Podcast Alert: WBD, Netflix, and Paramount

Transcript

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Charles Rolston: [00:00:00] Welcome to Navigating Sports Business podcast. I’m Charles Rolston, VP and Consultant here at Navigate, and I’m joined by Navigate’s Head of Media, Umar Hussain. And this is one of those topics where by the time that you’re listening to it, more news has probably been announced. We were originally going to record this podcast just on the Netflix bid, but Paramount came out of nowhere with an all-cash offer for the entire company. 

So we’ve got two very different visions for the future of one of the most important media companies on the planet. We’ve got shareholders staring down a January 8th decision, and we’ve got a lot of people in sports asking, “What does this actually mean for rights, live events, and the ways fans consume content?” 

So umar, let’s get everybody grounded. If someone’s been offline for the past couple of weeks, what do we know so far? 

Umar Hussain: We don’t know a whole lot, but what we do know is super fun and interesting if you’re following the media industry at all. [00:01:00] Your favorite brands like HBO, Netflix, and Paramount are all going at it here. 

It’s been no secret that Warner Brothers Discovery has been shopping itself, but over the last couple weeks, it’s actually kinda come to a head where they’ve actually been courting multiple potential bidders, and we’ve seen a couple large bids that we’ve never seen in the industry before come through. 

Everyone’s talking about how the media industry is getting disrupted and falling apart, but content is still king, clearly, and we’ll quote some of the figures involved here. First, I’m gonna start, Netflix and Warner Brothers Discovery announced a deal earlier this week worth around 800… Sorry, not 800, $82 billion for Warner Brothers streaming and studio assets. 

So that’s HBO and what you’d see come out in the movie theaters and box office. It did not include the cable and linear networks like CNN and TNT, which [00:02:00] were already spun out over the summer into its own entity, similar to what NBC did with its Versant product. Then Paramount Skydance launched a competing bid worth $108 billion that covers all of Warner Brothers Discovery’s assets. 

So this includes both CNN, TNT, the linear networks. And as you mentioned before, the shareholders have until January 8th now to consider this alternate offer. What makes it all super interesting is that from what we’ve seen and tracked publicly and what’s been reported Paramount’s CEO, David Ellison, had been sending texts to David Zaslav, who is the head of Warner Brothers Discovery, saying that, “We’re gonna make an offer, but it’s not our best and final offer.” 

Whether it’s a he said or she said, David Zaslav still went ahead and accepted Warner Brother– sorry, Netflix’s bid, and now we’re in this hostile takeover territory where [00:03:00] Paramount, doesn’t wanna leave the kitchen table just yet. 

Charles Rolston: So I think there’s an important distinction that we just need to lay out for our audience there. 

 And you were talking about the difference between what Netflix is actually acquiring versus what Paramount is acquiring. And Netflix is obviously getting much of the streaming studio and the IP, while as Paramount’s bid is for the entire company. And if you just do some back of a napkin math, you can see that Paramount’s valuing the additional WD assets, WBD assets at twenty-six billion. 

And I know that’s not really a great methodology to assign value in a bidding war, but, that’s what our audience is really interested because that includes a lot of those sports streaming rights. So what do you think is a fair price tag for the cable and linear channel bundle that they’re including in that vacuum? 

Umar Hussain: Yeah, it’s such an interesting question because a lot– with with a lot of media assets, the beauty is a little bit in the eye of the beholder. Stuff isn’t necessarily trading on the multiples or on the [00:04:00] EBITDA. David Ellison’s been out publicly saying that twenty-five billion range that is being quoted is actually a discounted price. 

He says it’s probably worth more than that, and it might be for for Paramount and for investors. These linear assets have been declining year over year. Pay TV was at its heyday in about twenty ten at over a hundred million subscribers. Pay TV now is at about sixty million subscribers. It’s a steep drop and doesn’t seem like it’s slowing down anytime soon, despite YouTube TV bucking trends and Charter’s entitlements helping slow down cable losses. 

But that question of valuation comes down to how quickly do you think those assets fall apart? If they don’t, if you foresee the value of the sports properties, the news properties like CNN and TNT, coupled with Paramount’s portfolio of CBS, the Viacom MTV [00:05:00] networks, then you might s- find some additional value in the cash cow that is still cable and striving if the ad market remains strong, if cable subscribers can remain strong, the power of that IP stays. 

The valuation could be northward upwards of thirty-five billion. Now, if you’re very bearish on where pay TV is going and where those pa- those assets are situated, especially if they’re on their own in a spun, spun out entity, that valuation is probably closer to fifteen billion. So is twenty-five billion a fair characterization of the value? 

It might be. That’s sits right in the middle of that range, and you can argue that- bundled with the Paramount services that it helps drive it up because it makes the leverage against pay TV pri- providers a little bit stronger. It makes the, those rights stay in those lucrative business models like cable. 

