TUDUMB
Congratulations on saying the biggest number, Paramount. $111B for a company that a year ago had a market cap of around $20B. For a company that shrunk in their most recent quarter, and in fact, for the entire year, with revenue down 5% to $37.3B. Paramount may not be buying the Titanic, but only because they already own that IP.
At the same time, kudos to Netflix for showing true discipline. Ted Sarandos kept insisting they would, but that's obviously far easier said than done when you've already talked yourself into a deal which you thought you had "won". They undoubtedly anticipated somewhat of a circus when they swooped in and stole it from under the nose of Paramount – the original bidder, remember – in December, but it turned into a full-on clown show.1 It turned into a battle against not just Paramount (as expected), but also politicians (to be expected), and Wall Street (probably should have been expected). Perhaps the real wild card though was the hatred from Hollywood itself (more on this in a minute). So it was clearly better to swallow that pride and walk away with a nearly $3B check of pure profit.
In a way, not bad for a quarter's worth of work distraction. It's almost exactly what Netflix made in actual profit last quarter.
Predictably, investors love this move. Netflix's stock has popped nearly 10% in after-hours trading. The share price had been ground down almost 25% since the deal was announced. The message was clear: you're the present and future of entertainment, why are you putting this albatross around your neck? The century-old past of entertainment stuck in perpetual decline?
At the highest level, it's why Netflix's deal was a surprise in the first place. Sure, you take a look at the deal, because why not? But nothing in Netflix's history suggested that they would take this too seriously. But Ted Sarandos surprised us. Clearly he saw a path to take such a storied legacy and shift it into the future. Netflix has proven their worth as an IP accelerant, what if they bought perhaps the best library available? It's an interesting idea, though I'm still not sure it made any business sense at $83B. At $100+B – the amount Netflix probably would have had to counter with (with a discount for the TV assets they wouldn't be buying, which Paramount will be buying) – I mean...
Of course, Netflix could have absorbed such a cost. It's a $400B company (well, before this deal, anyway) – double Disney! Paramount Skydance? They're worth $11B. Yes, they're paying almost exactly $100B more than they're worth for WBD. Yes, it's looney. But really, it's leverage.
To be clear, Netflix was going to pay for the deal with debt too, but they have a clear path to repay such debts. They have a great, growing business. They don't require the backstop of one of the world's richest men, who just so happens to be the father of the CEO. How on Earth is Paramount going to pay down this debt? I'm tempted to turn to another bit of Paramount IP for the answer:
1. Step one
2. Step two
3. ????
4. PROFIT!!!
Or maybe David Ellison should start an AI company, raise billions, then merge it with Paramount. I mean, this has worked in the past for deals that make absolutely no sense on paper!
But really, the answer will undoubtedly be a combination of huge cuts – "synergies" – mixed with the hope that rates keep going down so this can all be constantly refinanced with the buck being passed around until they figure out a way to spin out some assets and burden them with the debt. You know, just like David Zaslav was about to do!
I'm being harsh. The truth is that this is the deal that I thought Paramount should do! As Skydance was in the midst of acquiring National Amusements, and thus, Paramount, I wrote the following in July 2024:
There's been a lot of talk amidst the Paramount dealings that WBD might be a good home/partner. What if, once the Skydance/Paramount deal is closed, *they actually buy WBD*? Yes, there are debt issues, but a year from now, hopefully WBD head David Zaslav will have a better answer and path there. Ellison has spoken a few times about Paramount+ in particular. Most assume they'll either spin it off or merge it with another player, like WBD's Max or Comcast's Peacock. And perhaps they will. But again, I'm not sure they shouldn't just buy *all of* WBD to bulk up into one of the major players themselves.
Well, they took my advice. And just over a year later, with their deal finally closed, they made their bid. But that bid was $19/share – and a mixture of cash and stock. That would have valued WBD at just below $50B (before their own aforementioned sizable debt was taken into account). After eight more offers from Paramount, and yes, the one from Netflix (including switching their own offer from cash/stock to all cash), here we are.
Anyone who took issue with David Zaslav's pay package should apologize immediately. He may not have been great at running WBD's actual business, but the financial engineering required here to turn $50B into $80B into $111B in just a few short months – again, while the core business declined – is truly something.
