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Bigger Isn’t Necessarily Better For Hollywood As It Faces Tech Giants

ATT&T’s $85.4 billion acquisition of Time Warner may be on hold, awaiting a judge’s decision in the Department of Justice lawsuit, but Hollywood’s general impulse to get bigger continues nearly unabated, if at a slightly more measured pace while the judge deliberates.

The question is, will getting bigger, driven by fears that traditional Hollywood studios can’t compete against tech giants, make any of these companies better? 

In fact, as various combinations of traditional Hollywood ponder pairing up, it’s worth asking whether the push for scale at nearly any cost will simply leave companies saddled with massive debt, unable to invest in new and better products, especially when they must compete on new platforms where they have no natural advantage of reach, experience and talent. 

The question certainly leaped to mind amid this week’s CBS board coup against the company’s dominant shareholder, the Redstone clan’s National Amusements. A two-tier share structure has allowed NAI’s Shari Redstone and her ailing father Sumner to control not just CBS but Viacom for many years. 

Shari Redstone had hoped to recombine CBS and Viacom, convinced (like many in Hollywood these days) that a bigger merged operation could better face down the challenges of Apple, Amazon, Google, Facebook and most especially Netflix

The rest of the CBS board and CEO Les Moonves were less persuaded. When Viacom asserted a $14.7 billion value and a need for its CEO, Bob Bakish, to have a senior role in the merged unit, things turned nasty. 

Now we have a series of conflicting boardroom and courtroom maneuvers that a Delaware judge must sort out. If it’s anything like Shari Redstone’s fight for control of Viacom against negligent former CEO Phillippe Dauman, this distraction will continue for months. 

And that’s the real problem here, for CBS, Viacom and the rest of Hollywood’s champions of super scale as competitive response. 

CBS didn’t want Viacom’s portfolio of pay-TV channels, a legacy of the 1990s-era business model that focused on creating the biggest possible footprint of channels on the cable box. Start with market leaders such as Nickelodeon, MTV and Comedy Central, and use their must-have status to extract higher rents with secondary channels such as Nick Jr.. If  MVPDs wanted the big boys, they had to pay those lesser channels too. 

It was fabulously profitable for Viacom until millions of customers fled increasingly extortionate cable subscription rates. Offered choices such as skinny and mesomorph digital bundles, they left behind crappy, expensive secondary channels they never watched. Others shifted to OTT options such as Netflix and Amazon Prime. The secondary channels became lead weights on Viacom profitability.

Moonves and CBS’ board rightly saw little value in adding those lead weights, or even the weak-sister film studio Paramount. After all, it has a winning combination in the top-rated CBS network and the No. 2 premium channel Showtime, Even better, the CBS All Access and Showtime subscription online channels are showing great promise.  

For its part, Viacom under Bakish has made several smart moves. Bakish’s rescue strategy aligned behind six core channels and connected Paramount’s film output more directly to key brands from those channels.  The 17 other secondary channels haven’t exactly been put on an ice floe, but they’re largely left to fend for themselves. Bakish’s strategy has been admirable for prioritizing resources in a pivotal time.  

Viacom also has made some smart, even surprising acquisitions that better position its brands with younger audiences. First came the purchase of WhoSay, which connects celebrities, influencers and micro influencers with brands. Then, earlier this year, Viacom scooped up Vidcon, the company behind vast live events featuring online influencers and thousands of their tween and teen fans. 

Both deals give Viacom much better connections to the young audiences that no longer watch  Nickelodeon, MTV, and Comedy Central.  Minus the distractions of merger maneuvering, you could have expected Viacom to make more such moves, creating a viable path forward for its still-valuable core brands. 

And CBS might have doubled down on what’s made it so profitable with older audiences, while more seriously entertaining overtures from Verizon or other suitors. Now both companies are absorbed in a drama that likely will fester for months to come, when they could have focused on building their respective futures. 

It all reminds me of the newspaper business in the mid-2000s, another industry facing wrenching changes to its eternal economic verities. A mid-decade economic recovery encouraged some newspaper chains to cash out, and others to bulk up. Times-Mirror sold to Tribune Co., Knight-Ridder parted itself out to McClatchy and MediaNews, etc. 

What newspapers didn’t do was aggressively innovate and adapt as their business models turned upside down. The billions spent on overpriced acquisitions was money that didn’t go to creating compelling, reasonably priced new products, such as online subscription content of many kinds or curated live and local events. 

When the economy crashed in 2008, the remaining chains, now laden with debt and no better prepared for the future, struggled. Tribune and Media News went bankrupt, and thousands of journalists and others were laid off in repeated retrenchments.  

I’m not saying the same thing will happen to traditional Hollywood. But as its companies flee into the arms of each other and of mobile companies (which also are spending many billions of dollars creating the 5G networks central to their future growth), it’s important to ask whether all that capital, energy and time is best used in M&A, especially if it also comes with legal and regulatory distractions.

Hollywood is facing innovative and fast-moving companies such as Netflix, now with 125 million subscribers in 192 countries, and Apple, the world’s most valuable company, which makes more in quarterly profit than Viacom is worth as an enterprise.

Is it possible that these companies could spend a few billion dollars more on creating great content, locking in top talent for new shows, understanding how to use customer data or even building easy-to-use interfaces and innovative new distribution platforms that take their businesses forward? Bigger isn’t necessarily better. Better is better. 

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podcast logo David Bloom in Tech technology media entertainmentWriter’s note: I talk more about this issue in a new episode of my Bloom in Tech podcast, which you can hear on Anchor.fm here. The podcast is also available on iTunes, Overcast, Soundcloud and several other outlets.

I’d love to hear your perspectives on the idea of scale versus innovation in this era, and what it means for Hollywood. Reach me here or post on the podcast pages.