, you know, Matt listed out in the out. the notes, I'm not going to steal what he said. But I think, look, I think this is the status quo until or unless Paramount can get its feet on solid ground with the debt and then see what they can do from there. Matt, who do you think ultimately wins here? I mean, I think movie theaters are going to end up being the biggest winner from this deal specifically, and it's not even that

Starting point is 00:07:53 close. The settlement that allowed the deal to close requires at least 30 theatrical releases from warners a year or from the combined company, whatever, for the first two years. And 32 a year for the next three, it locks in a 45-day theatrical exclusivity window, which has been the biggest fear with movie theater disruption, that all that was going to go away. Not sure that would have happened if Netflix had bought it. So that's a big deal for the movie theater business. What about the content? You know, a couple of the names that I keep thinking about is TKO, so owns the U.S.

Starting point is 00:08:30 they did make the big deal with Paramount. It seems like those kind of live rights are now have companies that are going to ultimately be desperate for these live rights. The NFL, another one, they can opt out of some of their deal in the next couple of years, potentially renegotiate that. Now you've got companies like ESPN, which the NFL has a stake in. They need that content. CBS, Paramount, you know, this Kinglamarit needs that content.

Starting point is 00:08:56 Netflix arguably needs that content. It is that. that live sports going to be just an even bigger bidding war now? Well, it's tough to say if the live sports are going to be winners here. So think of like the NFL, for example. You're correct. They can renegotiate their rights after the 2029 season in a lot of cases. And it now has a stronger partner that it knows has deeper pockets in CBS, which is now owned

Starting point is 00:09:24 by the combined company. But on the other hand, you know, consolidation might not be the best. thing for, and not just the NFL, for all these sports leagues. So two of the major bidders for live sports, CBS and TNT are now combined under one company. So that means less competition. So it's going to, it's, it's tricky to say. I think it is a, it's a lift for the live sports, you know, leagues, but it's not the massive windfall that it might seem when you get consolidation. Because, yes, a lot of companies need this content, but there are fewer that they can make pay up for it now.

Starting point is 00:09:59 Right. And look, live sports, I agree everyone, including Netflix, needs live sports. I don't know if they all need the high, they all need to get in bidding wars. TNT arguably was the one kind of driving bidding wars in some of these. So to the extent that now they're constrained again, say it again. They backed out of the NBA, yeah. The debt. I, you know, I don't know if that's great.

Starting point is 00:10:24 But look, Netflix. Does it make sense for Netflix to pay up for the NFL? I don't know if long term they'll think that. I do think, yes, they need live sports, but Netflix is the service everybody has anyway. So they don't get a lot of incremental revenue out of, I mean, I guess they get ad revenue, but again, that's not enough to justify just stupid bidding.

Starting point is 00:10:49 I think they are in live sports to make sure that they remain relevant and people stay with them. But that is not just getting people to stay. That's a defensive move. That's not adding revenue. So I do think that, yes, live content and reasons to stay month to month and just set it and forget it versus just kind of with Apple TV, we've thought about, okay, we'll sign up for a month, binge and get off and not do that. I do think there's something to that. I don't know if necessarily these marquee assets are going to find bidding wars with everybody involved just because every.

Starting point is 00:11:24 everybody needs something live. Well, it's going to be interesting to see, too, who ends up being so weak that they can't get in those bidding wars. We'll talk about some of those potential losers when we come back. All right, we talked about some of the winners, potentially, from this merger that happened. Let's talk about what the potential losers are, Matt. And this seems like an area where we've had enough consolidation

Starting point is 00:11:50 that you kind of know who the power players are, but who are the companies that just don't have that power anymore? The obvious example is Peacock, and I'm not saying they're a loser because of this. They're just kind of a losing streaming service in general. And not just losing is, and they're not successful, they're losing money. They have 46 million paid subscribers, less than a quarter of either the Disney bundle or this new combined company. They've lost over $10 billion total since they started. And now its competitors are even bigger and more powerful than ever before.

Starting point is 00:12:22 my opinion is that Peacock should either sell themselves or find somebody to partner with. I mean, their best move at this point is a joint venture or sale. That that's really the only way I see them coming. Who could potentially do that? Is it, is it a Disney? Is it a Netflix? Well, I mean, and it could be piece by piece. There could be some sort of, you know, okay, we'll get rid of this asset, but we'll

Starting point is 00:12:44 bring on Peacock because they do on the NBC, you know, linear network. So, you know, there are some, there are a lot of companies. that could afford it. Netflix could afford it. Disney could afford it. It's just a matter of it being able to get through, you know, the regulatory process and what that might look like.

