It’s about the NFL. Also, why tech should buy media.
CBS, home of broad-based hits like “NCIS” and “Big Bang Theory,” is exploring a tie-up with Viacom, which owns Nickelodeon, MTV and Comedy Central, as well as Paramount studios. Both are controlled by entrepreneur Shari Redstone, and while it makes sense on the surface why she’d want to merge the two, it’s short-sighted.
Redstone should sell CBS to Amazon instead.
Here’s why. Combining two media businesses at a time when fewer people are paying for (or watching) TV won’t help either of them, even in the near term. But selling to a tech company like Amazon would allow CBS to more effectively compete with other networks by bidding higher for sports rights — the only content that still keeps mass audiences tied to TV sets — while at the same time getting ahead of TV’s inevitable shift to online distribution.
CBS would also have much more money to spend on itself under Amazon since Jeff Bezos would let it operate the Amazon way — without having to worry about profits. He prefers using money to boost the business, and the math on CBS is compelling.
Amazon’s operating margin is 3 percent — CBS is at 21 percent (welcome to media). Even halving that would yield an extra $1.3 billion that CBS could better spend on itself. The company also pays a dividend that costs $292 million a year — money that could go back into the network under Amazon.
It’s that simple.
But, of course, it’s also not. The hard part — there are a lot of hard parts, really, which we’ll address with all the proper asides — is getting at the narrative reason, the gut call for such an unconventional play.
So before flicking through the above thesis to lay out the business case (and there’s plenty there), let’s pause to consider: Bezos has become something of a media apparition these days. He’s the guy who owns two Beverly Hills homes and sits at the back table of the Golden Globes; the tuxedo’d gent grinning alongside Hollywood headliners at the latest premiere; the out-of-sight proprietor of a newly potent Washington Post.
He’s not always seen or heard, but he’s increasingly there, in the background or at the margins. On occasion, front and center, pitching his product.
His conspicuous public presence tells us the most important thing: Bezos simply likes media. He probably loves it. It’s the only real reason anyone ever gets into the business, and that postulate is more important than any business case.
But that doesn’t mean we shouldn’t go through that case.
Tech companies not only have all the money right now, they also have a lot of the eyeballs. Google and Facebook in particular have captured a lot of user attention, often at the expense of TV. And it’s that state of play that’s fueling the cacophony of media deals at the moment. Redstone’s move to merge CBS and Viacom, AT&T’s bid for Time Warner and Disney’s play for Fox’s film studios are all grand, last-ditch efforts to defend against tech, not each other.
The working theory is that by aggregating TV networks, a merged company could bargain for more carriage fees from the pay TV distributors like Charter or Comcast. CBS, for example, could help Viacom extract higher rates for its lesser-watched channels like MTV and Comedy Central by including them with its broadcast network, which is considered “must carry” given its highly rated programs and NFL games.
Some version of that thesis has been the boilerplate paragraph news articles have recycled to explain the rationale behind these multi-billion dollar mergers. It’s also wrong. The days of pay TV distributors continuing to shell out more for channels that fewer people are watching are over. These tie-ups aren’t about extracting more money. They’re about making sure they don’t get paid any less. They’re about staying alive.
Close observers and analysts have seen this story unfolding like a slow-motion massacre. TV ratings and subscribers are down. Contractually triggered rate increases have helped, but those rate hikes will be blunted in the next contract cycle.
The idea of a CBS merger with a Silicon Valley company isn’t entirely speculative. The network’s top brass, including CEO Les Moonves, have mulled how the broadcaster could benefit under the ownership of a tech giant, according to sources. And he’s still wary of a tie-up with Viacom, even though they’re now formally looking at a merger, these people say.
It may seem Amazon wouldn’t need the help of CBS since it has already produced several critical hits, having made Bezos an awards-season regular since 2015 when the company was honored for its series “Transparent.”
But — and here’s where it makes sense to own CBS — a show about a Los Angeles family whose 70-year-old patriarch comes out as transgender is ultimately a niche product. Recent Amazon Globe winner “The Marvelous Mrs. Maisel,” a period confection about a midcentury housewife trying to make it as a standup comedian, is a niche product, too.
Amazon was happy with niche hits when it started making its own shows. But now, Bezos wants Amazon Studios to think bigger, “Game of Thrones” bigger. Amazon’s abiding ethos is mass volume, the operating metric that unifies its catholic interests, and CBS happens to be the most-watched channel on television. While it’s broad-based programming isn’t exactly a swashbuckling fantasy epic, it knows how to draw big audiences.
That matters to Bezos, not just for the accolades or the party premieres, but because the more people watch Amazon’s shows, the more stuff they buy on Amazon.
“When we win a Golden Globe, it helps us sell more shoes,” Bezos has said at Code Conference. As an Amazon Prime member, you’re offered free two-day shipping on many items while also getting access to original shows. Put it another way, the shows, for now, are a marketing cost.
“Because we have this unusual way to monetize the premium content, we can charge less for the premium content than we would otherwise have to charge, if we didn’t have the flywheel spinning to help sell more shoes,” he explained.
