Comcast and ViacomCBS Consider Partnership to Boost Streaming TV

Comcast CEO Brian Roberts arrives for the Allen & Company Sun Valley Conference on July 6, 2021 in Sun Valley, Idaho.

Kevin Dietsch | Getty Images

The prisoner’s dilemma is a standard game theory situation often taught in business schools. Comcast CEO Brian Roberts and ViacomCBS President Shari Redstone experience it in real time as they plan to work together.

Comcast’s NBCUniversal and ViacomCBS are struggling to keep up with the biggest players in streaming video.

While Netflix, Amazon and Disney all have over 100 million subscribers to their flagship video services, NBCUniversal’s Peacock has 42 million US subscribers – most of which do not pay for the service – and ViacomCBS’s Paramount +. has less than 36 million subscribers. ViacomCBS doesn’t reveal the specific amount of Paramount + paying customers, but it said earlier this year that it has 36 million streaming subscribers, including Showtime and other niche products.

AT & T’s WarnerMedia and Discovery also offer small-scale streaming products. They announced their intention to merge earlier this year. This left NBCUniversal and ViacomCBS as the biggest remaining streaming players.

Roberts and Redstone have had conversations to explore ways companies can work together, according to people familiar with the matter. Investment bankers are injecting ideas into the two companies in hopes of securing what may be the last big mainstream media merger charge for some time, said the people, who asked not to be named because discussions are private. Spokesmen for Comcast, National Amusements Privé de Redstone and ViacomCBS declined to comment.

One of the options being considered is to bundle Peacock and Paramount + in international markets, as The Information reported earlier this year. The two companies are planning global expansions and the partnership is relatively fluid.

Another option is a merger or acquisition, but there are many complications along this path. Neither ViacomCBS nor NBCUniversal are actively pursuing a merger at this time, according to people familiar with the matter.

While it may not be urgent to merge, the two companies will eventually need more scale to compete with larger players. They could partner or merge, or they could attempt to merge with Warner Bros. Discovery when / if this deal closes in mid-2022. A merger with Warner Bros. Discovery may be more suitable for ViacomCBS or NBCUniversal.

But only one of the two could join Warner Bros. Discovery. It would leave the other company out in the cold – maybe for years.

This is the essence of the prisoner’s dilemma.

Working together can ensure that both companies are better off than they started out, but standing up to each other can be the best scenario for one company and the worst for the other. (This isn’t the perfect example of the prisoner’s dilemma, as companies can’t really betray each other, finding themselves in a situation where both are worse.)

Fusion problems

Regulators would likely not allow a combined NBCUniversal-ViacomCBS to own both NBC and CBS broadcast stations. It is likely that any merger will have to include a divestiture of one of the broadcast networks as well as any overlapping local NBC or CBS television subsidiaries in the same markets.

This immediately decreases the value of both companies. If CBS is divested, NBCUniversal would get Paramount + without CBS programming, including live National Football League games and NCAA March Madness. If the companies decide to divest NBC, ViacomCBS will not get “Sunday Night Football” and other popular NBC broadcast shows.

While it is possible that companies are trying to argue that broadcast networks are like cable networks and do not need separate ownership, regulators may not take this as a reasonable argument. According to Horowitz Research, about 40% of Americans own a digital antenna to get free live programming as well as streaming video. Broadcast networks have historically fought for valuable programming. Putting two under one roof would stifle these tendering situations.

The second obstacle is structure. Comcast could simply acquire ViacomCBS, repurchasing the voting shares of Redstone as part of a deal. But ViacomCBS has an enterprise value of around $ 40 billion and would charge a decent-sized premium to sell, two of the people said. Even with large divestitures, a deal would be costly.

Shari Redstone, President of National Amusements and Vice President of CBS and Viacom, speaks during the WSJTECH Live Conference in Laguna Beach, Calif., October 21, 2019.

Mike Blake | Reuters

Comcast shareholders, who MoffettNathanson analyst Craig Moffett says are more likely to encourage a split between NBCUniversal and Comcast, might not like a decision to buy ViacomCBS and divest one of the networks.

Roberts could bring out NBCUniversal and merge with ViacomCBS – similar to the WarnerMedia-Discovery deal. This could force him to relinquish control of NBCUniversal. If Redstone ends up having more economic control over a merged NBCUniversal-ViacomCBS, it may want to run the business, or choose who is in charge, for at least a number of years. Roberts and Redstone are expected to reach an agreement on economic control and vote control if that option is chosen.

A bundle through a business partnership circumvents M&A issues – and ultimately is the most likely “first step” scenario – but it gives companies less flexibility over bidding than a merger. It is also possible that the needle does not move enough for either company.

Wait for the discovery of Warner Bros.

NBCUniversal or ViacomCBS could theoretically correspond to Warner Bros. Discovery, because David Zaslav’s future company will not have a broadcast network. This would eliminate the need for an assignment. Combining with HBO Max and Discovery + would also arguably be a more robust streaming offering, in terms of content, than simply bundling the assets of NBCUniversal and ViacomCBS.

But the size of Warner Bros. Discovery combined with ViacomCBS or NBCUniversal could pose regulatory issues, depending on how regulators in the Biden administration view the entertainment market. Even WarnerMedia’s agreement with Discovery is not guaranteed.

The choice to strike a deal with Warner Bros. Discovery is forcing both NBCUniversal and ViacomCBS to wait two or three more years, given how long it would take to merge to get regulatory approval – first for WarnerMedia and Discovery, then for the second merger. There would also be integration costs and issues with two big deals going so quickly.

For the company that did not merge with Warner Bros. Discovery, the way forward would likely be the rollout of some of the smaller streaming players. like Lionsgate and AMC Networks, or push for an acquisition of Sony Pictures.

Merge or wait both present headaches. This is why investment bankers are paid dearly.

Disclosure: NBCUniversal is the parent company of CNBC.

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