Emergency Pod! Paramount Outbids Netflix and Wins Warner Bros.

0:00Matt Belloni:This episode is brought to you by Spectrum Business. Fast, reliable internet means everything for your business and even this podcast. That's why I trust Spectrum Business. They keep companies of all sizes connected with internet, advanced Wi-Fi, phone, TV, mobile services, plus 24-7 US-based support. Millions of business owners already trust Spectrum Business. So visit spectrum.com slash business to learn more. Restrictions apply. Services not available in all areas.

0:33Matt Belloni:This episode of The Town is presented by 20th Century Studios, Avatar, Fire, and Ash. Don't miss the movie Critics Are Raving is epic and exciting and gorgeous and heartbreaking and stands as one of the greatest films ever made. It's got incredible visuals, jaw-dropping action, and a cinematic achievement. Avatar, Fire, and Ash now playing in theaters and now nominated for the Academy Awards for Best Visual Effects and Best Costume Design. It is Friday, February 27th. It's official. We have a winner in the battle for Warner Brothers, and it's paramount. Quite a stunner. Not that the Ellisons ended up on top or that they ultimately agreed to a deal worth$111 billion.

1:14Matt Belloni:I've actually been predicting the Ellisons since the beginning of the auction for Warner Brothers Studio and HBO Max and CNN last fall, even after Netflix closed its$83 billion deal for the studio and streamer in December. But still, the way it went down pretty surprising. Earlier this week, Paramount finally raised its bid from$30 a share for the whole company to$31. Plus, the Ellisons agreed to a bunch of additional sweeteners on top of the breakup fees. And Larry Ellison, one of the richest men in the world, he agreed to backstop the deal if it falls through. It was all enough for the Warner Brothers Discovery Board to declare the Paramount bid, quote, superior, which then gave Netflix four days to submit a matching bid, which most of us expected them to do, given how aggressive Netflix has been fighting for their deal.

1:58Matt Belloni:But nope. Ted Sarandos and Greg Peters, the co-CEOs, they walked almost immediately. Ted was actually in D.C. courting the Justice Department when this all went down. We've always been disciplined, he wrote in a statement. At the price required to match Paramount Skydance's latest offer, the deal is no longer financially attractive. Of course, there was a political cloud hovering over all of this, especially Netflix's ability to close this deal amid antitrust scrutiny. We discussed that with Ted on the show last week. The Trump administration is pretty happy with how the Ellisons are managing Paramount, and in particular, CBS News.

2:32Matt Belloni:And David Ellison was all smiles doing the thumbs up with Lindsey Graham at the State of the Union on Tuesday. So how did this happen? Was it just that Paramount was willing to dramatically overpay to the extent Netflix was not? After all, the Netflix shareholders didn't like this deal. The stock has been in decline ever since they started talking about buying Warners, and it shot up when Paramount got the deal. Or was this preordained by Trump? And most importantly, what comes next. Regulators are still going to take a close look here. And David Zaslav, he said on a town hall this morning that this deal could not close still.

3:05Matt Belloni:And if it does, it will likely take six to 12 months. And then the aftermath. In all likelihood, two studios are about to get smashed together. That cannot be good for Hollywood in general. Pretty disastrous, actually. So today it's an emergency pod with our usual Monday guy, Lucas Shaw from Bloomberg. Paramount wins Warner Brothers. Now what? From the Ringer and Puck, I'm Matt Bellany, and this is The Town.

3:32Matt Belloni:Okay, we are here. Emergency pod time. Lucas is at home dealing with five other things. I am in Arizona going to some spring training games, Dodgers Central. But we are convening here because finally we have a winner in the sweepstakes for Warner Brothers, and it's Paramount. Just like I said it would be. not quite how I thought it would go down. Lucas, I assume you were also surprised by this. I was surprised by the speed with which Netflix retreated. But the more I thought about it, I wasn't. Because over the last week, there had been this sort of creeping feeling that Warner Brothers was going to go with Paramount and that Netflix...

4:14I thought that the whole Sarandos PR tour, to me, even though it was in theory offensive, I interpreted it as a little defensive. And I started to feel like that.

4:26Matt Belloni:Like he saw where it was going. Right. And we, they had lost the war in public, the war of public opinion and was frustrated by it and wanted to try to counter the narrative. And it was, it ended up being too little too late. Yeah. I mean, well, there's the public narrative and then there's the political narrative, which I think was intertwining. Yeah, they are, of course. But, you know, listen, how long have we been talking about this being an era of consolidation in media to fight big tech. Disney bought Fox, Amazon bought MGM. Now Paramount is buying Warner Brothers. So big picture, this is not a huge surprise this is happening, but the ramifications are absolutely enormous here.

