Paramount + Warner Bros.: The $110 Billion Bet That Could Reshape Streaming

Travis Hoium (0:02)

The Streaming Wars just took another big turn. Motley Fool Hidden Gems Investing starts now.

Welcome to Motley Fool Hidden Gems Investing. I'm Travis Hoium, joined today by Lou Whiteman and Matt Frankel. Guys, the big news for the day is that Paramount has officially closed its merger or acquisition of Warner Bros. Discovery $110 billion deal. For context, that's about half the value of Disney, but they don't have the Parks, which is the profit driver of Disney.

So Matt, when you look at this deal, also $80 billion worth of debt, which seems like a notable amount of money. When you look at this deal and all the competition that's happening in the streaming space, everybody's raising their prices. Does this merger, does this new company have a chance to thrive in a world where you have YouTube with actually the number one market share in streaming? You have Netflix, there's Disney, and then a whole bunch of other players. Is this going to work out?

Matt Frankel (1:00)

My short answer is yes, with a big asterisk on it. This instantly makes the combined company a major player, for sure. It gives the combined HBO, Max and Paramount Plus services a little more than 200 million subs. It's essentially tied with Disney Plus, when you consider the Hulu and ESPN Plus subscribers as well.

When it comes to screen time, the combined company is actually the incident number two. Only YouTube has more watch hours than the combined company. They're way ahead of Disney, way ahead of Netflix even.

Travis Hoium (1:31)

Oh, really? That must include cable too.

Right.

Matt Frankel (1:34)

Well, that includes all their linear stuff as well. But it includes Disney's linear as well.

So it's a pretty impressive combination. They have a pretty stacked content library. They've, in my opinion, a sports library that even Netflix couldn't touch right now. Of the three you mentioned, Netflix looks the most disruptible by this deal. But you mentioned the debt.

When you say, can they thrive? Can they win? That all depends on cost savings and being able to eventually pay back that debt. They want to achieve $6 billion of cost savings in three years. David Ellison had said that's not going to come from job cuts. So where is it going to come from? So debt-fueled mergers have a bad track record in the media space. Think of like when AT&T bought DirecTV, for example. They don't have a great track record. So Guest Day could be a success here. It instantly makes them a contender, but it's not a given.

Travis Hoium (2:36)

Lou, not only do they not have a good track record taking on this much debt, but also this company, Time Warner, has a long track record of sort of odd and arguably failed mergers.

Lou Whiteman (2:48)

So let's game plan this out. Let's try and figure out how they win here.

Consumer price. There's a lot of talk about bundling HBO Max and Paramount Plus or bundling the non-premium services. But they need cash to service that debt. That debt is the biggest thing. If you're bundling, you're bringing down the cost versus having the two as standalones.

That only works if you substantially grow the pie. I am not convinced right now that there are a lot of people that would have HBO Max if only it was like a buck cheaper. So I don't know if you can substantially grow the pie by just bundling here, which makes me skeptical about their ability to bundle. Look, I do think that this is a pretty powerful group of assets in the streaming world. If they can survive the initial stage, if they can pay down the debt and go from treading water to actually investing in the business. But in the near term, I don't think the landscape has changed that much, because I don't think on the revenue side, they're going to be able to bundle and do synergies the way they'd like. On the cost side, like Matt says, if they're not going to take out jobs, maybe a little less server space combined. I don't know where that's coming from.

Travis Hoium (4:09)

Lou, do you think that there is a possibility that this bundle would actually make it attractive enough for those of us who maybe don't pay for Paramount or HBO Max, whatever they're calling that right now, by the way, that naming configuration, they've got to figure that out. But is it possible that they are able to say, you know what, if we put both of these things together, put all of our assets in one for $15 a month, that's going to be a bigger pie overall than two of these services separate for, let's say, $10 a month. I'm not getting quite the subscription numbers correct. But having more people paying even a little bit less than the sticker price for the individual services could be a good thing, and maybe you don't have as much churn.