People are still watching live sports. A combined Paramount, [00:06:00] TNT, CBS entity has a pretty substantial live rights portfolio with college football, NFL, hockey and a bunch of other tent-pole properties, most notably UFC, which just got acquired by Paramount. That’s all a long-winded way of saying that 25 could be fair. 

If it’s on by itself, I’d probably call it lower. If it’s with Paramount and CBS, maybe they do find about $35 billion. 

Charles Rolston: And let’s just assume that Paramount comes out to be the the acquirer in this case. You’re reducing the amount of bidders that are out there for sports rights. Combining TNT and CBS, that’s just one less bidder that we can really bring to the table. 

And usually what people s- would say that fewer bidders actually averages l- leverage to the buy side of these deals. What do you think happens if you’re a rights holder in this case? Are you cheering for Paramount or Netflix? 

Umar Hussain: Yeah. I think as a from a sports rights perspective, I’m gonna start with the Netflix. Netflix has just shown that [00:07:00] they’re more interested right now in tent-pole properties. They just got the Home Run Derby. They’ve done a Christmas game slate. They’re not going for full rights just yet. So if Netflix acquired Warner Brothers Discovery, I don’t know if that necessarily gets them to be more active in the sports rights bidding market because, again, those linear assets would be, those sports assets would be housed in that old Discovery Global service, which is the name of the spinout. 

Now, if it’s under Paramount, Paramount’s, being run by Jeff Shell. Jeff Shell’s a former NBC guy, Comcast guy. He loves sports. He’s seen the value of sports. They just bid, a billion dollars annually for UFC rights. You could argue that even though they’d be combining the assets of TNT, TBS with CBS, that they’ll maybe get more aggressive in buying and bidding on sports rights because now they have [00:08:00] more windows, more channels, more streaming services to put and program the content towards. 

So I don’t know if this necessarily takes a potential lucrative buyer out of the market. I think it probably makes Paramount even more aggressive. And if Netflix got it, you could argue in some ways that actually hurts sports bidders more because a independent Discovery Global will likely have less money to spend on sports rights. 

Charles Rolston: And from what I understand about Paramount is that they’re getting a significant amount of international investment support to actually make this offer, and the one thing that I was thinking of was, realistically, are is it sustainable to have inflated sports rights when that debt service is ultimati- you’re ultimately gonna have to come due to be able to pay these investors off? 

Maybe they’re gonna be looking at short-term deals that really do convert a significant amount of viewers [00:09:00] over to their platform, but rather than trying to lock in the rights for 10 or 15 years. But that’s a greater question about the direction of sports rights as a whole. 

Do you see a lot of these 10-year deals, or are we thinking more short term as there’s just so much chaos and and and conflict within this ecosystem on a, on an annual basis? 

Umar Hussain: Yeah. It’s a great question. No one’s been able to predict when the cliff’s gonna fall off on sports rights. 

They continue to invest and invest big. Amazon’s come in and to invest big with the NBA and the NFL, so the tech players have arrived. Netflix has paid premiums for, seemingly a la carte sports rights on a, from a, from an asset basis. YouTube, paying 1.5 billion a year for NFL Sunday Ticket. 

They haven’t yet made a meaningful splash on another sport right, but they were rumored to be in the mix for NBA rights with Warner Brothers Discovery. The other underlying thing to follow here is that while cable is shrinking, streaming [00:10:00] hasn’t necessarily supplanted the economics or been as attractive as what the old cable model was. 

Now, I think what we see as we track this industry is that it’s becoming a case of the haves and the have-nots. The NFL, the NBA, now looks like UFC, and I think premium college football can be put in this bucket, too. I think they’ll get their long-term deals. They’ll get big increases. They’re, they will be the properties that they invest with. 

Everyone else, it’s a little bit of a scarier proposition. I think there’ll be shorter-term deals. I don’t think there’ll be massive increases in rights unless you can demonstrate growth and global appeal. So you’ll see what we saw lately with the IndyCar renewal with Fox, which IndyCar’s performed super well on Fox, but it’s not a top performer, so Fox, still in the business, but equity partners. 

They’re taking equity stakes. They want a share in the upside. Similarly with Premier League Lacrosse [00:11:00] on ESPN. There wasn’t a rights fee increase announced in any press. Usually that hints that there probably wasn’t a increase, or if there was, it was modest or as part of some sort of exchange They also, came to an agreement for equity with ESPN. 

So from a sports rights fees perspective, like I think if you’re global, if you’re premier, you bring premium volume or you drive really large tentpole audiences with events, like what Netflix has done with some of their boxing headlines I don’t know necessarily if value’s gonna be driven in increased rights fees over a long period of time. 

