Hollywood Merger Mania: Getting Bigger Doesn't Mean Studios Are Getting Smarter

This quarterly earnings season also seems to have given Hollywood's smaller studios a chance to signal they're open to deals. They, like many others in Hollywood, seem to believe that scale will insulate them from the depredations of the FANGs, the tech giants impinging on Traditional Hollywood's turf.Hollywood's growing merger mania implies that spending billions to get bigger is the best response. It's also possible that they could better compete by investing some of their billions of dollars in M&A money in areas such as machine learning, data analytics and artificial intelligence. What we're getting instead is a series of signals that Size Matters Most:

• CBS and Viacom are now formally in talks to re-merge. Independent directors and the CEO of CBS reportedly and rightly have concerns, but controlling shareholder Shari Redstone is pushing hard. Viacom's assets are hardly intoxicating: 23 cable channels, (three-fourths of which are zombies), the limping Paramount Pictures and a few other odds and ends. But it's the easiest deal CBS can pull off to get bigger as it tries to feed its All-Access SVOD service.
• Sony CEO Kaz Hirai's announced he's transitioning April 1 to an advisory role as company chairman, to be replaced by CFO Kenichiro Yoshida. Hirai came up through Sony's hugely successful PlayStation videogame unit. He long has championed the company's entertainment assets, despite years of losses at the film, TV and music operations (Sony also reported significant profits in entertainment). Yoshida, by contrast, emphasized that Sony is a tech company, like Apple, Facebook, Google and Amazon. Those four companies, it's worth noting, have market capitalizations an order of magnitude larger than Sony's revived $64 billion. That still makes Sony roughly double the size of even a combined CBS-Viacom ($34 billion). Regardless,  Yoshida's ascension and comments read as a "Ready to Deal" signal from Sony City.
• After years of stiff-arming acquirers while buying Summit Entertainment, Artisan, Pilgrim Studios and Starz, Lionsgate signaled the company is ready to deal, as either a buyer or seller. Media mastermind John Malone, who owns a stake in Lionsgate as well as Charter/Spectrum, Discovery and Liberty Global, could engineer some further marriage between his assets (as he did with the $4.4 billion Lionsgate-Starz deal). With a $7 billion market cap, Lionsgate is, as Vice Chairman Michael Burns told CNBC, "a pint-sized bite" for the tech giants: "...so we would talk to anybody at any time and see if a deal makes sense."
• No word yet on companies such as my former employer MGM, though I did run into a pair of fellow former MGM hands at this week's Digital Entertainment World conference. They joked that the company is available for "whatever their current share price is plus $20." MGM has been private since it was sold for about $5 billion in 2005 during the last big Hollywood merger wave. These days, the DVD and Blu-Ray business that undergirded that sale is an afterthought, but MGM still has a huge library, a sturdy TV operation led by "The Handmaid's Tale" and "Orange is the New Black," and interesting new distribution platforms such as Comet TV. If libraries still have value in an era of bottomless access to content (an open question by some at DEW), MGM is a target.

It feels like all these companies are actively in play, a sense that was reinforced by many at DEW. Such dealmaking will be great for the investment bankers and shareholders of acquired companies. But it almost certainly will mean the disappearance of a whole tranche of jobs in traditional Hollywood, where the AT&T-Time Warner, CBS-Viacom and Disney-Fox deals are partly being sold as ways to generate "efficiencies," more commonly known as layoffs of suddenly redundant positions.Even worse, it may just be a bad idea.Once again this year, Google and Facebook are expected to vacuum up the lion's share of online advertising. Both companies reported hugely profitable quarters this past week, though neither came close to Apple, which once again had the biggest quarter in the history of capitalism, with an astonishing $20 billion in profit on $88 billion in revenues. Put another way, Apple made nearly as much in quarterly profits as nearly the entire market capitalization of CBS. And all three digital giants are muscling into entertainment.At the end of Day One at DEW, two ferociously smart young female executives from Facebook and Netflix geeked out on stage about the joys of Big Data, machine learning and endless A-B testing. In Celiena Adcock, head of Facebook's Streaming Entertainment unit, and Kathy O'Dowd, the Netflix product lead in advertising & technology, show organizers found the antithesis of Traditional Hollywood.Their delighted geekery ultimately represents the future of Hollywood. Whatever Hollywood becomes in this Era of Gigantism,  to compete against the digital giants,it will have to become far more like Adcock and O'Dowd than Louis B. Mayer, Walt Disney, William Fox or even Sherry Lansing.It's not clear that bigger Traditional Hollywood companies will translate to smarter ones. Scale has value, but in our fast-approaching data-driven entertainment future, brains matter more.