A Wave of Media Mergers: The Race for a Stake in the New Hollywood
Entertainment has shifted as technology has progressed in the past 15 years, leading to a significant change in how media companies distribute content through streaming services. At first, this transition was gradual. COVID-19 then acted as an industry disrupter, drastically accelerating industry transformation. Over the past two years, we have seen industry leaders like Disney, ViacomCBS, and WarnerMedia launch streaming services and evolve their film distribution strategies. The rise of a litany of new streaming services has introduced a completely new industry business model, which in turn, has led to a complete revamp of the market landscape.
Many entrenched legacy companies are now rapidly losing market share to new entrants. Companies like Netflix and Amazon, which are streaming-centric, are becoming the new giants of Hollywood. While streaming technology is essential to remain competitive, what ultimately will dictate the winners and losers of this next era in Hollywood is ownership of premium content and intellectual property (IP). IP is the precious asset that allows for creating great films — and great films drive new subscribers and growth for media companies. As such, the search for valuable IP and key streaming technologies is ultimately causing the flurry of mergers and acquisitions (M&A) activity in the current market.
These industry redefining moves involve significant players like Amazon, Lionsgate, Sony, and WarnerMedia. However, in other cases some of the activity includes companies in entirely different industries trying to break into the content business. So, the M&A transactions taking place now can fall under one of two categories outlined below.
Industry leaders bolstering their existing libraries
Let’s begin by exploring some of the purchases that might fall under the first transaction type. The most significant being Amazon acquiring Metro-Goldwyn-Mayer (MGM) for $8.5 billion. This purchase grows its existing library of films on Amazon Prime Video and gives it a wealth of underlying IP to develop future films. Amazon Studios now has access to the IP rights of franchises like “James Bond”, “Pink Panther”, and “Rocky”, and has enhanced infrastructure to distribute and market upcoming films.
Amazon has been working to grow its content library to draw more eyes to its Amazon Prime Video service, but it also has powerful, IP-rich competitors in Disney+ and HBO Max. This purchase is a big step in the right direction to competing with these other studios, as these franchises will go a long way in increasing and retaining subscribers.
Similarly, Sony Pictures purchased Crunchyroll, the premier American distributor of Anime content, from AT&T for $1.2 billion. Anime, a style of Japanese film and television animation, has grown in popularity in the United States in the past decade and is projected to grow $23 billion in the next seven years into a $48 billion market. Sony already had a pre-existing Anime production division, Funimation, but with the acquisition of Crunchyroll, it now has a direct line of distribution to the premier outlet for Anime in the U.S. Sony was not a significant player in the streaming space previously, but with this acquisition, it acquired a library of popular anime content and now has the infrastructure necessary to compete in an niche streaming-centric environment.
Another example of this type of acquisition is Roku purchasing $100 million of streaming content from Quibi. Roku has access to millions of televisions nationwide and buying the Quibi library allows it to own the content it’s distributing. Additionally, Comcast and ViacomCBS announced a partnership to launch a new streaming service in Europe called SkyShowtime, which would combine and distribute content from both of the company’s established streaming services: Peacock, Paramount+, and Showtime. Comcast’s Peacock has over 54 million subscribers, and ViacomCBS’ Paramount+ and Showtime have over 42 million combined subscribers. This partnership would enable them to become more competitive in a key territory with Netflix and Disney+, which have over 100 million subscribers on their services.
New companies looking to enter the market
The second category of transactions can be understood as companies, typically in other industries, just entering the premium content market. These purchases don’t necessarily come from smaller ventures but some unexpected players. A prime example of this type of acquisition is Hello Sunshine being purchased by a firm backed by private equity giant The Blackstone Group.
While the company’s name is not disclosed, what we do know is that it is led by Kevin Mayer and Tom Staggs, two former executives at Disney. Experience aside, this was the first investment by the Mayer and Staggs led media company, and Blackstone is not known for its involvement in entertainment. Mayer and Staggs were able to start their new media company, and with this purchase, they have immediately surrounded themselves with an experienced production team, as well as an established brand in Hello Sunshine. Also, a purchase like this gives hope to independent production companies, as after only five years of existence, Hello Sunshine was valued at $900 million. Reese Witherspoon and her team will be able to continue the success they’ve had in content creation, with more financial assets at their disposal from Blackstone.
The second acquisition of this type is Hasbro purchasing eOne for $3.8 billion in 2019. Hasbro has a rich collection of IP in its toys that it has been licensing to Hollywood for 40 years, beginning with the animated series “GI Joe” and “Transformers” in the 1980s. While it always licensed its toys to other production companies, it never managed the distribution of that content. Hasbro already had a working relationship with eOne, but never had the final say or complete control over the revenue from its projects. This purchase represents a shift in Hasbro’s relationship with Hollywood, now firmly controlling both the underlying IP and the production and distribution of its content, much like the major and mini-major studios.
What are Purchasers Looking for in a Potential Acquisition?
This leads to the next question: regardless of previous activity in the film world, what are these purchasers looking for? In both situations, the purchaser is looking to fill a hole in their business model and ultimately scoop up as much highly coveted IP as possible. In the Amazon-MGM deal, Amazon’s weakness was its lack of existing library and IP, and its strength was its distribution capabilities. From the other perspective, MGM has a catalog full of iconic IP but struggled to compete with much larger and more prolific studio competitors. Similarly, Hasbro has an extensive toy line with a history of success in the entertainment world. It had led to multi-million dollar blockbusters at the box office. However, it did not have the resources to produce and distribute its content. eOne had many production and distribution resources but did not have a deep IP library like Hasbro.
It has also been reported that A24 has been shopping its brand around to the likes of Apple, as well as countless other suitors over the last 18 months. The price tag is reportedly somewhere between $2.5 billion and $3 billion, according to Variety. This high asking price has raised eyebrows for a relatively smaller player who produces less than ten films a year. However, this underscores the importance of IP in these transactions. While A24 does not have the size and scope of most of its studio competitors, it consistently produces new and original IP that holds lasting value.
Similarly, given these market dynamics, Lionsgate looks to be a possible acquisition candidate. It has established production and distribution capabilities and has several hit franchises, like “John Wick”, “Hunger Games”, and “Twilight”. Lionsgate also has a streaming arm in STARZ. It’s considered a mini-major and could be looking for an investor to help bolster its balance sheet to compete with the major studios. Lionsgate would likely be open to an acquisition or merger with a partner looking to incorporate its IP, production and distribution capabilities, and streaming service. It currently provides those at a world-class level.
Overall, the market is amidst a massive reorganization. Some old industry giants are starting to lose ground to newer, more tech-savvy entrants. Companies that were never considered competitors are now bidding on the same film projects or releasing films simultaneously with legacy Hollywood studios. The core driver of theatrical revenue is now taking a backseat to streaming and digital revenues. In response, companies are working hard to shore up their distribution capabilities and buy as many IP rights as possible.
For investors, such as MCT, the continued industry consolidation and the increasing value of IP presents a rare opportunity. Players both large and small are beginning to understand how critical the next several years will be in Hollywood. Smart investors who can successfully obtain valuable IP ownership and align with forward-thinking, distribution-savvy studios will thrive. With the global content market forecasted to grow massively over the next several years, the upside of investing in content now presents a generational chance to own a stake in the new Hollywood.