Charles Rolston: Yeah, and I’m gonna predict that there’s gonna be changes that we can’t necessarily foresee to the monetization of the model. But let me ask you one last question before you throw a couple rapid fire back at me because I think it was really important that you brought up, what is Netflix’s goal with this? 

And I’m wondering if there’s a broader signal here because, Netflix has really prided themselves on [00:12:00] really promoting org-or-organic growth of their platform and really being against any type of massive acquisition of IP or a studio that we’re seeing in this particular case. So do you think that this is a signal that maybe the streaming model has hit a little bit of a ceiling and they have to adjust? 

And do you also see it as a signal for what they’re thinking about the sports market and sports right industry that it’s just not the position where they wanna be right now? 

Umar Hussain: Yeah. I’ll answer the first part of the question, and I think Netflix is interesting case study here because they have repeatedly said, “We are not gonna do ads. 

We’re fine with password sharing and whatnot,” and we’ve seen those measures as the street has reacted to their sub growth or slowing sub growth. Where do you find areas of growth? In shareholder value, you do those sorts of things. You had introduced an ad tier, and they’ve invested in live sports when they said they necessarily weren’t gonna get into live [00:13:00] sports. 

So I think this is just another step in that evolution where they have shown and I think, we, we can talk about the regulatory landscape with this and whether each gets approved or doesn’t or what faces scrutiny or not. But what this acquisition does for Netflix is it gets them into the movie theater business, and it gets them into the third-party content licensing selling business. 

HBO Warner Brothers Discovery sell a lot of content to cable and other streamers. Netflix hasn’t necessarily done those two things, so this opens up another business line. The other thing for Netflix here is, and this is interesting, when they announced the Warner Brothers Discovery acquisition, they were talking about how the rich IP library of Warner Brothers Discovery was gonna complement the rich IP library of Netflix. 

But the three shows that were cited for Netflix were “Squid Games,” “Stranger Things,” and “K-Pop Demon Hunters.” [00:14:00] “K-Pop Demon Hunters” is just one movie that just came out very recently Stranger Things is a show that’s just about to end, and Squid Game’s a show that just had a second season, and I wouldn’t necessarily call that a big franchise just yet. 

Now, I think that signals a little bit of probably the weak- the weakness in Netflix’s programming in terms of building these sort of franchise models. Now, all of a sudden, with the Warner Brothers Discovery, they’ve got DC Comics, they’ve got Lord of the Rings, they’ve got Harry Potter just to name a few. 

And with that, they’ve signaled they’ve been trying to get in the gaming business to have powerful IP that helps in gaming. They’ve also shown they want to get into the sort of in real life or IRL experiences with Netflix houses. It’s not necessarily an answer to a Disneyland or a Universal Studios, but what could draw people to those sort of pop-up experiences with a Harry Potter Quidditch experience or a Lord of the Rings fly on the eagle experience. 

They can do so [00:15:00] much more with the business lines they’re already in and the franch- with these franchises that it probably would have taken time to build with their existing IP. From a sports rights perspective, I almost think it’s inevitable they get there. I think we’ll see where the cliff comes with pay TV because once that happens, if Netflix is just being disciplined that, there’s only so much price in, in elasticity they can have with their subscriptions and how consumers will pay for it. 

I’ve already seen YouTube TV today announce that they’re gonna do some sports genres packaging, which signals to me that we’re getting to genre-based and maybe Netflix, that’ll open the door for Netflix to be like, “We don’t need to bundle sports into our base tier. We could have a bolt-on add-on tier for sports, and that’s how we’ll monetize.” 

What that means for the valuation of sports rights, that’s to be seen. But, maybe there’s a, maybe there’s an, there’s a situation or a scenario here where cable falls apart, sports values are somewhat reset [00:16:00] and they’ll get in at cheaper prices cause they have the money to do they have the subscriber base to do they’ve invested successfully in sports on the docuseries side and deliver that, and it’s been enough for them to then get into some tentpole events. Maybe that’ll kick the door open for them to get into for larger packages. 

Charles Rolston: It sounds like more fragmentation even within individual platforms. I’m not necessarily think that’s a good thing for the consumer, but it’ll be really interesting to see how this plays out. I’m wondering as we wrap up here, you got any rapid-fire questions that you want me to answer for you? 

Umar Hussain: Yeah, I do. If you’re a Warner Brothers Discovery shareholder, what questions do you have right now before you have to cast your vote by January 8th? 

Charles Rolston: That’s a good question. I think you’re really trying to answer what you- 

Umar Hussain: This isn’t rapid fire, by the way. This is take your time. 

Charles Rolston: Yeah. Exactly. Okay. Something I’m good at, but I’d be trying to answer what, what is my true risk profile and how much certainty do I want? Because you look at the Paramount offer, that’s all cash.[00:17:00]  

That’s really appealing to shareholders, especially in a choppy media environment. And then you look at what Netflix offers, and it gets much more uncertainty, m- more upside as well, and still keeps a little piece of the linear content as well as the streaming rights, to capitalize on some of that upside. 

