Paramount, Skydance and the streaming wars

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0:26Pushkin.

0:31The Paramount deal has finally gone through. It's a Hollywood earthquake. Today on the show, we're talking about the future of the movie business. This is Unhedged, the markets and finance podcast from the Financial Times in Pushkin. I am Rob Armstrong coming to you from Unhedged World Headquarters in New York City. Joining me today is the FT's US Deals Editor, James Fontanella-Khan. James, welcome to the show. Thanks for having me. James, the last time you were on the show, and this really delights me, frankly, you told us this deal wasn't going to happen. And it just brightens my heart that someone besides me is wrong.

1:13But tell me what changed here that the deal did happen despite your prognostications. Well, actually, I wasn't wrong because the deal did die. So I think I was right then. You guys didn't interview me again after it died. Yes. I could have told you maybe it comes back. I mean, it died, then it came back. So, yeah. All right. So what happened? What changed? As ever in dealmaking, it's all about the money. Shari Redstone, interestingly, when the deal first collapsed, said that she wanted, she felt that the non-voting shareholders were not getting treated fairly. That was kind of the message that her spin doctors were pushing out.

1:54But in reality, what happened after the deal collapsed, Larry, sorry, David Ellison, I got him mistaken with his father, Larry Ellison, the founder and billionaire, mega billionaire behind Oracle, the tech giant. David Ellison reached out to Shari Redstone and said, look, let's find a way to get this done. And the way they did it is they gave her a bit more money to Shari, not the non-voting shareholders. Who she was so concerned about. Absolutely. And the other key factor is essentially providing greater protection to Shari Redstone again in case the shareholders sued her. It's important to kind of remind our listeners of the structure of this deal because it's not a straightforward deal.

2:40Essentially, Skydance agreed to buy NAI, National Amusements, which is a Shari Redstone company, which then controls Paramount. And once you take control of Paramount, they are going to merge Paramount into Skydance, which is an independent movie studio, and then add some cash to make the non-voting shareholders happy. This all sounds very complex. And I know there is a window now, a 45-day window in which others can intervene. Is this deal going to get done? So this time around, I'm going to say that it will get done. But to your point, there's a 45-day go shop clause. That means that anybody else could come in and offer more money and take over the company.

3:32If that happens, then Skydance will receive from Paramount a fairly chunky breakup fee. I think it's around$400 million. So whoever comes in with a better deal needs to top what Skydance is offering plus another$400 million. So the likelihood of that happening is low. And part of the reason they put this 45-day go-shop clauses is to protect themselves from potential lawsuits coming later on. Because if nobody shows up, they can go back to the shareholders and say, look, we put it on the market, as you would with a house. Nobody turned up. So this was the best deal out there. And you should accept it.

4:16Before we turn to the industrial implications of the deal, do you expect a lawsuit? Is somebody going to have a go at them? There's always a lawsuit when you have a deal. So it wouldn't be shocking or surprising. I'd also add Shari Redstone has been kind of sued by non-voting shareholders before. And she has always won. I mean, the contention here is to help our listeners to understand what is a genuinely complicated transaction. Here you have a vehicle owned by a person that controls the majority of a company without really owning the economic majority. So NAI, National Amusements, owns about 10 % of Paramount, but controls around 80 % of the voting rights.

5:05but you know and it's a listed company but nobody forced anybody to buy paramount and that's kind of the main argument that the red stones as well as it is what it says on the tin the non-voting shares say non-voting in big letters on the box okay let's assume the deal does go through this is being pitched as a deal that changes the landscape in hollywood is that true and if it is kind of how come? What is the plan for this deal that could make it revolutionary or change the way movies are made? This deal is being closely watched by everybody in Hollywood. And I have to say, there's a lot of respect for David Ellison, what he's done at Skydance.

5:50He's the CEO of Skydance, the studio. He's the CEO, founder of Skydance, which is an independent studio, which has worked with Paramount before. Larry Ellison, the billionaire founder of Oracle. Billionaire doesn't really do him justice. He's like a multi-kajillionaire. Yeah. And that is putting some money to this deal. I think it's around 6 billion of the overall eight that is being invested as part of the transaction. The remaining 2 billion is being put by Redbird Capital, the private equity firm backed by Jerry Cardinale. So yeah, The plan here is, we've heard it before, it's to turn a media company into a media and a tech company.

