Does it really matter who ends up owning Warner Bros.? Media exec Tom Rogers breaks it down

It is extremely rare for a merger and acquisition story to break out from the business pages. Yet, when it comes to the sale process of Warner Brothers Discovery it has become mainstream news as probably the most compelling media industry story of the last 12 months. I suppose it is fairly obvious as to why, with such universally known media brands involved in the fray from Netflix, HBO, Paramount, CBS, CNN and MTV. These are media brands of real significance so one might assume who owns it is a significant issue in itself.

But is it?

There are a number of perspectives from which to answer this question. Should TV viewers care? Should policy makers care? Should the industry care? Should President Donald Trump care?

And, probably most importantly, should shareholders care?

David Ellison, newly installed CEO of Paramount and son of one of the world’s wealthiest billionaires, Larry Ellison, decided to make an aggressive move to attempt to acquire all of Warner prior to Warner’s decision to split itself into two companies. One company was to consist of HBO and the Warner movie and TV studios, and another created holding all the Warner cable networks, which include CNN. Ellison made this preemptive move to capture the Warner assets, correctly strategizing that Paramount would be the only bidder for the entire company. However, his move catalyzed the Warner board to entertain bids for just the studios and HBO as well, which then created a highly competitive bidding situation.

In a move that industry analysts considered extremely surprising, Netflix made a very aggressive bid for the HBO and the Warner studios, and was able to convince the board that its $27.75 per share offer of mostly cash and some Netflix stock, was more valuable than the $30 per share that Paramount offered for the whole company, because it was leaving behind the cable networks which the Warner board valued as worth more than the difference between the two bids. The Warner board also strongly believed that the Netflix offer had terms that made its offer carry greater certainty to close than the Paramount offer.

The Ellisons have now decided to go hostile and take their offer to shareholders and this has sparked enormous debate about who should own these assets. WBD’s board told shareholders to reject this latest hostile bid on Jan. 7.

First, from a consumer point of view, television viewers care about having substantial amount of choice, at reasonable prices, with plenty of quality productions. Since all the major streaming services seek today is greater engagement — meaning more viewers watching for longer periods of time — whoever owns the Warner studios and HBO will have plenty of incentive to produce more than they currently do and maintain the perception of high quality that HBO commands amongst consumers. Either buyer will serve this consumer interest.

The anti-Netflix argument is that since Netflix is the far bigger streaming service today than Paramount+, that it will command sufficient market power to raise price in a way that will be detrimental to streaming subscribers. However, Netflix has pursued a pricing strategy that actually offers the lowest cost service for subscribers that are willing to accept ads, and the highest price service for those who do not want advertisements. This strategy has worked incredibly well for them and there is little reason to think this approach would change, of offering its entire service at the lowest cost. Moreover, as Netflix has argued, being able to offer Netflix and HBO services as a discounted bundle might well provide substantial savings over the status quo for those subscribers that have both services, which is the vast majority of HBO subs. In addition, Paramount, like some of the other services that are much smaller than Netflix and struggling for profitability, have a need to continue to substantially increase the price of their services.

Of particular note when considering the issue of consumer choice, Netflix has indicated it will keep the HBO service alive, whereas Paramount+ and HBO are likely to merge into a single stronger service which one might argue will eliminate some degree of choice for consumers, compared to keeping HBO alive as a separate offering.

Nevertheless, whoever wins this bidding war will be subject to regulatory review, and that poses questions of competition which is what policymakers most concern themselves with. It is hard to argue that Paramount+ is not a subscale service that badly needs to combine with another player in order to compete with the larger players in the market such as Disney and Amazon, and of course, Netflix. So, yes, competition will be enhanced by Paramount+ combining with HBO to become a stronger streaming player, but just because it is more pro-competitive for Paramount to acquire Warner, however, that does not mean it is anti-competitive under the antitrust laws for Netflix to absorb the Warner properties.

So, let’s look at this issue from an industry perspective. Paramount has announced it plans to cut costs far more aggressively once the companies are merged than Netflix anticipates doing so. While much of those cuts will come on the cable side which Netflix would not be buying, many of those cuts will also come from HBO and Paramount+ combining, and maybe more importantly from the Paramount and Warner studios combining.

Beyond jobs, combining the Paramount and Warner studios would reduce the number of major studios producing theatrical motion pictures which clearly reduces competition — just as Disney’s acquisition in recent years of 20^th Century Fox eliminated the latter as a major studio player. The industry counter argument is that Netflix has not been a believer in movie theater distribution and would look to put its output on its streaming service and substantially reduce what plays theatrically. Yet, the response to that argument is Netflix has made very little impact in the media zeitgeist as a producer of movies as compared to its television series, while it has been able to garner substantial viewership from movies that it licenses from third party studios. The difference there is that those licensed movies have had theatrical runs with all the promotional marketing that goes along with those releases, and there is good reason to believe that in order to drive greater engagement of viewers when it comes to movies on Netflix that they would maintain movie theater distribution in order to drive the type of promotional awareness that have made for successful movie runs on the streaming service.