But right now, Amazon’s future programming slate is unclear as it hunts for someone to lead its studios division. Its previous head, Roy Price, resigned in the wake of sexual harassment allegations. Amy Powell, the head of Paramount TV, and Nancy Dubuc, the CEO of A+E, have been seen as candidates, along with former Sony Pictures co-CEO Amy Pascal. Stacey Snider, the head of 20th Century Fox, is also a logical choice since it’s unclear what will happen to her and the studio’s top execs after Rupert Murdoch sells the studio to Disney.
CBS has had some modest digital success thanks to execs like Jim Lanzone, who leads the broadcaster’s digital division. The company’s standalone streaming service, CBS All Access, along with Showtime’s online service (also a CBS property), together now have four million paying subscribers, a figure the company expects to double by 2020. A lot of that was boosted by Amazon already, since it sells those services through its website.
Within Amazon, CBS could have immediate access to the over 60 percent of U.S. households that have a Prime membership, or about 75 million. Even though CBS already reaches 90 percent of those households, the bulk of that comes through pay TV subscriptions, which, as we’ve already noted, are in decline.
But the real prize — for both — is sports.
Professional leagues still dominate the ratings, making it increasingly valuable to advertisers and media companies in the age of fast-forward television. The NFL, despite recent viewership declines, is still the most valuable content anywhere. That’s why marketers still line up to pay $5 million to own 30 seconds of the Super Bowl.*
Where this matters for Amazon and CBS is their combined spending and distribution power. Amazon has the money; CBS has the audience and the programming expertise.
Amazon already paid big for streaming rights to Thursday night games, so Bezos clearly sees the benefit to owning sports, but viewership was lackluster. (The NFL just completed a renewal for Thursday TV rights going to Fox, but streaming rights are still being negotiated.)
CBS, meanwhile, has no problem driving big viewership to NFL games, but it’s paying a pretty penny for the right to do so — about $1.2 billion a year — and those fees will go even higher when the traditional Sunday and Monday games come up for grabs in 2021-2022.** The common wisdom is that a tech giant will snatch away those rights from the TV guys.
But the NFL has also seen what the NFL looks like on the internet and it’s not pretty. Thursday night games on Twitter barely got past 300,000 viewers, at least in terms of a Nielsen equivalent. Amazon did marginally better.
That means it’s doubtful the NFL will offer exclusive or near exclusive rights to an internet player no matter how much they bid. The NFL will still need a CBS or a Fox to make sure enough real people are tuning in.
Amazon and Facebook and Google, however, are less likely to pay big money for games that only draw a few hundred thousand viewers. They’d want scale, and for a deal to be meaningful they’d need to own sole rights — games you can only watch on the internet. (Verizon owns the mobile rights for now.)
Solution: An Amazon-CBS would allow one company to own both ends of the video spectrum right away, while also allowing it to experiment more quickly, possibly making a few games available only online while maintaining the bulk of NFL games on broadcast.
That’s a long walk to rationalize a merger that would cost Amazon $28 billion and would be its largest ever acquisition.*** But Amazon, more than any other enterprise, has shown an ambition that puts the Roman Empire in a gauzier light.
Adding binge-worthy serials and NFL games (or other pro sports) will certainly “sell more shoes.” But even then there’s also the draw of being a bigger player in media. Look at that photograph.
Requisite reality check (saved for last): There are some key reasons a deal like this is unlikely to happen.
First, the Redstone family. As controlling shareholder, Shari Redstone has sole say over the future of CBS and Viacom. Combining the two would likely mean a contraction of both. Viacom has already started to slim down, which is smart, but it will still be a weight on CBS.
Of course, she wants to combine the two not necessarily because it’s the best home for Viacom but because she can simply make it happen, and time is running out in media merger land. If she doesn’t combine it with the more valuable company, CBS, soon, Viacom’s value could drop.
A better idea (though a harder one to pull off) would be to sell off Viacom to a different buyer. Disney is already in the process of bulking up by purchasing Fox’s studio assets, but that deal doesn’t include a cable network as big as Nickelodeon or MTV.
Disney’s deal for Fox has partly been about shoring up ESPN with Fox’s regional sports networks. Adding Nickelodeon and MTV to Disney’s smaller cable networks — Disney channel and Freeform, a channel aimed at teens — would create a stronger lineup than the one that has Viacom added to CBS, or one that Disney would have without those networks. The caveat to such a deal, of course, is everything said above, but it solves a problem for Redstone while maximizing a takeout price.
The other reason this deal is unlikely to happen: The chaotic and oftentimes personally driven regulatory environment created by the Trump Administration. Trump has already cast doubt on the AT&T-Time Warner merger, and he’s unlikely to look favorably on anything Jeff Bezos might do that would make Amazon even more powerful.
But that doesn’t mean it still couldn’t happen. And while the smart play isn’t always the one that actually happens, it’s one always worth spelling out.
* NBC, which is broadcasting the Super Bowl this weekend, is a minority investor in Recode parent Vox Media.
** CBS and the rest of the TV guys will certainly argue that the drop in NFL viewership (despite some stellar playoff games) merits a lighter increase in fees, or even a flattening. But the NFL could make the argument (and they will) that because of this structural decline, football games are more valuable — it’s still one of the few things that consistently draws in big audiences relative to everything else on TV. And where will the big brand marketers go? The internet?
*** AT&T’s purchase price of $85.4 billion for Time Warner means it’s paying about 9.9 times its profit before interest, taxes, depreciation and amortization. At that multiple, CBS could sell for about $28 billion, a 33 percent premium to its current market value.
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