Hollywood’s New Misery

Hollywood’s New Misery

If You’re a Lender, Fund Manager, I-Banker, Smile. Unions and Talent Are Mad as Hell

As if the film and television (including streaming) companies weren’t stressed enough, among AI, rising supply chain/health care costs, political pressure (censorship and the “donate or else” reality), changes in consumer tastes (catering to the young without losing the rest), etc., you’d might not think that studios would still vie for big theatrical entertainment, and the streaming world would simply be a continuing income supplement or a competitor for only one of your divisions. But industry consolidation, factoring the massive costs of buying the massive entertainment players, puts an additional pressure on costs.

Traditional networks used to order 22 to 26 episodes a year. Plenty of work for writers, directors, crew and performers. As streamers began to dominate the space, they were happy to buy old traditional network fare – Netflix was particularly adept ay marketing what used to be “network reruns” far better than did any traditional network – and reduce the percentage of original production from 50% to 30%. Oh, and streamers’ order pattern is 8 to 13 episodes/season. Although YouTube remains the largest streamer on earth, Netflix is the world leader in scripted, premium content. But as A-list creators and talent were able to extract a theatrical release for their Netflix features prior to exhibition on Netflix, the streamer was never able to make that theatrical component work. That will become material later.

The industry was still reeling from a recent flurry over-priced studio acquisitions. The Walt Disney Company announced the purchase of Rupert Murdochs’ 21st Century Fox on December 14, 2017, and the transaction was completed on March 20, 2019. The price started at $52.4 billion, but wound up at a staggering $71.3 billion after a short and nasty competitive bidding war with Comcast. Murdoch retained the physical plant, Fox broadcast/news and other assets, and Disney used the library to feed its nascent streamer.

A complex reverse merger left former Discovery CEO David Zaslav effectively heading both Warner Bros. (which was then held by AT&T) and the Discovery assets for $43 billion of cash and massive assumption of debt carried by the new entity, Warner Bros Discovery (WBD). Despite efforts to whittle down the debt and the success of a slew of successful theatrical releases, WBD was forced to consider selling the whole of the company or splitting the company into the linear television and cable assets, on the one hand, and the theatrical arm/HBO-HBO Max asset on the other (with the physical plant). Gee, that seems to have happened as I’ll explain below.

With the world assuming the likely buyer would be newly formed Paramount Skydance merger entity under Oracle heir, David Ellison, Oracle CEO, Larry Ellison (David’s father), already under a heavy debt load from massive investments in artificial intelligence development, began looking for other potential equity investors in the Middle East and elsewhere. After all, the Ellisons were tight with Donald Trump, and the only other expected bidder, Comcast, faced headwinds from the Trump administrations from his distaste for Comcast’s NBCUniversal.

Then came the unexpected behemoth, Netflix, which had the financial capacity to buy WBD without much strain, but its aversion to theatrical releases suggested that WBD would not be a comfortable acquisition. But then the WBD traditional studio lot would make a major improvement over the smattering of Netflix offices, and WBD’s franchise content would provide creative and marketing values for the streamer. The deal for Netflix to buy the WBD premium content wing (vast feature and television content library, including HBO/HBO Max) and a magnificent historical studio complex sprang to life, as Deadline’s Nellie Andreeva (December 5th) explains how the surprise announcement that Netflix got the golden ring (studio lot, WB content including HBO/HBO Max), albeit for the tidy sum of $82.7 billion:

“Unlike Paramount Skydance CEO David Ellison, who pulled out from his Wednesday [12/3] appearance at the NYT’s DealBook Summit, Netflix co-CEO Ted Sarandos showed up at the streamer’s off-the-record event, mingling for hours and taking pictures with talent, including Jacob Elordi, Ted Danson, Rian Johnson and Mike Schur… But if a reporter broached the WBD sale in any way, even as a joke, Sarandos would walk away. The Netflix boss clearly was not going to do anything that might jeopardize his company’s chances in the high-stakes auction…

“The philosophical differences [are particularly deep] in features. Netflix has disrupted the movie business by undermining theatrical distribution, with Sarandos calling movie-going experience ‘outmoded for most people’ as recently as several months ago. On the call announcing the merger this morning [12/5], Sarandos expressed commitment to theatrical releases while reiterating the streamer’s insistence on truncated windows, noting that ‘over time the windows will evolve to be much more consumer friendly.’

“The Warner Bros. staff may be in for another culture shock as Netflix has a very distinct work culture marked by high level of intensity. The studios have gone through a couple of different owners over the past couple of decades through the failed AOL and AT&T mergers, each bringing a different work environment. Just three years ago, they went through a culture clash with the new regime following the acquisition by Discovery.

“And then there is the prospect of layoffs that follow every merger. The concern was brought up at the Warner Bros. Discovery town hall this morning, with Zaslav sounding upbeat, saying that the intention is for Netflix to bring over ‘most’ people.” While the deal has to withstand regulatory scrutiny with at least US and European regulators, a process expected to take between one and two years, that may be an unpleasant experience as unions, guilds, talent and rightsholders are already expressing rage at this anti-theatrical player, driven by algorithms that enrage too many creatives… and ready to fight.

For those of us in entertainment transaction land, we see Netflix cutting talent, rights and other costs/prices to justify the purchase price – a practice that will ripple throughout the industry as it always does – and we just see one fewer buyer in this consolidating marketplace reducing and limiting mainstream competition and opportunities accordingly. “While the sale may ‘serve the financial interests of shareholders of both companies,’ it is also sure to have sweeping consequences for the future of the entertainment industry, ‘and especially the human creative talent whose livelihoods and careers depend on it,’ the SAG/AFTRA actors guild argued in a statement issued Friday [12/5]…

“Following the news that the streaming giant had won the bidding war for the one of the most storied studios in the entertainment industry, the below-the-line union’s secretary treasurer warned in a statement that the development is ‘yet another call for alarm as we continue to see these corporate giants seek mergers and billion-dollar fast track consolidation deals.’” Deadline, December 5th.

I’m Peter Dekom, and I see one more huge reason why apartment rentals and real estate prices in Los Angeles are about to fall… after the Olympics.