There is the further industry issue of how do you even measure competition when it comes to television viewership. Paramount would like regulators to define the relevant market as being streaming services that air long-form tv shows and movies, because under that analysis Netflix combined with HBO Max would have about a 28% market share, whereas Paramount plus HBO Max would only have about a 7% share. This approach would exclude YouTube’s first place share of connected TV streaming viewing of 24%. Yet with YouTube included, the Netflix/HBO Max share of streaming to the tv set audience is only about 20%, still below YouTube’s viewing share. With YouTube having just bid the Oscars away from Disney/ABC and the Disney streaming services, it is hard to argue that YouTube should not be considered as part of the relevant TV market.

The real critical number though is that HBO Max’s share of streaming viewing is only 2.6%, so in any event it adds a nominal amount of increased viewership to Netflix, and the resulting Netflix share would not typically rise to the level of concentration that would cause regulators to upset a transaction.

The better argument for Netflix actually is that it doesn’t just compete in the streaming universe, but for the majority of television households today that still receive traditional broadcast and cable channels, those channels are still significant competition for viewing eyeballs — and when those traditional channels are included Netflix only has about an 8% viewing share, and is only in sixth place well behind Paramount. In fact, when considering the totality of television channels and streaming services together, Paramount’s acquisition of Warner would catapult it to first place, even ahead of YouTube, when it comes to total viewership based on Nielsen’s latest numbers.

When it comes to the advertising revenue which attaches to this viewership Netflix ad revenues are still very nascent, and with the addition of HBO Max ad revenue, would still be a small percentage of overall TV advertising. Paramount’s much larger ad revenue would close to double with the acquisition, but neither outcome would substantially change competitive dynamics in the TV ad industry.

Regulators would also look at the industry concern as to whether the number of players available to license or acquire shows produced by others would involve a reduction in competition. Whether the buyer of Warner was Netflix or Paramount in either case there would be one less buyer of third-party produced TV shows. So on that score, it is hard to claim one buyer or the other makes a competitive difference. Netflix today might have a much bigger programming budget, but Paramount has already proven that it will bid more aggressively for key licensing rights than any other bidder in the marketplace.

While Netflix would not be acquiring CNN, Paramount would be, and it plans to combine CBS News and CNN which would be a smart rationalization of substantial news operations overhead. However, in the course of accomplishing that there would be a reduction of six major broadcast and cable news organizations down to five, a clear elimination of a competitor just as the case would be with Paramount’s acquisition of the Warner studios. While many industry observers would bemoan CNN coming under more conservative leaning editorial leadership, in terms of editorial diversity in the overall media marketplace, it would be hard to argue that the opinions and editorial approach CNN represents can’t otherwise be found by viewers elsewhere in their diet of news programming choices.

So, there are pluses and minuses for consumers and the industry depending on who bought the Warner properties, but there is no clear-cut case that one outcome is better or worse than the other for consumers or the industry.

Not that this should play any role here in determining an outcome, what about the interests of President Trump?

Paramount very much thought it had the inside track to getting Trump’s blessing on the acquisition, and the President has made no secret of the fact that he plans to weigh in on an unprecedented basis regarding regulatory approval. While he has clear political ties to Larry Ellison, the President’s outlook towards Netflix looks pretty benign. However, there is no doubt Trump wants CNN under different ownership because of its current editorial slant, which could well mean if Paramount does not succeed in acquiring all of Warner, he would be less pleased with the outcome. Yet, there seems to be interest in third parties acquiring CNN, or the whole Warner cable bundle including CNN, and Trump could influence regulatory approval of a CNN deal to a new owner so that it is not left to be spun-off for current Warner management to operate. The fact is Trump has been less than fully satisfied with the performance of CBS News, which is owned by Paramount, since Ellison took it over. So Trump standing in the way of a Netflix acquisition of HBO and the Warner studios because of the ultimate fate of CNN seems like a long shot.

Alternatively, if Netflix was to acquire HBO and the studios, Paramount might still acquire the cable assets as a way of bulking up the traditional side of the company and having an opportunity to still take out very substantial cost, including the consolidation of CNN and CBS News.

In the end, it appears that the only ones who should really care about the outcome here are the shareholders of the three respective companies, where Warner shareholders clearly care about getting the highest price with the greatest certainty that it will be paid, and the Warner board is going to have to be meticulous in making sure that whatever decision they make is guided by that metric. Larry Ellison has now agreed to personally guarantee the Paramount bid, which largely removes the uncertainty around the equity financing the Warner board had been concerned about — though the board has raised issues surrounding the debt financing — so the question of which offer provides a better price and greater certainty for shareholders is still at issue. Beyond the interests of shareholders, with there being pros and cons running in both directions, it is hard to see that either outcome rises to the level that anybody should really care who ends up owning Warner.

Tom Rogers was the first president, NBC Cable and the founder, CNBC. He is a CNBC contributor, senior advisor to Versant (CNBC’s parent company) and executive chairman, of AI company Claigrid, Inc.