5:08Matt Belloni:And I don't think people in Hollywood quite realize what is about to happen. So we're going to go into a bunch of different topics. First, we're going to go into why this happened. So give me your sense of why this went south for Netflix, why Paramount beat this down and took this and essentially swiped it away from a closed deal. I think there are a bunch of factors. Look, Paramount was relentless. They kept coming, kept coming, kept coming. And they kind of bid by bid answered different problems that the Warner Brothers board had. Have Larry Ellison back this personally. Okay, he did have a breakup fee.

5:44Yeah. I mean, they end up with a deal where they are going to have to pay Netflix$2.8 billion go away. They have to commit$7 billion if this deal falls apart because of court case regulatory scrutiny, all of that. Larry Ellison is largely backstopping a$111 billion deal. Paramount can't change the terms or back out if their business falls apart, if Warner Brothers business falls apart, because remember, both these companies make basically all their money from cable networks that are shrinking every year. And so that really helped Paramount. And then there was the political pressure that they created where they kept talking about what a bad deal the Netflix kind of arrangement was.

6:20They got folks in Europe energized. They got attorneys general energized, the Senate, people in the White House. And even though Netflix and Warner Brothers dismissed it all as noise, where it really, I think, had an impact was on Warner Brothers shareholders who started to say, wait, why are we doing this Netflix deal when Paramount's going to buy the whole company and they're probably going to get it approved? And then the wrinkle on the Netflix side is their shareholders didn't like the deal. And so at a certain point, that's the big one there.

6:44Matt Belloni:I think that pressure, if the Netflix stock had started going up on the prospect of buying Warner Brothers, it's a different ballgame. But the Netflix stock was down, what, 30, 35 percent. And it kept going up every time the Paramount people would make a new deal because the shareholders were so hopeful that this wouldn't happen for Netflix. Like that's got to make an impact on them. Yeah, I mean, Netflix's market cap over the course of this process went down by more than they were offering to pay for the assets from Paramount, which is pretty crazy. And Ted argued throughout the process that they've done a lot of things that the shareholders didn't like.

7:21Matt Belloni:And this was all just uncertainty. And, you know, when they added ads, people were upset. But I think this is different because this was a fundamental change of what the company had done for the entirety of its existence. They just didn't do deals like this. And people were asking, like, why? Why are you going about trying to buy this traditional media asset when you're kicking everybody's ass and streaming? And are you going to get caught in a bidding war, which would have happened again this week, where you're going to spend too much money, you're going to take on all this debt. And if you're a shareholder, it also means, oh, you're not going to be doing buybacks anymore.

7:58That's not as lucrative for us. So yeah, I think they ran into a real problem with their shareholders that the political situation only made even worse. And look, I think Netflix got really frustrated at the end that basically nobody was on their side.

8:13Matt Belloni:You know what, though? I think that the TED press tour did start to convince people around town. They started to say like, oh, you know, maybe they will keep Warner Brothers separate. Maybe they will commit to movie theaters. You know, maybe the alternative here of CBS and the Barry Weiss nonsense coming to CNN and all the cost cutting and the layoffs. Maybe that's not what we should be rooting for here. I felt like the tide was turning a little, at least within the Hollywood community, certainly not on the political end. I had felt that earlier, right, where initially the deal gets announced and the Hollywood response was, oh, my God, this is horrible.

8:50How could we allow this to happen? And I felt like over the course of the next, you know, week or two, people started to think about it. And they're like, well, if this is going to happen, maybe Netflix is actually better than Paramount and we don't love it. But like, you know, let's try to basically let's try to get what we can out of Netflix on theaters and all that. And Ted, after initially slipping up on some of the messaging, became very consistent, said the same thing over and over again on theaters. is that you could not say it any more clearly than he did.

9:15Matt Belloni:Yeah, I went bullet point by bullet point with him and literally got him to commit to things like marketing and all this stuff that he was happy to do. There was not a James Cameron who came out and said, I'm behind these people. We should go with this. But it's easier to pick holes at the deal that has been made, the Netflix deal, than pick holes in the deal in the case of Paramount that was a theoretical deal, right? We spent all this time arguing about movie theaters, which was one of the central concerns about the Netflix deal, and spent very little time arguing about the billions of dollars in cuts that Paramount is about to make because that deal wasn't on the table at the time.

9:52Matt Belloni:Exactly. And now I think the realization hit people in town last night because I'm sure your texts and emails are blowing up like mine, like, holy shit, this is catastrophic. You know, is my entire department going to be gone? What is going to happen to CNN? what is going to happen to not the creative team necessarily at Warner Brothers. Maybe they'll keep them to pick the movies, but everybody else, all of the apparatus that goes into making and marketing and distributing and exploiting movies. All those people are on the table now. Yes. I think my favorite was, I thought I'd be happy, but now I'm scared.

