There is now significant and potentially irreversible inequality in the world of media. If you're looking for an equalizing force, don't bet on it happening in 2020.
Two major shifts in the past year have made scale — the concept of being as big as possible — more important than ever for media companies. The first is the transition from linear cable TV to streaming services, which are expensive to build out and run and require premium content to stand out.
The second is major consolidation — Disney buying Fox, Comcast acquiring Sky, AT&T purchasing Time Warner and Viacom merging with CBS — that has put media companies with enterprise valuations under $50 billion at a severe disadvantage to their peers.
The result leaves a handful of companies, including AMC Networks (enterprise value: $5.2 billion), Discovery (~$40 billion), Lions Gate (~$6 billion), MGM (private), Sony Pictures (part of larger company, Sony), and even the merged ViacomCBS (~$25 billion), in positions of relative weakness.
On the other side, Netflix (~$160 billion), Amazon (~$965 billion), Comcast (~$320 billion), AT&T (~$487 billion), Disney (~$315 billion) and Apple (~$1.4 trilion) have all put their flags in the ground in what the media calls The Streaming Wars, an evolution from bundled cable TV to a world of a la carte services that can be watched anywhere on any device. If Comcast, Charter/Time Warner Cable, Dish and DirecTV were the Big 4 of the media distribution world for the past decade, Amazon, Apple, AT&T, Comcast, Disney and Netflix look like the Big 6 of the streaming era.
MGM, in particular, seems like a logical candidate to sell this year. Its owners include Anchorage Capital, Highland Capital and Solus Alternative Asset Management, hedge funds that acquired the company out of bankruptcy in 2010. The funds have made a brilliant decision to sit on their asset for nearly a decade, turning a bankrupt content library into an asset likely worth more than $10 billion, according to people familiar with the matter. And unlike family-owned media companies like AMC (the Dolan family) or ViacomCBS (the Redstone family), the company's owners are probably less likely to be deterred from selling.
MGM has held preliminary talks with a number of companies, including Apple and Netflix, to gauge their interest in an acquisition, two of the people said. MGM owns the James Bond catalog and its studio has made several current hit shows including "The Handmaid's Tale," which streams on Hulu, and "Live PD," a reality police show that has frequently been the most watched show on cable TV and airs on A&E. It also owns premium cable network Epix. MGM had revenue of more than $1 billion for the first nine months of the year consisting primarily of about $600 million in TV and film licensing revenue and $300 million from Epix subscriptions. For the nine months ended September 30, 2019, MGM reported adjusted earnings before interest, taxes, depreciation and amortization of $123 million.
Representatives for MGM, Apple and Netflix declined to comment.
The bifurcation of media into haves and have-nots could lead to several outcomes.
The default is smaller companies will simply license their content to the bigger companies' streaming services. This is the foundation of what built Netflix and Amazon Prime Video.
But the shift to streaming could make the so-called "arms dealer" extinct over time. Disney will want Disney content for its streaming services, AT&T will want WarnerMedia content, NBCUniversal will use NBCUniversal content, and so on.
If that's where the world is headed, the big streaming services will continue to look for an edge over each other. That's good news for the little guys, which may see their values spike if they turn into juicy acquisition targets.
Apple, for example, is brand new to media production and distribution and has started Apple TV+ without an existing library of series and movies to entice consumers. Buying an existing studio with experienced media executives may make sense, especially if the company, such as MGM, is heavy on intellectual property and light on people. (Apple is historically averse to corporate integrations that may result in culture clashes.) Apple, of course, also has a balance sheet that dwarfs virtually every other media company and could make a sizable acquisition without betting the company.
Netflix is the only pure play entertainment streaming video company, meaning it will have to churn out content at rates far faster than its competition, which still gets billions of dollars from a declining yet formidable traditional cable TV model with 80 million U.S. households. Buying a studio could help jump start Netflix's original productions, particularly for time-consuming movies. Netflix has an internal goal to make 95 movies in a year, according to people familiar with the matter. That's nearly four times what a studio like Universal Pictures makes in a year.
MGM's studio and library of content, which also includes movies such as "Rocky," "Mad Max," and "Hot Tub Time Machine," would be an appealing add to any company looking to bolster its streaming offerings, including traditional companies like Disney, WarnerMedia and NBCUniversal. But each of those companies is still digesting enormous acquisitions from last year, potentially opening the door for a large, unchallenged bid by one of the big technology companies. If it happens, it would be the first time a big tech company makes a sizable legacy media acquisition.
The catch is that Apple and Netflix have always been averse to big acquisitions. Netflix has never done a material acquisition in the history of the company. Apple's largest deal ever was a $3 billion purchase of Beats in 2014, an almost laughably small "record deal" given Apple's size and cash hoard.
Still, things stay the same until they change. Until 2017, Amazon's biggest deal was online shoe-seller Zappos, which it bought for $1.2 billion in 2009. Then it dropped $13.4 billion on Whole Foods. Just because a company hasn't made a large acquisition doesn't mean it won't.
There's one other option to arms dealer and mass consolidation: bundling.
Smaller players like Starz, Discovery and ViacomCBS could partner with members of the Big 6 to bundle their streaming services together for a discount. WarnerMedia CEO John Stankey said he was open to this idea in a CNBC interview last year, with HBO Max serving as the centralized hub to access not only WarnerMedia content, but also programming from other services.
In this scenario, instead of distributors such as Comcast, Charter, Dish and DirecTV all offering basically the same bundled service, consumers could have choices of bundles among different streaming services. It's conceivable the Big 6 could each market a different bundle centered around the user experience of their technology. Comcast could have an Xfinity streaming bundle, Apple could have an iOS bundle with Apple Music and Games, Amazon could sell a Prime-based bundle and so on.
Lions Gate CEO Jon Feltheimer alluded to this in his company's second-quarter earnings call in November.
"Rather than watching our traditional business ratchet down with each new unwinding of the television bundle, we're embracing the realities of the evolving marketplace, collaborating with our linear partners to grow our respective businesses and transitioning our customers on an innovative and orderly path to an a la carte environment together," Feltheimer said.
It's possible the Big 6 could turn into a Big 7 if ViacomCBS and Discovery merged their assets. They're currently too small to effectively compete toe-to-toe against the Big 6, but big enough where both companies feel they can survive in a streaming world.
Viacom, under current ViacomCBS CEO Bob Bakish, was interested in buying Scripps in 2017, but it was ultimately outbid by Discovery. Bringing the companies together would add strength to a global company that has a movie studio (Paramount), live sports (NFL, Premiere League), and non-fiction programming (HGTV, Discovery, Food Network).
Still, the structure of a deal could be challenging, with potential ownership challenges between the Redstones and billionaire John Malone (the largest individual Discovery shareholder) and Discovery dwarfing ViacomCBS in enterprise value but likely acting as the seller. Moreover, Viacom and CBS just merged and are still integrating the companies, which could make a second large deal untenable for a while.
That could lead ViacomCBS and Discovery to either sell or look for smaller acquisitions to build scale, such as Lions Gate's Starz.
It's highly unlikely we'll see the same type of mega-media merger action of 2019 in 2020. Companies will instead focus on marketing their streaming services and bidding on professional sports rights, including the NFL, in the second half of the year.
But the stratification of media has already taken place, and the lines have been drawn. If you're a media have-not, chances are organic growth, efficient operations and shrewd strategy won't get you very far. Fortunately for them, there are some very big fish that may finally be hungry enough to bite.
Disclosure: CNBC and NBC are owned by Comcast's NBCUniversal unit.