But again, while this deal makes no sense financially, it does feel like Paramount needed it. For Netflix, Warner Bros was a nice-to-have. For Paramount, it was existential. Without the Warner Bros studio, which, before a last-minute holiday surge by Disney was the number one movie studio for much of last year, Paramount was the distant fifth place player in a group of five. Adding WB vaults them close to or at the top with Disney.
Meanwhile, in streaming, Paramount+ is also the fifth place player, but there, it could be worse: they could be Peacock. Still, despite some decent numbers – thanks Taylor Sheridan (who subsequently bailed) and the NFL – they were far behind the "major" players. Including, yes, HBO Max. This deal vault them near the top there too. Ahead of Disney but behind... Netflix.
So yeah, you can see why Paramount felt the need to win this deal, no matter the cost. Without it, they were a sub-scale player. With it, they're a real player.
Of course, it's in a game stuck in secular decline. Disney makes most of their money from the theme parks and cruises, not the movies. There's a reason why Parks chief Josh D'Amaro is the new CEO. Yes, the IP fuels it and keeps the flywheel going, but even Disney has to manage the fact that the actual movie business is simply not a great one anymore.
You'd think Hollywood would recognize this. But it's hard when their jobs literally rely on them not recognizing it. They're blinded by box office results that exist in a magical realm where inflation doesn't seem to. If we look at tickets sold – butts in seats – the situation looks dire. And it looks even worse if you put it through the lens of per capita moviegoing in the US.
Netflix carved a new path forward in the form of streaming. No, it's not as good of a business as the heyday of movie theaters – or even DVD sales – but it clearly works for Netflix. They're on their way to becoming the first $1T media company. Again, they thought Warner Bros' IP could have accelerated that, but now they'll find another way. One big question: without the need for Sarandos' endless promises of doing proper theatrical releases and windows, will Netflix go down this path? I still think they will – unless Sarandos decides the path forward with Hollywood is more scorched Earth in light of their reaction to his deal.
I wouldn't be shocked if Netflix goes the other way: aiming to show Hollywood what they missed by moving to dominate the box office themselves. Then again, I predicted this move long before this actual deal.
Perhaps it's simply, "They won. We lost. Next."2
Here's the thing: Hollywood absolutely shot themselves in the foot here. They thought the Netflix/Warner deal signaled the end of their industry, when really it showcased the best possible path forward. To be fair, it's not like the industry loves this Paramount deal either, but what they wanted was no deal. For Warner Bros to continue on as it was, forever. That was simply not tenable and not an option. If Netflix was a path to growth, and Paramount is a path to slower decay, the status quo would have been a quicker collapse under the burden of steady, managed decline.
I'm not trying to be a dick, I'm trying to paint a realistic picture. The only studio that can survive on its own is the one that has for the past century: Disney. And again, that's thanks to their other businesses propping up the studio. For a long while this was cable. Now it's the aforementioned parks.3 There's a reason why every other studio has spent much of the past 100 years being passed around various conglomerates like trading cards. These are not great businesses! Certainly not in our modern age. And when a modern age player came calling, Hollywood freaked the fuck out and threw a tantrum until they walked away. Nice work.
I'll end by once again quoting some Warner Bros IP, fittingly from the fictional media mogul I kicked off by quoting. "Money wins."
But really, it's more like: "Debt wins." Good luck.
M.G. Siegler
M.G. Siegler
M.G. Siegler
M.G. Siegler
M.G. Siegler
M.G. Siegler
M.G. Siegler
1 Strange how this keeps happening with Skydance deals? Also, I'm not really going to delve into the political aspects here, but I very much look forward to future reporting on that particular aspect, which sure seems to have a strong waft of a bunch of bullshit. ↩
2 Though "next" remains figuring out a way to combat YouTube. You know, the real competition here... To that end, probably not crazy to think that Netflix may be able to buy at least some of these assets – at far more firesale prices! – in a few years... ↩
3 Yes, Warner Bros has a small parks business too, thanks mainly to Harry Potter and deals with Universal. Paramount has been trying to get back into the game (after selling off some amusement parks back in the day). ↩