Starting point is 00:13:02 And there's, it's not just a sale. A partnership could work as well. You know, we've seen Disney partner with, with certain companies before that they don't own and it's worked out advantageously for both. Yeah,

Starting point is 00:13:12 and don't forget that that, Universal Studios, parks are also part of that should be, I would be surprised if Netflix doesn't get involved if they end up, if there ends up being some sort of bidding for NBC. But Lou, who do you think comes out weaker here? So I think Netflix comes out weaker.

Starting point is 00:13:27 I know everyone points to the breakup fee. That's great. Cash is fine. But they were in and continued to be in the hunt for IP. They could really use that. And I don't know how much that $2.8 billion or whatever it is in cash is going to give them versus the libraries and just kind of the cheap content that I think they're all striving for right now. We're not having to invest.

Starting point is 00:13:49 Peacock, look, the real question here is, is that it took a lot of finangling just to get two also rents merged. I don't know if there's anyone who has the money to buy peacock that regulators would allow to buy peacock. It's hard to imagine Disney with ABC already getting to kind of take a crack at that. Netflix is still sort of the boogeyman. I mean, I'll tell you what I'd like to see happening. I think that Netflix and Peacock will figure out some sort of. of aggregation deal where they kind of work together short of a merger. I think that makes a lot of sense.

Starting point is 00:14:26 So maybe even shut down the Peacock streaming service and just say, you know what, Netflix, we'll just sell you all of our content. Or some way to revenue share and add the Peacock content to Netflix while it's just something short of a merger where they are working together and aligned. I still, and I'm, this is just me out here dying on a hill, but I think the ultimate move here to get an advantage is Disney taking its studio and streaming business, all of the non-experiences, merging it with Netflix, with Disney retaining a stake, keeping the IP,

Starting point is 00:15:01 continuing to grow the IP, but for Disney to just get out of the low margin slash, we can't make this work business that is they've struggled with, despite all of the, you know, they've been moving cups around. There's still no ball underneath them. turn them into the part that works, the experience, let Netflix run that IP with Disney, I don't know, owning if it's a reverse Morse trust or something, they could easily retain

Starting point is 00:15:28 a 25% stake. That is the winning hand. I don't know if I would have the courage to do it if I was one of these CEO, so I doubt it'll happen. But I do think that that is the checkmate move out here. Lou is going to be on this hobby horse for a while. as a parent who gets decisions over what my kids get to watch, Disney going away would be awful because that is the one service. Why would it go away, though?

Starting point is 00:15:56 Well, if it was folded into Netflix. Netflix just doesn't have the parental controls, the quality. Right, right. But we just talked about this. WD and Paramount is unlikely just to combine all of their assets in one. There is easily, I mean, I don't think, and Netflix would be crazy to say, yeah, we're just going to show. shut down this kid's brand. You know, there's a lot of ways to make this work. I think for Netflix, it's the IP, it's all of the production, it's just the ready-made stuff. And for Disney, it's,

Starting point is 00:16:29 let's continue to benefit from this, but focus on the parts of the business that have worked for the last decade, which is, again, experiences, cruise ships, things like that. Why not just being the part of the business that makes money? Why is that crazy for Disney? It's maybe not crazy. Maybe not the user experience that the parents want. That's my only pushback here. If you have thoughts about what these companies should be doing, who should be merging with who, send us an email at podcast at fool.com. As always, people in the program may have interest in the stocks they talk about and the Motley Fool may have four more recommendations for or against, so don't buy or sell stocks based solely on what you hear. All personal finance

Starting point is 00:17:07 content follows the Motley Fool's editorial standards and is not approved by advertisers. Advertisements are sponsored content and provided for informational purposes only to see our full advertising disclosure, please check out our show notes. For Lou Whiteman, Matt Frankel, and Dan Boyd Behind the Glass, I'm Travis Hoyum. Thanks for listening. We'll see you here tomorrow.

Motley Fool Hidden Gems Investing - Paramount + Warner Bros.: The $110 Billion Bet That Could Reshape Streaming

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