I think also about this is that, inherently I’ve invested in this IP already. I’m a fan of HBO, I’m a fan of DC, Harry Potter. I wanna understand who’s gonna be the best shepherd for this IP moving forward because we’ve seen many cases where IP changes hands and it becomes totally saturated, and a studio will come out with two movies in a year and an incredible amount of spin-offs where, you just get exhausted with the IP. 

But I’m really interested to see because from two different points of view, Netflix really seems like they wanna add it to their ecosystem, but I’m kinda interested to see what the crossovers that they have with their current IP and what new kinda content could be created from that as well. 

Whereas Paramount, it seems like more like they [00:18:00] wanna integrate it and then reduce redundancies. Answering that question on shepherding, I think is more of a qualitative question. I think the real question that somebody’s invested their hard-earned money into this is, what’s gonna pay me the most, but also have the best chance of going through this regulatory framework because I don’t wanna go six months down the road where this gets denied, and now we’re in a totally different ecosystem where trying to get this top dollar might be a little bit more challenging. 

Umar Hussain: Yeah. It’s super fascinating and it’s a question I think you’re right is of do I take all cash like Paramount or do I get in the upside and get Netflix stock here? I almost look at that, what, three to four dollars a share on the Dis- Discovery global asset as like a nice-to-have, and you hope that there’s other buyers out there that perhaps want to acquire and make something of that asset. 

You could certainly argue that like Paramount’s probably the best, most interested one to make the most out of those assets today because I don’t think Disney’s trying to add more networks even though they have invested with the [00:19:00] NFL with NFL Media. I don’t see Comcast Universal doing it when they just spun out a few of their cable assets, and Fox, same as well. 

They sit in this very interesting situation where they’re very tethered to linear. They just launched a streaming subscription. I almost think if there was a money line on who was gonna get sold next, it’s probably Fox, although they have been signaling publicly that they weren’t interested, but can only take a grain of, only take all of that with a grain of salt. 

Charles Rolston: Let’s make this next one rapid fire actually. What are some of the Warner Brothers Discovery franchises that you’re most a fan of? 

Umar Hussain: Yeah, I think what I love the most about Warner Brothers Discovery now is the Christopher Nolan sort of output deal, the stuff he’s done with The Dark Knight, with sh- movies like Interstellar, and I know he’s done some stuff with Universal, but he’s got a good relationship with Warner Brothers Discovery. 

In some ways here, it’s like that’s the coup for Netflix or Paramount to get he’s driving [00:20:00] big box office ticket sales and a ton of attention. So I’d say my favorite franchise is just anything Christopher Nolan puts out. 

Charles Rolston: Yeah, for me it’s HBO originals all the way. The Sopranos, Succession, The Wire, and a shared favorite of ours, Industry. 

I’m hooked on that. I feel like they just do not miss and it’s some of my favorite TV. Okay, let’s get to the prediction segment of this. Which would these deals moves forward? 

Umar Hussain: I just have a gut feeling about Paramount. The all cash component, the taking care of all of the assets, all the IP from the cable portfolio to theatrical, it’s just like you said, there’s synergy there. 

I am afraid a little bit of just they’ve already laid off a ton of existing Paramount employees, and bringing in Warner Brothers Discovery, even more of a hit in a challenged Hollywood landscape has already lost 40% of its workforce. It would be more. So that’s a little bit scary to me. 

I think there’s less [00:21:00] jobs lost under a Netflix model, but again, it’s cash king. The Paramount has already made inroads with this government and it’s no secret, I don’t wanna get too much into the politics of it, but the president’s son-in-law is part of that cash capital injection with Paramount, so it’s hard to bet against that. 

How about you? 

Charles Rolston: Yeah, usually I’m taking the other side of this, but I think for this one I gotta go with Paramount a little bit because of obviously the connection to the current administration. But more it really puts Warner Brothers Discovery’s board in a tough position because this hostile takeover, either you have to admit that you’re not getting top dollar and you have to figure out some way that you’re gonna defend that to your shareholders in order to choose Netflix over Paramount in this case, and I think that just might be a little bit of a challenge, considering the economics of this company and what the shareholders are looking for moving forward. 

But Umar, it’s been great chatting with you. I wanna thank our audience for listening to Navigating Sports Business once again. I’m [00:22:00] Charles Rolston. I’m joined by Umar Hussain. If you have any questions or comments for us, please feel free to reach out. You can find me at my email, Charles@NVGT.com, NVGT.com, and you can always connect with me on my personal LinkedIn, and obviously Umar’s personal LinkedIn as well. 

And we’ll catch you guys on the next one. Thank you.