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Streaming and the remaking of Hollywood

Assif Shameen
Assif Shameen • 9 min read
Streaming and the remaking of Hollywood
Photo: Bloomberg
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I have long been a movie buff. There is a multiplex cinema complex walking distance from where I live. It is mostly abandoned except on weekends. Like everyone else, I watch movies mostly on TV or on my i­Phone when I am on the gym treadmill or stationary bike.

Streaming pioneer Netflix, which made money renting DVDs mailed in red envelopes, began dabbling as a distributor of streaming content for other Hollywood studios like Walt Disney and Time Warner in 2011. Eventually, Netflix pivoted away from being merely a content distributor for Hollywood studios to producing its own original shows like House of Cards. Hollywood has never been the same again.

Tinseltown underestimated the revolution that Netflix had unleashed with its bet on streaming original programming. Netflix’s current market capitalisation of US$270 billion ($366.12) is almost as much as all its listed competitors including Walt Disney, Paramount Global and Warner Bros Discovery, combined.

For almost five years now, rivals have tried to pivot away from relying on revenue streams that include ad-based linear TV and subscription-based cable TV to streaming as North American households cut the cord, cancelling their expensive pay-TV subscription — an average US$120 to US$150 a month —for cheaper streaming options.

Disruptive tech
A massive transformation is now unravelling in Hollywood. Old order is being disrupted and some of the world’s largest technology companies are leading the charge to remake the global entertainment industry. Hot on the heels of Netflix are search giant Google’s owner Alphabet which owns YouTube, e-commerce and cloud computing giant and i­Phone maker Apple. When the dust settles there will be fewer leaner and meaner players dominating the world of entertainment with tech giants at the apex.

Let me set the scene up for you so you understand the unfolding drama a little better. There are six big Hollywood studio owners: Comcast’s NBC Universal, Japan’s Sony Corp which owns Columbia Pictures, and Walt Disney which bought 20th Century Pictures from Rupert Murdoch’s Fox Corp a few years ago.

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There are also two beleaguered players Warner Bros Discovery (WBD) and Paramount Global in a last-ditch fight for their lives. WBD has US$43.7 billion of debts in the current higher-for-longer interest rate environment. Paramount Global has US$16 billion in debts. The sixth player is MGM, now owned by Amazon.

Actually, I should mention that there is a seventh player, Lionsgate, a minnow among the studios.

Then there is streaming pioneer Netflix, a giant studio in its own right, and, of course, Apple with its Apple TV+. Oh, don’t forget YouTubeTV, another entertainment behemoth in its own right. If you cancel your cable TV subscription and subscribe to YouTubeTV, you get a vast array of filmed content from a bunch of TV channels and studios as well as exclusive live sports offerings. YouTubeTV had eight million subscribers at the end of last year and is growing fast. Over the past two years, YouTubeTV has emerged as an aggressive bidder for sports streaming rights in North America. The upcomers are taking market share and mindshare from the incumbent studios.

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Cable TV has long been the “cash cow” for the likes of NBC, Disney, Paramount and WBD. Cable networks had a dual revenue stream of subscriber fees and ad dollars. At its height, Americans were shelling out between US$120 and US$200 in cable fees a month and cable networks were bringing in US$35 billion a year in ad revenues. This year cable industry’s ad revenues are likely to be around US$20 billion according to most estimates.

Cable TV penetration in the US peaked in 2011 when over 105 million American homes, or 91% of all TV households, had cable subscriptions. That has fallen to around 70 million US households or 55% of all TV homes in America. Within three years, less than half of all US homes will have cable subscriptions. Netflix, Amazon Prime, Disney+, WBD’s Max, Paramount+, NBC’s Peacock and AppleTV+ are seeing their own subscriber numbers soaring. The driving force is cost, convenience and the ability to watch filmed entertainment or live sports on multiple platforms like TV, tablets, smartphones or desktops and order programming à la carte rather than a buffet of over 300 channels of which 285 you never ever watch.

When Netflix first challenged the incumbents with its streaming service, NBC, WBD and Paramount were reluctant to let go of their ad revenues and just chase streaming subscription fees. Over the past decade, as ad revenues plummeted because fewer people were watching, the advertising revenues of incumbent linear TV networks like ABC, CBS and NBC and cable channels declined as well. By the time the incumbents woke up to realise they could be losing both their main revenue streams, it was too late.   

Netflix benefited from being a tech disruptor at a time when interest rates were near zero and tech stocks were on a tear. It spent US$17.5 billion on original programming in 2021 — or several times what larger incumbents were spending. This year, Netflix has budgeted US$17 billion for spending on original content. It has been willing to pay big bucks to woo Hollywood’s top stars, directors and writers.

