The Biggest Story of August That Not Enough Folks Heard About…

The Most Important Story of the Month of Aug-2023

(Welcome to the “Most Important Story of the Week”, my bi-weekly strategy column analyzing the most important (but often not buzziest) news story of the last two weeks. I’m the Entertainment Strategy Guy, a former streaming executive who now analyzes business strategy in the entertainment industry. Please subscribe.)

Well, I knew this was going to happen.

For a few months now, I specifically decided to NOT rigorously plan my content schedule because of the WGA strike. When the strike started, I held off from publishing some articles, expecting a WGA deal to derail whatever topic I would dive deep into. After months of no deal—and honestly not a lot of news on the strike week-to-week—I decided to just plow ahead with some long-simmering topics and deep dives.

This week, for example, I had planned to publish an extra “Most Important Story of the Week” column. The fun twist? I would cover a news stories from August, since I realized I had a bunch of stories I saved up that I really wanted to analyze, especially some under-the-radar stories some folks may have missed...

So naturally, after a few days of furious speculation that a deal was coming, the WGA announced a deal with the AMPTP on Sunday. The best laid plans…am I right?

Obviously—I mean obviously!—the WGA news is the biggest news out there. So that’s the most important story this week, and next week I’ll dive into it. In my defense, we still don’t know much about the deal aside that a deal has been announced, and we sort of know a few areas they they hammered out. As I write this Tuesday, we have no specific deal terms or anything beyond speculation about what is in the deal. So in this case, I actually do want to wait so I can actually offer opinions and analysis on the specifics.

In short, expect WGA analysis next week. This week, we’re re-looking at some of the biggest news stories from the summer, including one mega-gigantic story that went completely under everyone’s collective radar...

The Most Important Story of the Week, er, Month - The Entertainment One Sale to Lionsgate for $500 Million

Let me be super clear up front:

I think this story is HUGE news.

For those who missed it—and it was only in the news for about a day or so—Lionsgate bought Entertainment One from Hasbro. There is a huge caveat to this news, but to just really scream the headline at you:

In 2019, Hasbro bought Entertainment One for $3.8 billion.

In 2023, Lionsgate bought Entertainment One for $500 million.

Now, the huge porcine/pajamas-sized caveat to this is that Hasbro is keeping some of the most valuable pieces of Entertainment One: their kids brands. That includes Peppa Pig. It may also include PJ Masks, which was a co-production that Entertainment One owns, but none of the articles on the sale mentioned PJ Masks. So Hasbro, a toy company, is keeping the IP rights that could sell more toys. Fair enough. (They already had other toy properties, like My Little Ponyand Transformers before the Entertainment One acquisition.)

Could you sell me on the idea that all those kids brands put together are worth $3.3 billion on the open market? Maybe. In 2021, private equity backed Candle Media—the group trying a roll up of production companies—bought Moonbug (the owner of Cocomelon) for $3 billion on its own. I don’t know if Peppa Pig & PJ Mask out earn Cocomelon, but I’d probably value them similarly.

But even if the headlines have that huge asterisk, don’t lose the meaning here!

An independent production company with a content library, including 6,500 library “titles” and multiple TV shows in-production/on-air right now, sold for $500 million.

I’ve written a few times over the last year that the price tags for celebrity production companies make no sense to me, and this data point is another prime example. How can Reese Witherspoon and LeBron James have companies valued just shy of a billion dollars when Entertainment One—maker of The Rookie, Naked & Afraid, The Recruit and Yellowjackets, all bigger than anything from those two companies—is valued at $500 million?

One of these thing has to give. (And by the way, if you want a deeper data dive into “celebrity production companies”, I’ll have more on that very, very soon…)

And my bet is it will be the valuations of these privately held firms. Remember, at its core, the “value” of a company comes from its discounted future cash flows multiplied by the growth rate. To simplify things, investors tend to use “multiples” of current cash flows. When growth looks weak, those multiples come down, and so do the valuations.

Entertainment One just showed that entertainment company multiples are down. Way down.

If they weren’t, some buyer like Candle Media would have splashed billions on it. Or some other private equity group.¹ Often, you don’t know what something is worth until you try to sell it; Hasbro sold a media company and it didn’t get very much for it. Pair this with the bankruptcy of BRON, another Canadian production company (who I covered back in August), and the market for smaller independent production companies doesn’t look great.

(I’d add, I have my eye on All3Media too. That UK-based independent production company is also for sale, but ITV just passed on it. In 2014, Discovery invested and valued the company at a total value of $930 million. We’ll see how much that business grows or shrinks if it sells.)

Almost Most Important Story of the Week - Warner Bros Discovery is Making Some Strategic Moves with HBO

No one is probably more maligned than WBD CEO David Zaslav and his crew. They’ve been taken to task as cost-cutters more interested in the bottom line than anything else. Since taking over last year, they’ve been “right-sizing” content spending, and that meant TV show and film un-orders, removals and cancellations.

And that tends to make you look like the bad guys in a town that loves spending and buying!

But they’ve quietly put together a string of moves that says they are indeed trying to grow their streamer business. First, they announced they would add a linear channel to Max from CNN. And not with extra content a la CNN+, but with the live news coverage.² Second, they added some AMC shows to bolster their content line up.

