This article first appeared in The Edge Malaysia Weekly on May 13, 2024 - May 19, 2024

I have been a movie buff since my college days. There is a cineplex within walking distance of where I live. It is mostly abandoned except on weekends when it comes alive. Like everyone else, these days I watch movies on TV or on my iPhone when I am on the gym treadmill or Peloton stationary bike.

Video streaming pioneer Netflix Inc, which made money renting out DVDs mailed in red envelopes, began dabbling in the distribution of streaming content for other Hollywood studios like Walt Disney and Time Warner in 2011. Eventually, it pivoted 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 the streaming of original programming. Netflix’s current market capitalisation of US$270 billion (RM1.28 trillion) is almost as much as all of its listed competitors including The Walt Disney Co, Paramount Global and Warner Bros Discovery Inc (WBD) combined. For almost five years now, its rivals have tried to move 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 by cancelling their pay TV subscription — an average of US$120 to US$150 a month — for much cheaper streaming options.

A massive transformation is now unravelling in Hollywood. The old order is being disrupted and some of the world’s largest technology companies are leading the charge to remake the global entertainment landscape. Hot on the heels of Netflix are search giant Google’s owner Alphabet Inc which owns YouTube, e-commerce and cloud computing giant ­Amazon.com Inc and iPhone maker Apple Inc. 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. Among them are Comcast’s NBCUniversal, Japan’s Sony Corp which owns Columbia Pictures and The Walt Disney Co which bought 20th Century Pictures Inc from Rupert Murdoch’s Fox Corp for US$71.3 billion in 2019. Then there are two beleaguered players, WBD and Paramount Global, which are in a last-ditch battle for survival. WBD has been weighed down by US$43.7 billion in debts in the current higher-for-longer interest rate environment. Paramount Global has the albatross of US$16 billion in debts around its neck. The sixth player is Metro-Goldwyn-Mayer Studios Inc (MGM), now owned by Amazon. I should mention that there is a seventh player, Lionsgate, a minnow among the studios.

At the other end of the spectrum is Netflix, a giant studio in its own right, and, of course, Apple, with its Apple TV+. Oh, don’t forget YouTube TV, another entertainment behemoth in its own right. If you cancel your cable TV subscription and subscribe to YouTube TV, you get a vast array of filmed content from a bunch of TV channels and studios as well as exclusive live sports offerings. YouTube TV had eight million subscribers at the end of last year and is growing fast. Want to watch a movie or interested in what your favourite movie star is up to? Just google it. The search giant might show you a clip or two on YouTube or direct you to where on YouTube you can watch the movie. YouTube makes money from what you pay for the movie as well as all the ads that it inundates you with. Over the past two years, YouTube TV has also emerged as an aggressive bidder for sports streaming rights in North America. The up-and-comers are taking market share and mind share from the incumbent studios.

Cable TV has long been the “cash cow” for the likes of NBC, Disney, Paramount Global and WBD. Cable networks had a dual revenue stream of subscriber fees and ad dollars. At its height, the average American family was shelling out more than US$120 in cable fees a month and cable networks were bringing in US$35 billion a year in ad revenues. This year, the cable industry’s ad revenues are likely to fall to around US$20 billion.

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 a cable subscription. Netflix, Amazon Prime, Disney+, WBD’s Max, Paramount+, NBC’s Peacock and Apple TV+ are seeing their own subscriber numbers soar. 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, 285 of which you never ever watch.

When Netflix first challenged the incumbents with its streaming service, NBC, WBD and Paramount Global were reluctant to let go of their ad revenues and chase just streaming subscription fees. Over the past decade, as ad revenues plummeted because fewer people were watching the incumbent linear TV networks like ABC, CBS and NBC, cable channels’ advertising revenues declined as well. By the time the incumbents woke up to realise they could be losing both of 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 much more than what the incumbents were spending. This year, Netflix has budgeted US$17 billion for original content. Disney will spend about US$15 billion on original content this year. 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 hand 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.

Clearly, the best route would be industry consolidation, with tech giants like Google, Apple, possibly Meta Platforms Inc and even Microsoft Corp buying debt-laden studios. Yet there are several roadblocks here. The Biden administration doesn’t want the dominant cash-rich tech giants or the “Magnificent 7” to grow even bigger. Amazon’s US$8.5 billion purchase of MGM Studios, which co-owns among other things the James Bond franchise, was initially allowed but 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 or Disney. Indeed, FTC is likely to even block an intra-industry merger between say, NBC Universal and WBD, or between NBC and Paramount Global.

It is unclear to me why US President Joe Biden is unwilling to allow consolidation. A couple of mergers will only reduce the number of studios from seven to five. It’s not as if a monopoly or oligopoly is being created. 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 27 countries in eight languages. Other streamers are making global programming as well. My sense is that a second Trump administration will likely look more kindly at consolidation and allow America’s home-grown champions like Apple, Google, Meta, Amazon and others to grow and prosper, rather than keeping them chained.

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 in National Amusements Inc, a chain of cinemas in the US, UK and Latin America with over 1,500 screens that was founded by her grandfather. National Amusements 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% stake in National Amusements for over US$2 billion, which will give them control of the rest of Paramount Global. David is the son of Larry Ellison, the founder of software firm Oracle Corp (net worth US$148 billion) who is backing his son’s bid. The younger Ellison will then inject cash into Paramount Global as well as merge his entertainment firm Skydance Media LLC. Paramount Global’s minority shareholders will get nothing except a promise to ride with him in restructuring. Megan Ellison, a film producer behind movies like Zero Dark Thirty and American Hustle, is David’s sister.

A second bidder, which is offering US$26 billion for Paramount Global, is also a consortium — led by Japan’s Sony Corp and private equity giant Apollo Global Management Inc. Because Sony is a foreign firm, it can’t own CBS, which is a TV broadcaster. So the consortium has vowed to break up Paramount, sell CBS along with cable channels like Nickelodeon and Comedy Central and its streaming service Paramount+ and merge Paramount Global’s TV and movie library as well as its intellectual property (IP) with Sony’s studio assets. Paramount Global’s minority shareholders love the Sony-Apollo deal but Redstone is backing the Ellison deal because that gives her far more cash.

The Sony-Apollo solution appears to embrace market reality. Apart from Netflix, nobody is making money in streaming. Disney in its quarterly earnings report on May 6 hinted that it might be on the verge of breaking even on its streaming. Unlike other movie studios, Sony refused to enter the streaming business. It was happy making movies for cinema releases and programming for other cable TV networks and streamers. Instead of building its own army or a streaming platform, It chose to remain an arms merchant — making movies and TV programmes. By keeping the studio, IP, and film and TV libraries to themselves and jettisoning everything else, the Sony consortium is sticking by the Japanese giant’s original content arms merchant business.

In a bid to boost revenues, streaming companies are embracing advertising and becoming more like cable channels. Once subscription-only services are adding cheaper ad tiers. Netflix last year added an ad tier and Amazon recently asked its Prime customers to choose whether they wanted to remain in the free service where they would be forced to watch ads or pay extra to move up to a premium tier with no ads. Netflix is already a money machine and while Amazon was using PrimeVideo to attract and retain e-commerce customers, ad tiers will help its bottom line. Whether the new ad tiers will help other non-profitable streamers turn a profit anytime soon is still unclear.

The Paramount Global merger, however, will likely become a template for future global entertainment industry consolidation. How might the changes impact Asia? There are state-owned TV broadcasters as well as some private TV stations in most Asian markets. Because of government involvement, change is unlikely to come to Asia 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 the state-owned channels too will embrace the business model of global streamers and 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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