Paramount is now poised to acquire Warner Bros. Discovery. Paramount made Warner Bros. Discovery an offer they couldn’t refuse and Netflix has exited the competition.
Some people commenting on this story have expressed relief with Paramount winning over Netflix. That relief is primarily out of concern for the theaters. The theatrical market is the economic cornerstone of the movie business. Paramount is a legacy Hollywood studio and its CEO David Ellison has committed to maintaining a slate of cinema releases with a healthy theatrical window. But the prospect of Paramount acquiring Warner Bros. Discovery still raises many of the same concerns as Netflix and should be opposed.
Under a Paramount-Warner Bros. Discovery merger, there will be significant job losses. Whenever two very similar companies combine, that creates a lot of redundant jobs which will be eliminated. And in this case, Paramount has a lot of debt to pay and they’ll need to engage in significant cost cutting. The filmmaking industry probably can’t absorb all of those layoffs.
A Paramount-Warner Bros. Discovery merger also narrows the market for both filmmakers and consumers. This is both a creative and an economic concern. Media consolidation eliminates the competition between streaming services that keeps subscription prices in check. It also impairs the ability of movie theaters to negotiate with the studios.
Mass media mergers also eliminate options for filmmakers. Creators will have fewer opportunities to get their projects financed or distributed. Films and television programs that rankle the owners or express ideas that are contrary to corporate interests or that upset people in power or just have the inference of difficulty get shut out.
The Ellison family, who own Paramount, have been very politically active and since taking over CBS the Ellisons have reshaped that broadcaster’s news division to make its coverage more amenable to the White House. Paramount already owns Pluto TV, Nickelodeon, Comedy Central, MTV, BET, and CBS, among others. If Paramount acquires Warner Bros. Discovery their control of media becomes downright monopolistic and HBO, CNN, TNT, TBS, DC Comics, and Discovery will fall under its control.
However, there is another important political influence at play. Paramount’s bid for Warner Bros. Discovery includes money from several sources, among them Saudi Arabia’s Public Investment Fund, Abu Dhabi’s L’imad Holding Company, and the Qatar Investment Authority. According to Variety, these three companies have committed $24 billion to fund Paramount’s acquisition of Warner Bros. These governments are not supporters of free speech and have criminalized dissent. Saudi Arabia allegedly murdered Washington Post reporter Jamal Khashoggi in 2018. Paramount says that these foreign investors will not have board seats or voting rights in the new company but the idea that $24 billion doesn’t buy influence is utterly fanciful.
The theatrical issue remains the central problem. Mergers tend to result in fewer movies getting released. Disney’s acquisition of 20th Century Fox is instructive. As reported by Variety, Fox released about 14 films a year before the merger. After the merger, Fox put out about five movies a year.
Paramount seems to think they can make up the difference. According to Deadline, Paramount CEO David Ellison said the company will release 30 movies a year once the merger is done. That announcement sounds good and ambitious but it’s also disconnected from reality. As covered in Variety, most Hollywood studios release about 10 to 15 films a year. Putting out 30 films a year—almost a movie a week—would flood the market. It would also be extraordinarily expensive. Marketing costs run around $60 million per title and Ellison has expressed a preference for big blockbuster spectacles which often cost $200 million to produce.
The money question is really important. Paramount has a mountain of long-term debt. As covered by Variety, Fitch Ratings, one of Wall Street’s major credit-rating agencies, has downgraded Paramount’s debt to BB+, putting it in the junk bond category. Moody’s and S&P Global are also reviewing Paramount’s debt and considering a downgrade. Warner Bros. Discovery also has $33 billion in debt and if Paramount merges with Warner Bros. Discovery the total long-term debt will be approximately $79 billion.
This amount of debt calls into question Paramount’s stability as a company. The decreased credit rating signals a lack of faith in Paramount by Wall Street and that could make it difficult for Paramount to raise the money it’s going to need to enact these big plans of doubling or tripling its production output.
There’s one additional financial detail that might explain all of this. Writing in The American Prospect, David Dayen explained that Paramount’s offer for Warner Bros. is a private equity deal and “The entire reason Warner Bros. was selling itself was because of several bad mergers where it took on significant amounts of debt that it couldn’t dig itself out of.” Dayen also observed that if the deal succeeds, Paramount will be at a leverage ratio of seven times its earnings.
This is part of a pattern in private equity. Most of us think of businesses as organizations that generate wealth by providing customers with goods and services. Private equity doesn’t work that way. It’s about extracting wealth from existing companies. Private equity is fundamentally parasitic and it has a history of destroying companies such as Toys ‘R Us, Sears, and Joann Fabrics by saddling them with enormous amounts of debt, declaring bankruptcy, and then selling the company off for scrap. Private equity isn’t interested in building a business. It’s a white-collar chop shop.
And that could be the real endgame. Paramount absorbs Warner Bros. Discovery by taking on a massive amount of debt. It becomes the biggest company in the United States film and entertainment industry. Paramount is unable to repay its debt and the company goes bankrupt. With Hollywood’s biggest company gone, there won’t be enough movies playing at the cinemas and the theatrical business dies. Without the theatrical revenue, the remaining Hollywood studios go under. And that’s the end of the American film industry.
This does not have to happen. The Paramount-Warner Bros. deal can be stopped by state and federal governments. According to The Guardian, California Attorney General Rob Bonta said they will review the deal.
Contact the US Senate subcommittee on Antitrust, Competition Policy, and Consumer Rights, the Department of Justice, the Federal Trade Commission, the Securities and Exchange Commission, and your state attorney general and demand that they stop the Warner Bros. sale. You can find contact information and a draft of a letter here. When you do reach out to these politicians, be concise, impassioned, and respectful. We need to persuade, not to bully.
When I first started publicly commenting on this merger, I argued that the Warner Bros. Discovery sale was an existential threat to the American film business and to the media in general. Everything we’ve learned since then has only reinforced that position. A Paramount-Warner Bros. Discovery merger is a private equity suicide pact that will not only destroy these legacy companies but ultimately collapse the entire United States film and entertainment industry.