6:36The objective here is to compete with Netflix. Yes. And I spoke to David Ellison and Jerry Cardinale, and they believe there's one player in town at the moment, and they think that they can modernize the way things are done at Paramount. There's definitely a truth that Hollywood is way behind other industries when it comes to technology, with the exception precisely of Netflix. And so there's a lot of fat to be cut. And one of the things he told us is about kind of using Oracle's kind of cloud to cut costs massively. And he said there's a lot of resistance at the moment amongst kind of the operators in Hollywood because they think that the quality will be affected.

7:22Ellison begs to disagree. I want to cut in and disambiguate. The sense in which Netflix is a technology company is in the distribution, not the production of movies. So I think the user experience on Netflix's platform is better, not just because they have more movies, but because it's sort of easier to use, smoother. The recommendation engine works a little bit better. And so I very much understand the idea, let's have a distribution platform built on cloud technology that works as well as Netflix's. Where I get a little skeptical is that in movie production, there is more to be done by digitizing and using the cloud, which is one of those words that just gets kicked around like AI or blockchain or whatever.

8:17you know where it's like we will do techie things and everything will be great do you buy that argument that on the production side there are technological efficiencies to be i mean i think it'd be crazy not to have some healthy skepticism but i i think you got to give him the benefit of the doubt so the truth is nobody knows it'll be a test i think it is not worthy that you have both Redbird and Ellison putting a lot of their cash into this deal. So they definitely have skin in the game. But on the other hand, if you look at the share price of Paramount, it's been down since the deal has been announced.

8:59So I'm not sure shareholders are quite convinced about it. We'll see. When I think of digital production of movies, the example I always think of is Disney's Star Wars franchises, The Mandalorian or whatever, where you look at those things and you have a couple of pretty well-known actors in the foreground, and then you can tell, you have to pay attention, but if you really look, you can tell everything those actors aren't physically touching. They're just in front of a green sheet and the entire show in the background is created on a computer, you know, and some of it looks fine. Other times you can sort of see the glitches in the machine, but that seems like the model is you pay for a few stars.

9:47They do some voice work and some moving around work. And then it's just animation in the background of a very high end form. Jason did talk a lot about the importance of animation and kind of doubling down on animation and really using that aspect of technology in that sector of the movie making industry and especially at Paramount. There's obviously the Paramount Plus platform, which is there. And we can use maybe this as a segue to talk about the broader streaming industry. Yes. But it's like he said that actually him and Jeff Schell, who used to be at NBC and will be running the business with Ellison.

10:27The idea is they might be partnering with other streaming companies and kind of recreating, if you want, the bundle. Yeah. They might end up buying other businesses. They might be selling certain brands. The question that it raises for me is whether streaming is naturally an industry that just has one or two dominant players. The fixed costs are extremely high, making the shows, building the tech platform. And then adding an incremental subscriber doesn't cost you much at all. so it's all you know if you get over your fixed costs if you pass that threshold then you're making money and you can reinvest and there's like this flywheel where you get stronger and stronger which is clearly what happened with netflix and as a result we have netflix which makes a decent amount of money we have disney which is making a tiny amount of money in streaming if you believe their accounting and then you have everybody else and it's like wreckage and I wonder if no matter what Skydance and Paramount now do together, they're up against an economic barrier that's going to be hard to overcome.

11:40You know, this is a first to the post winner take all-ish kind of industry. So I think that's a very fair point. And I think one of the other interesting aspects of my conversation with them after they was announced was that they are very open to selling their content to others. So while pursuing the Paramount Plus, their kind of streaming platform and trying to make it better, again, using technology to improve discoverability of stuff and whatnot, they don't want to gatekeep their content. And that to me sent a message saying, we're going to try to fix the platform. If it doesn't work, I think they will be ruthless about shutting it down.

12:21We're a production company and we will produce and we'll let other people do the distribution. Exactly. We'll produce the best kind of content and people will have to pay for it. So if Netflix wants our movies and there'll be a competition. So I think there'll be nimble and it might become something that other production companies will themselves reconsider their distribution platforms. We've seen a lot of partnership already in this industry. It's like we're being sold bundles all the time. Disney plus Hulu, whatever. Is that a way forward where maybe all of the Netflix also rands get together and it becomes Disney plus HBO plus Hulu plus everything else all in one and we have a clash of the two conglomerates?

