Paramount and Disney are chasing a pre-stream pipe dream
Studios built streaming platforms believing it would create a tight bond with viewers
Once upon a time, media companies like Paramount and Walt Disney lived a peaceful existence, producing content and licensing it to the highest bidder. But the fairy tale ended when big studios started to engage in costly streaming land grabs against Netflix, creating a glut of video distribution services. Now, both are trying to recapture better times.
Paramount Skydance is attempting to solve the streaming wars through its $110bn takeover of Warner Bros Discovery. The process isn’t without hiccups: 12 US states, led by California, are suing in federal court to block the deal, alleging that it will result in excessive concentration in both movie production and distribution of content.
Not true, says Paramount. The company run by Donald Trump ally David Ellison says that the merger will, thanks to cost savings that would increase its total ebitda from $12bn a year to $18bn, leave it better positioned to invest in a fortified slate of film releases and TV shows. Thus it will become a better foil to the likes of Netflix and YouTube.
But what if the right answer for investors isn’t to get bigger in order to win the streaming wars, but to quit that costly fight altogether? A report from Wells Fargo published on Monday claims Disney could add 40 per cent to its market capitalisation by ditching its Disney+ direct-to-consumer service and instead stick to making and selling on video content.
It’s possible that the perks of owning both content and distribution have been exaggerated. Studios built streaming platforms believing it would create a tight bond with viewers. But even the mighty Netflix, which pioneered the model, is now suffering: its shares have fallen a fifth this year. Even hundreds of billions of dollars in investment don’t guarantee a monopoly on long-term customer loyalty.
Disney’s digital service has never come close to matching the favourable economics of its studios; Wells Fargo points out that after years of losses its expected operating margin of 13 per cent is less than half what Disney’s legacy studio made in the pre-streaming era. Before the House of Mouse started investing heavily in Disney+, its market capitalisation was 15 times expected earnings, or 15 per cent higher than its valuation now.
Paramount often pegs its own steady decline, which started 15 years ago, to a strategy of reselling too much of its back catalogue to a nascent Netflix for easy money. Yet the response has been to spend mounting sums, both on streaming platforms and now on a premium-priced acquisition of Warner Bros Discovery. Netflix may be the fairytale villain, but the companies it displaced are their own worst enemies.