Will New Trump Administration Set Off Merger Fever In Hollywood?

Among the outgrowths of Donald Trump's presidential victory is an expected shift in antitrust and other regulatory interventions, well timed for battered Hollywood studios hoping to restructure for a post-Streaming Wars era.

In case you missed it, Netflix won those Streaming Wars, perhaps more emphatically than anything in the political sphere this year. Financially strained studios have cut thousands of jobs, killed off projects, reduced new program orders, sold off pieces to private equity, and otherwise pondered what next if they're to survive and thrive.

As MoffettNathanson senior analyst Robert Fishman wrote in a recent note: "The battle caused a lot of damage to traditional media and Netflix has emerged as the clear victor."

Studio chiefs have mused in various public settings about joint ventures, partnerships, and outright mergers and acquisitions as a way to better compete against Netflix and the video operations of tech titans Apple, Alphabet and Amazon. Now, with changes afoot at what has been a reflexively anti-merger Federal Trade Commission and Department of Justice, media moguls may again get to mogul-ing, instead of bemoaning their fates while leaving many others unemployed.

The latest trial balloon came during last week's Comcast earnings call, when President Robert Cavanagh surprised listeners, saying the company is considering spinning off or otherwise removing its cable operations from Comcast's complicated corporate structure, while holding on to both the NBC broadcast network and loss-making, under-sized streaming service Peacock.

"We are now exploring," Cavanagh said, "whether creating a new well-capitalized company, owned by our shareholders and composed of our strong portfolio of cable networks, would position them to take advantage of opportunities in the changing media landscape and create value for our shareholders."

Macquarie senior media-tech analyst Tim Nollen wrote that a cable spinoff likely would help Comcast's shares and core media assets, but questioned who would invest in a troubled, declining sector, especially if the assets are stripped of the cross-platform synergies possible now. For instance, the all-news MSNBC and all-business-news CNBC share many assets with NBC News. How would they disentangle, and what would be left of value?

"(Comcast's) NBCU(niversal) has been deemphasizing cable nets for some time, exiting regional sports and putting content on Peacock; new NBA rights were won thanks to broadcast and Peacock - not cable, as Warner Bros Discovery found out," Nollen wrote. "We question how valuable cable networks would be stand-alone, without ties to NBCU's studio and streaming capability, and lacking advertising tie-ins; industry M&A/JVs appear possible."

Lots Of Other Deals May Be Coming Too

The cable spinoff is just one possible deal that likely will be more feasible under a Trump regime with a more wave-it-through approach. But it won't be the only one.

For instance, private equity giant TPG is trying to do two deals in one: take over AT&T's minority share of DirecTV and merge it with competitor DISH Networks. Given the struggles vexing both satellite TV providers, and DISH's particularly perilous finances, even Biden/Harris regulators were expected to probably approve the merger, much as happened in 2008 with the Sirius and XM satellite radio services. The biggest challenge there might be DISH bondholders who don't want to take a haircut on their notes.

But lots of clues suggest far more dealmaking across the industry is in the offing. What might that look like?

What a Modern Media Company Needs

To begin with, MoffettNathanson's Fishman attempted to quantify what a major modern media company (to paraphrase Gilbert & Sullivan) might look like.

"Companies for whom video is a core part of the business trade at significant discounts, with Netflix's enterprise value now greater than Disney, WBD, Fox, and Paramount combined!" wrote Fishman in a research note released last week. "Where does that leave the rest of the field? What does each player bring to the table, and how might a bit of strategic M&A augment their position?"

It's increasingly clear what assets those reshaped media companies would need to compete as the industry enters the second half of the 2020s, Fishman wrote.

"We see these assets as: a scaled streaming service (both in the U.S. and globally), a free AVOD platform, top-tier sports rights, a U.S. broadcast network, and film and television studios," Fishman wrote.

Broadcast has the broadest reach, and as cable viewership fades, "Having a broadcast network, therefore, has increasingly become a must in the eyes of top sports leagues when evaluating distribution partners...Sports drive viewership, subscriptions and advertising dollars," Fishman wrote.

Disney remains the combined leader in overall viewership most months across all platforms, though YouTube with its vast supply of user-generated content sometimes grabs the mantle, according to Nielsen statistics released at the recent Advertising Research Foundation's OTT conference. That cross-platform approach suggests there's still power even in older distribution platforms when it's intelligently harnessed and cross-promoted.

"As for non-sports viewing, free AVOD / FAST channel platforms bring reach and inventory that can supplement ad sales across a portfolio," Fishman wrote. "AVOD is the basic cable networks of the streaming age. These platforms now provide an avenue for monetizing older content for companies with large catalogues."

What Studios Might Be Combined?

There are some combinations of existing media companies that might fill respective holes on each side, and would make sense as the companies try to scale up against Netflix and the Titans.

Fox, for instance, has hugely popular AVOD platform Tubi and a broadcast network with strong sports rights in the NFL and other major sports, even after it sold off most film and TV studio assets to Disney in 2019.

Warner Bros. Discovery, by contrast, has highly regarded film and TV production studios, the increasingly global Max streaming service with more than 100 million subscribers, and its own batch of sports rights (though it loses the NBA after this season).

That's why, Fishman wrote, "When thinking about the next potential media deal, we continue to see a marriage of Fox and WBD's assets as the most natural fit, especially when considering how it would fill WBD's current need for top-tier sports rights and grant it ownership of a big four U.S. broadcast network."