10:31Matt Belloni:Yeah. I think scared is a good moniker. I mean, also the HBO people. I mean, what's that going to look like? I mean, maybe, yeah, I think it'd be asinine to get rid of Casey Boyes and his creative team at HBO. And already the Paramount people are saying that they're not going to do that. But again, it's everybody else. Let's walk through that, okay? Casey is obligated contractually to report to the CEO of the company. So are they going to keep HBO separate and have Casey report in to David Ellison? I would guess yes. I don't believe he would ever report to Cindy Holland. Not going to happen. So they will have Casey and Cindy running parallel organizations for parallel streaming services.

11:12Yeah, why not? You do what you got to do to keep people. That's not usually what you do.

11:17Matt Belloni:No, but it's also not usual that they have a president, Jeff Schell, that nobody reports to. So, I mean, it's all in how you want to set this up. I mean, this is all very early. There are many, many questions about this. And the overarching truth here is that there are going to be massive, massive cuts. I think the movie lots are on the table. Will Ellison sell off the Warner Brothers lot to develop it for condos? Will he sell the Paramount lot? Will he sell both of them? I mean, all of this is on the table. It's pretty catastrophic for the industry. In the short term, at least, he's arguing that he's going to create a behemoth that can finally take on Netflix.

11:59Matt Belloni:And in the long haul, it'll be a growth mode company. But that's a big, big ask. And it gets to this question, can this deal close? Probably, right? I don't know, man. Rob Bonta, the Attorney General of California, is already putting out statements saying, this is not a done deal. We are looking hard at this. The other state attorneys general in liberal states are going to go hard against this. the European regulators are going to go hard against this. There was a report from TD Cowan this morning that said they are pretty confident that this can close. They cited the Sprint deal from 2019, where a lot of the attorney general opposed that.

12:42Matt Belloni:And there were some concessions made. And ultimately, the Department of Justice signing off on it was dispositive. And they got that deal. It was a Sprint T-Mobile deal. I really do think that this is going to be a challenge. This is not over. The Paramount people don't agree with this, but by like normal antitrust measurements, the Paramount deal is actually like the one that would get blocked because it is a horizontal merger combining a bunch of duplicative assets, direct competitors. But we haven't really seen the Trump administration come out and try to block any deals, which is why I don't think that this one would I don't think the Netflix deal would have gotten blocked.

13:19I do think it would have wound up in court for a year or two. I don't think that this deal will get blocked.

13:24Matt Belloni:I don't think the Department of Justice is the problem. I honestly do think that's where the politics comes into play. You think they'll see either attorneys general or Europe? Basically, because, I mean, Elizabeth Warren and Cory Booker are already talking about this. Well, the senators don't really know. I know they don't, but you could have said the same thing on the other side. And that nonsense hearing in D.C. with Ted Sarandos, that did impact the public opinion on this. And if this this has now become something bigger than just a corporate deal, bigger than Hollywood, bigger than media.

13:53Matt Belloni:This is now something that like regular people know about. And if this is a cause celeb in the democratic political apparatus, we've got to protect CNN. We've got to protect the media. We've got to protect your data and all of this stuff that the Ellison family, Trump donors want to suck up and turn into this big media behemoth. This could be a problem for them. I think you mentioned Rob Bonta from California already said that they were going to review this closely. Europe has generally expressed concerns about media consolidation and American hegemony. I think that Europe probably would have been more alarmed by Netflix than Paramount, other than the fact that Paramount is in fact buying a bunch of the European TV network assets, which makes it a little more complicated.

14:40But I think, gun to my head, I think it'll be a slog. I think they'll probably need to pay some of those tickers that they pledged for how long it goes.

14:51Matt Belloni:And there are concessions that they can make. I mean, this is the same thing that was true on the Netflix side. I mean, Paramount could say, we agreed that we won't do XYZ. And okay, that's enough for the California Attorney General. Okay, we will do XYZ. That's enough for the New York Attorney General. Stuff like that. We will continue to produce a lot of stuff in the US. Oh, by the way, we will continue to sell many of our most popular shows to Netflix. Right. Which I do think is going to happen. I want to go back to that question of the consolidation and really the power of the Ellison-owned platform.

15:28Matt Belloni:Now, let's assume this deal goes through. I don't think people really realize what this deal will create. I mean, this is now a company that will have, with duplicates, they could have 219 million subscribers on streaming. They will have dozens of linear platforms and television networks. They will have CNN. They will have CBS News. They will have two of the original five, six movie studios. They will have a pretty unprecedented amount of the traditional entertainment assets. Now, take out Apple, Amazon, Netflix. This will be a pretty dominant platform. How do we think Ellison is... Well, and they'll account for more...

16:17They'll account between CBS and Paramount and Warner Brothers. They'll account for more production than any entity on the planet.