This last point should really make people take notice. They added shows! From another channel/streamer! That’s not cost-cutting; it’s content spending! The difference is they have ratings data from AMC—and AMC needs cash as much as WBD does!—so they likely got a good deal on shows that will move the needle. And the shows are only on Max for two months. Yes, WBD did just rent some of their biggest shows to Netflix (Band of Brothers being the latest), but clearly they’ll spend on their streamer as well.³

To repeat an old belief, I love discussing “strategy” for the entertainment industry. And that means looking at each company for what they are actually doing, not what the industry has characterized them as doing. WBD is quietly innovating on Max, though I doubt they’ll get much credit until/if they really see strong growth.

Update - The Death of the Pac-12

The biggest sports story in August from a business perspective—and one I personally have a rooting/fan interest in—was probably the “death of the Pac-12”. Yeah, yeah, yeah, we use the term “death” way too often in this show biz media, but in this case, yeah, this conference died.

The Pac-12 started out the year with twelve teams committed to its future; by the end of August, only two teams remained.

The reason—that I feel like a lot of casual observers like to say because it sounds smart—is that “it’s all about the money”, which is as true as it is obvious. In this case, other leagues with higher earnings essentially bought the top teams from the Pac-12 (first the Big 10 with USC and UCLA, then the Big 12 with Colorado) and then the rest of the teams abandoned the sinking ship that was the Pac-12. So yes, this was about the money.

But if you want to sound really clever, it’s not the money per se, but the power of the cable sports networks i.e. ESPN and Fox trying to run a duopoly on college football, backed up by cable carriage fees (for now). Toss in the collapse of Regional Sports Networks—a topic I haven’t dove into yet, but should!—that meant that really ESPN and Fox had more power than ever, since there were fewer bidders for league viewership rights. And each would rather focus on their own “super league” than supporting multiple smaller leagues.

When looking to cast blame for the Pac 12’s demise, I still go back to the early 2010s when the Pac-12 decided to launch their own network without a strategic partner. In this case, they needed to align their interests with either ESPN, Fox or maybe Comcast. Ironically based on the previous paragraph, not throwing in with ESPN in the 2010s is what doomed them. They thought they could make more money running their own cable channel and they were wrong.

Other Contenders for Most Important Story in August

Disney Partners with Gambling Company Penn Entertainment

In August, Disney announced a big deal with Penn Entertainment, a gambling company, to license its ESPN brand to their gambling products, replacing Barstool Sports. Like Warner Bros Discovery above, Disney is in cash generation mode, and this deal helps with that. Of course, I don’t love this from a branding perspective for Disney, even if ESPN is slightly removed from the core Disney brand. (I’ve predicted for a while that legalization of gambling—while okay on the legal merits—combined with digitization and unlimited marketing could have bad social ramifications long term.)

Oh, and it should be noted that right now gambling isn’t a great business. Yes, revenue is growing, but no one seems to be profiting from it since competition is so fierce. At the same time that Disney is getting paid by Penn, Fox just shut down their gambling business and NBC Universal exited their deal too, when PointsBet USA sold their business to Fanatics.

Disney Accused of Withholding Money from TSG Entertainment

Keep an eye on the story that Disney allegedly withheld profits from TSG Entertainment, the co-financier of a lot of Fox films. A lot of the streamers made decisions that will impact their  co-producers like this, so the results of this trial could reverberate across Hollywood.

Keep an Eye on NFL+

There are so many smaller streamers it can be hard to keep track of them all. I feel that way about the NFL’s streamer, NFL+, which I haven’t really had time to study yet. The news in August was that NFL Redzone was coming to NFL+, a legitimate business for one day a week during the fall. We’ll see if that moves the needle for them.

Netflix and Amazon Have a Bidding War

No one is more worried about a content retraction than yours truly, but that doesn’t mean bidding wars are dead. This article from Deadline was about a showdown between Netflix and Amazon for a high profile crime film starring Chris Hemsworth and Pedro Pascal.

According to Puck, Amazon won the deal by promising a theatrical relase, which should again tell us something about the future of straight-to-streaming. The one interesting “media” detail here is that while the trades normally repeat stories all the time, not one trade confirmed that Amazon secured the rights to this movie. It’s almost like the trades specifically avoid referencing stories from Puck (and other independently-owned media outlets).

Covid-19 Update - Live Theater has NOT rebounded

I haven’t had an update on Covid-19 in a while, because mostly the story is that everything came back. Theaters? Yes. Concerts? Definitely. Theme parks? For sure.

It turns out live theaters might be the one exception to this trend, especially off Broadway. Non-profit theaters groups like the Center Theater Group in Los Angeles are still seeing ticket declines of about 20% compared to pre-pandemic.

If you’re in Los Angeles and want to support live theater, I’d find a show and support the cause of live performances.

M&A Updates - Paramount Sells Simon & Schuster to a Private Equity Group

One trend that probably deserves a deeper dive is the fact that all the traditional studios are currently selling underperforming assets. One explanation is that they’re “trimming down” for potential sales, and that probably does play some role.

But there’s also an economic principle at play that conglomerations tend to not be valued properly by the market. If you have a bunch of diverse businesses that don’t actually reinforce each other, usually the market rewards selling off those businesses.

In that context, Paramount sold book publisher Simon & Schuster to a new private equity owner after a judge blocked their sale to fellow publishing rival Penguin Random House. Overall, this is a good result for consumers, even if it is a PE group buying it.

1. Ironically, I think Candle Media and Redbird Capital were the least interested buyers here. If you buy a company with 6,500 titles for $500 million, you have to justify why your production companies with a few dozen titles to their name are worth even more.

2. Longer term, this could help Max experiment with bringing FAST elements into the Max interface too. We’ll see.

3. There was one other huge announcement last week—Max is adding live sports—but we’ll save that topic for the next, regularly scheduled “most important story” column.