Less likely, perhaps, is any imminent deal affecting Trump's sometimes-favorite all-news cable service, Fox News Channel, even as the business around it is shrinking. Though Fox News has long had cable TV's oldest average viewership, it remains the most-watched, certainly among the three all-news competitors.

What Next For CNN?

But what would a Fox merger mean for CNN Worldwide, which is part of WBD? CNN's cable network is habitually third in ratings these days, even as Chairman and CEO Mark Thompson continues to build up a thriving online side. The service tacked to the political center after the Warner Bros. Discovery merger 2.5 years ago, but still enrages Trump routinely.

Is CNN headed to a private-equity spinoff or the sort of billionaire side project that has kept afloat (sometimes with plenty of controversy) such outlets as the Los Angeles Times, Washington Post, Time, and The Atlantic?

It's even possible, Fishman wrote, that as Netflix continues to build out its ad-supported operations (still less than three years old), it may consider either launching or acquiring its own AVOD platform to go with its premium, first-run subscription shows.

"We would not be surprised to see Netflix explore either launching their own FAST service or even acquiring an AVOD platform as advertising becomes a more meaningful driver of its revenue in the years ahead," Fishman wrote.

Leveraging Cross-Platform Power

During the ARF's OTT Conference, Nielsen's SVP, Product Strategy & Thought Leadership Brian Fuhrer suggested that one underreported story is how well some media companies integrating and cross-promoting programming across streaming, broadcast and cable.

"A lot of people said you're giving too much of an advantage by zeroing in on streamers," Fuhrer said in recounting the challenges Nielsen has had capturing viewership in its The Gauge reports. "For companies with assets in multiple categories, (critics said) you're not showing how they stack up."

Indeed, over the summer, with children out of school and football out of season, four different media companies took turns at No. 1 in total viewership, most notably NBCUniversal and Peacock, which dominated August with record viewing of the Summer Olympics in Paris, and shifted it share of viewership by 4.9 points.

"It's really pretty extraordinary," Fuhrer said. "We'll be looking back on these Olympics as a use case for a long time to come. They really leaned into every asset they had and connected it to consumers. The ability to meet people where they are, in categories they want to use, that's one of the things people have under-appreciated. There's a halo effect back and forth. I think this is an underappreciated opportunity to understand what's working here." "

Younger Viewers Overwhelmingly Turn To Streaming

Streaming has become the way most viewers under 35 are watching "TV," Fuhrer said. Streaming comprises about 80 percent of their view time, especially when gaming is removed from the analysis. Older audiences split their viewership more evenly across cable, broadcast and streaming.

That analysis leaves out streaming-only Netflix and Youtube, as well as Apple TV+ and Amazon Prime Video. They're doing just fine without those legacy linear operations, it would appear. But there's hope, Fuhrer suggested, for the traditional media companies in Hollywood to do far better than they have.

Broadcasting makes up about 22.6 percent of view time in the United States, while cable still attracts another 26.1 percent. Together, that's less than half of viewtime these days, but still notable.

What's more remarkable, Fuhrer said, is the patterns that remain intact in peak viewing across platforms. The biggest viewership still happens on Super Bowl Sunday, New Year's Eve and Thanksgiving.

Football Remains Vital To TV Success

Football drives a lot of that. A Thursday Night Football game on Amazon Prime will generate between 2.3 billion and 2.9 billion live streaming minutes, Fuhrer said. He compared that to Netflix's most watched series in September, The Perfect Couple, with about 500 million streaming minutes.

"Football is really impactful and really different," Fuhrer said. But what he called "The Netflix Effect" is expanding. By that, he was referring to the vast new audience Netflix generated when it licensed NBCUniversal's decade-old cable hit Suits. Now other media companies are figuring out how to promote shows across all their distribution platforms.

"Cross-platform promotion to reach non-viewers can work in both directions, linear to streaming and streaming to linear," Fuhrer said. "The Netflix Effect isn't limited to Netflix anymore. The ability to promote streaming content to linear audiences, that's a valuable commodity and I think is under-appreciated."

While there's hope here for a way out of the morass facing traditional studios, there's still plenty of griping, as suggested by Needham & Co. Senior Analyst Laura Martin, based on a dinner she had with a group of senior Hollywood executives.

Among the gripes, she wrote: "Streaming is a lousy business, compared with the linear TV bundle. Not only does it typically have only one (revenue) stream instead of two, but streaming's ad loads are well below linear TV, and its total (advertising revenues) are relatively small (typically around 10% of linear TV). Also, churn is MUCH higher for streaming than linear TV, where 2-3 year agreements were the norm. The transition from linear to streaming has been a material downdraft for economics for the traditional media companies, with no end in sight, they all agreed."

Netflix Still Makes Missteps Too

Not everything Netflix touches turns to gold, of course. The company's new film chief, Dan Lin, is the latest to propose making fewer but better films, in contrast to predecessor Scott Stuber's "stuff-the-pipeline" approach, epitomized by a post-pandemic plan to produce an eye-popping 70 films per year.

That led to plenty of criticism about underdeveloped or copycat projects, perhaps inevitable with such an ambitious slate.

Lin also is hoping to be more targeted in how Netflix spends its money, throwing fewer wads of upfront cash at big names while perhaps, perhaps, shifting away from its standard approach, and giving at least some talent a chance to share in the back-end profits of successful projects.