16:26Matt Belloni:And how do we think Ellison is going to use this platform? Because his argument has always been that if we're allowed to do this deal, there will be synergies and there will be additive elements here that are going to make the linear business work for us and allow us to create this direct-to-consumer platform that is going to be best in class and better than Netflix. And I still haven't fully bought into their argument for why this is better overall, other than just a consolidation play. But then you start to think about it. I mean, why would you? what we've seen i only say that because we've seen these deals happen again and again and again and we yet to have a successful example of one of these mega mergers that kind of had the intended effect and would be looked back upon as a positive we heard these same arguments for warner and discovery or and it's not that different from disney fox right you know disney fox the the what disney bought from fox was probably a little smaller than what paramount is buying from warner brothers, but Disney, a much larger company than Paramount.

17:32Matt Belloni:Yeah. And Fox, the Fox network was not part of the Disney transaction and Warners doesn't have a linear broadcast network as well. So that's one thing, but the power of these sports assets, the Ellison's now have football, UFC, golf, March Madness. They own all of March Madness now. Like they can deploy those assets across all of these platforms and potentially save those linear networks longer than would have been saved under the warner regime because what if you start putting ufc on tbs or tnt which i believe they can do what if you start you know using this to i i just think that they having all of this having all of these different kind of levers of audience can prolong the linear business a little bit longer.

18:28It's not the same as Discovery and Warner Brothers, but we keep having these media companies that because of the decline of cable are sort of worried about their future and believe that they will ultimately fail if they don't get bigger. And so you just keep having smaller companies swallowing and swallowing and swallowing. So yes, Paramount is in a much stronger position having the assets of Warner Brothers Discovery under its hood than not, right? Just having David Ellison's firepower, the Ellison's firepower behind Paramount may not have been enough. They have a bunch of cable networks that are just not going to get turned around.

19:04So it was really all about what they could do in streaming. I don't ultimately think that this is really about necessarily prolonging or strengthening Linear. What Linear gives the Ellisons is a bunch of cash flow.

19:18Matt Belloni:They do need it to continue because the numbers on the declines are pretty scary. They need it to continue because they need to use that cash flow to invest in streaming and pay down their debt. And the Warner Brothers Discovery networks are more profitable than the Paramount networks because David Zaslav doesn't spend a lot of money. It's a bunch of low-cost reality programming for the most part well and the the paramount networks are just not as strong of brands and they've been neglected for so long well they were they just yeah they were youth skewing to begin with like mtv and vh1 and like they just were in the worst possible position for a digital disruption i think the real quest the most interesting question at least from like what does the combined company mean or do is like we've been hearing forever about like oh oh, these different streaming services, all they need to do is join forces and then they can keep up with Netflix, right?

20:10Like David Daslam was talking all about, we got a bundling HBO Max with Disney Plus and Peacock and Paramount Plus and you just need to put it all together. Now we're going to see, right? A company is going to have HBO Max and Paramount Plus and the same thing. They can choose to combine it and make it one. They can choose to sell it as a package deal. This is the shot. If you think that this is going to make you competitive with Netflix, you now have the resources. You have two studios. You have a lot of programming. You have HBO. You have a library, all this brand. Go for it. Can you, is that really what you needed in order to be a suitable rival to Netflix and YouTube and Amazon and Disney?

20:46Matt Belloni:Yes. Not to mention the debt question, because I was looking at these numbers last night. My partner, Puck, Bill Cohan, I did a back and forth last night on this. You can read that at Puck. he went through the debt issue and we're talking about$70 billion of net debt for this company. And that's an estimate, but the revenue and profit associated with this company does not support that level of debt, at least not in the short term. Are we just getting into another Warner Discovery situation here where the focus for the next five years is going to be on paying down this debt and doing whatever possible they can to loosen the reins of this debt.

21:33Matt Belloni:That's going to be a huge part of it. I mean, that's why. But doesn't that just equal cuts and layoffs rather than investment? David Ellison has been talking about how he's the one that's going to invest in this company and they are going to be able to put two and two together and make five. But the history of this Warner discovery transaction tells us that that's not what happens. They just have to cut and cut and cut to pay down debt. Right. Well, that's why I said what I said earlier. The history of all these transactions is that they talk about how great it'll be for the industry, but then they just end up firing a bunch of people and cutting costs.

22:04Now, again, yes, David Ellison has said, we're going to put 30 movies a year in theaters. We're going to invest more in production. We all would like to believe it, right? We want that to be the case because it's what the industry could use. The history of M &A suggests otherwise. You don't usually combine the same assets to spend more money. You do it to save money, especially if you have debt. And they've already talked about having billions of dollars in synergy. So yes, you're going to see thousands of people lose their jobs. And we'll see what the impact is on output, right? We'll see how many movies combined Warner Brothers and Paramount produce in three years.