13:10I think inevitably we're going to see a version of that. And some have already announced the kind of plans to kind of put together joint ventures. But there's two problems. One, I think, is are they going to get along? Are they going to find the right economics to make it work? Again, I often look at our industry because I think Hollywood is about to go through what the newspaper industry has already gone through. Yes. There were long talks about bundling and stuff. Didn't work. No, I mean, Apple does a bit of it, but you get a few articles, you don't get the full journal or whatever. I don't think the FT is in there.

13:52And so there's issues around bundling because people are only willing to pay$10. And then it's how they split the$10. I think my content is better than yours. Indeed. So there's that issue. So they'll try, but might fail. If they succeed, then there might be a regulatory issue. And one thing that regulators are catching on to is companies avoiding to combine economically, but essentially merging, which would raise antitrust issues. And they're trying to circumvent the antitrust issue by doing joint ventures. That's probably a trend in technology generally. Absolutely. And they've also been targeted by the regulators.

14:33And the regulators might be a little slow on this one, but they're not stupid. But they'll get there. Yeah. So do you think, you're a deals reporter, do you think consolidation proper is off the table for the time being in Hollywood? The short answer is I don't think we're going to see any deals imminently. But Zaslav of WarnerMedia Discovery recently said that he thinks there will be more consolidation. The likes of Comcast have long been looking to kind of buy more assets. The question is a regulatory one, and I think the environment at the moment is very hostile to big mergers. Well, what if it's Trump in a few months?

15:18Does that change that? It really depends what kind of Trump we're going to get. Because as I asked one of the top regulators in place at the moment, appointed by the Biden administration, so the more progressive school of thought. and we were told, look, if the J.D. Vance school of thought has its way in matters of antitrust, they will be extremely populist and would have a position which is kind of quite hostile to big business and consolidation. Especially in an industry that the likes of J.D. Vance feel culturally very alienated. Correct. And Trump too. I mean, I don't think there's very little love for Trump in Hollywood.

16:00And the same thing for the big kind of houses in New York. So they wouldn't be dying to help. On the flip side, when AT &T bought Time Warner, there was a lot of noise mainly because of CNN, but they didn't block the deal. They didn't block the deal. Let me ask you a question on a slightly different front. But does this whole conversation that we've just had presume that the old fashioned movie theater is on its way out? Is the background here that Hollywood realized that their old distribution chain theaters is just for all intents and purposes, it's gone. It's disappearing. I think that's been true for the longest time.

16:47I mean, NAI, Shari Redstone's family business was born as kind of, I think a drive in, but it was all about the movie theater. I think it will need a reconceptualization of the movie theater. I love going to the movie theaters, but I tend to go to more independent theaters where I can find those movies that I wouldn't necessarily find on these platforms. So I think the big chains are in trouble, have been in trouble, will continue to be in trouble. I don't think this is changing anytime soon. Well, the podcast business in general, and unhedged in particular, is not in trouble. Absolutely. So we will return after a break with Long and Short.

17:33Listeners, welcome back. This is Long and Short, that portion of the show where we go long things we like and short things we don't like. James, on Sunday, we have the final of the Euros in what you call football and I call soccer. It is Spain versus England. And only partly to piss you off, I'm going to go long England. The reason I badly want to see them win is that they played so badly in the group stage that my Twitter feed, which is largely British people because of where I work, was one long continuous beatdown of what awful soccer the English team was playing. and all of a sudden they're in the finals.

18:15They could win it all. And I love the idea of the Brits being incredibly cynical about something and then being proved wrong. So you think it's coming home? Yes, I do. Well, I don't. Just like three years ago in the Euro 2020 that was played in 2021 against Italy, they lost to Italy. And so I'm going to stick with my Mediterranean brothers and sisters. so I'm going to go along on Spain because they play the best football and more importantly it'd be so obnoxious to see work amongst all these Brits and celebrating England it'd be painful now that you point that out maybe I'm seeing your side of the story listeners we'll be back in your feed after this great question is decided next Tuesday until then stay sharp Unhedged is produced by Jake Harper and edited by Bryant Erstad Our executive producer is Jacob Goldstein.

19:11We had additional help from Topher Forges. Cheryl Brumley is the FT's global head of audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn, and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Rob Armstrong. Thanks for listening.

19:49We'll see you next time.