Incumbent rivals laden with legacy costs have been reluctant to change and cannibalise their former cash-cow businesses that are in structural decline. It is a classic innovator’s dilemma. They don’t want to let go of a bird in their hands to catch two in the bush. It is a repeat of what we saw earlier with the global print media when publishers were afraid to let go of their coveted print advertising revenues to chase digital ad dollars only to find that they were losing the battle for both print and digital ads. Now, a similar drama is being played out in filmed entertainment.

Consolidation ahead
Clearly, the best route would be industry consolidation with tech giants like Alphabet’s Google, Apple, possibly Meta Platforms and even Microsoft buying debt-laden studios. Yet, there are several roadblocks here. The Biden Administration doesn’t want the dominant cash-rich tech giants or “Magnificent 7” to grow even bigger. Amazon’s US$8.5 billion purchase of MGM studios, which co-owns among other things besides the James Bond franchise, was initially allowed though regulators are now having second thoughts. The Federal Trade Commission or FTC is likely to strongly resist Apple, Google or Meta taking over WBD, Paramount Global or Disney. Indeed, FTC is likely to even veto an intra-industry merger between say NBC Universal and WBD or between NBC and Paramount Global.

It is unclear to me why Biden is unwilling to allow consolidation. A couple of mergers will only reduce the number of studios from seven to five. It is not like a monopoly or oligopoly is being created here. Five strong studios will be better for competition than say four strong film studios and three weak ones. It will make the US entertainment industry even more globally competitive. Netflix makes movies and TV serials in 15 countries in eight languages. Other streamers are making global programming as well. My sense is that the second Trump Administration will likely look more kindly at consolidation and allow America’s homegrown champions like Apple, Google, Meta, Amazon and others to grow and prosper rather than keeping them chained.

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Another problem: the owners of some of the financially crippled entertainment giants. Right now, Paramount Global, which owns a film studio, linear TV network CBS, and Viacom the cable network that owns MTV, Nickelodeon and Comedy Central, is on sale.

Shari Redstone, daughter of the late media mogul Sumner Redstone, controls the firm through her holding National Amusement, a chain of cinemas in the US, UK and Latin America with over 1,500 screens that was founded by her grandfather. National Amusement has 77% voting shares in Paramount Global but only owns a mere 20% economic interest in the listed firm.

Filmmaker David Ellison and a consortium that includes a private equity firm want to buy out Redstone’s 80% in National Amusement for over US$2 billion which will give them control of the rest of Paramount. David is the son of Larry Ellison, the founder of software firm Oracle who is worth US$148 billion. The younger Ellison will then inject cash into Paramount as well as merge his entertainment firm Skydance into a listed firm. Paramount’s minority shareholders will get nothing except a promise to ride with him in restructuring. David also has a sister Megan Ellison, also a film producer, who was behind movies like Zero Dark Thirty, American Hustle and Phantom Thread.

A second bidder, which is offering US$26 billion for Paramount, is also a consortium led by Japan’s Sony Corp and private equity giant Apollo Global Management. Because Sony is a foreign firm, it can’t own CBS, which is a TV broadcaster and can only be owned by US-owned companies or American individuals. Even Apollo, which is US-owned, is unlikely to be allowed to own a US broadcast TV licence.

So, the consortium has vowed to break up Paramount Global, sell CBS, along with Paramount’s cable channels like Nickelodeon and Comedy Central and its streaming service Paramount+, and merge Paramount’s TV and movie library as well as its intellectual property with Sony’s studio assets. Paramount minority shareholders love the Sony-Apollo deal but Redstone is backing the Ellison deal because that gives her far more cash.

Unlike other movie studios, Sony refused to enter the streaming business. It was happy making movies and programming for other cable TV networks and streamers. Instead of building its own army or a streaming platform, Sony chose to remain an arms merchant — making programming for others. By keeping the studio, IP and film and TV libraries to themselves and jettisoning everything else including streaming, linear TV and the cable TV business, the Sony-led consortium is sticking by its original content arms merchant business.

The Paramount deal will be a template for future entertainment industry consolidation. How will it impact markets like Asia? There are state-owned TV broadcasters as well as some private TV stations in most markets in Asia. Because of government involvement, change might not come to the region as quickly as it is unfolding in the US. But in the end, as a new generation of movie and TV watchers emerge, glued to their smartphones and streaming services, it is more likely than not that state-owned channels will embrace the business model of global streamers or indeed even cut deals to ride with them to gain audience, subscription fees and, of course, advertising.

Assif Shameen is a technology and business writer based in North America

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