The pros and cons of a Paramount-Warner Bros. Discovery merger, according to media buyers

Rumors of Paramount Global being up for sale have been running rampant for the past few weeks with various suitors reportedly in talks to acquire the beleaguered media company. The latest could-be buyer is Warner Bros. Discovery, whose CEO David Zaslav is said to have held conversations with Paramount CEO Bob Bakish this week as well as Paramount’s chair Shari Redstone. While the deal is in early talks with no clear indicator of finality, it would have major implications for dynamics in the TV ad market, according to advertisers. See our Year in Review stories here A potential Paramount-Warner Bros. Discovery merger would likely produce new opportunities for advertisers, who have borne the brunt of TV’s fragmentation problems and have been forced to become increasingly creative to find aggregated audiences. But as Warner Bros. Discovery’s own merger has shown the industry, enjoying the benefits of a consolidated media ecosystem may be a long way off. Warner Bros. Discovery and Paramount declined to comment for this story. The Pros The top benefit of combining Paramount and Warner Bros. Discovery would be the breadth of its merged media assets, and by extension, the size of the audience it would attract, according to multiple media buyers. Bringing together the companies’ sports league rights, theatrical studios and TV assets, including the libraries of HBO, Showtime, CBS and numerous specialized networks such as Magnolia, MTV, BET, Nickelodeon and Discovery, would create a powerful force. And while Paramount and Warner Bros. Discovery each have streaming platforms taking up arms in the ongoing streaming wars, the dominance of Netflix, Disney and the overwhelming force of tech companies such as Amazon, Google and Apple in video leave little room for smaller players to survive. Also read: Revisiting Netflix’s first-add supported year “A merger would be good for advertisers, helping re-aggregate fragmenting audiences and probably getting scale efficiencies in having fewer, larger sellers to work with,” said Dave Morgan, founder and CEO of ad tech company Simulmedia. The top performers of Nielsen’s The Gauge, which measures the share of total TV viewership by platform, are YouTube and Netflix, by a notable lead, followed by Prime Video and Hulu. On their own, Warner Bros. Discovery’s Max and Paramount’s Paramount+ and Pluto TV comprise three of the bottom four slots. Not counting for duplicate audiences, the platforms combined would surpass Hulu on the rankings, which have become an industry leaderboard for streaming dominance. While Nielsen’s The Gauge is a good indicator for overall audience reach, it doesn’t differentiate platforms’ ad-supported versus ad-free audiences. Disney leads the total U.S. TV ad market (inclusive of all assets, not just streaming) at 19% share, which Warner Bros. Discovery and Paramount trail by 3% each, according to data from media analyst Brian Wieser’s “Madison and Wall” consultancy. But merged, the two would account for about 33% share of the TV ad market, per Wieser’s estimates. “If [the Paramount-Warner Bros. Discovery merger] happens, we will probably see two more mergers—both Comcast and Disney will need partners for their broadcast and cable networks,” added Morgan, who thinks the deal is likely. “[Warner Bros. Discovery and Paramount] are each shrinking in revenue, though WBD has made great progress in cash production and debt management ... Now that interest rates are up, time is not a luxury anyone has,” said Morgan. Beyond the potential for audience aggregation, the combined companies could also have benefits in spending power and ad capabilities, according to one media buyer. In the short term, the buyer said the new Paramount-Warner Bros. Discovery company would have “enough media money to better combat big tech and their push to devalue content” via efforts to commercialize entertainment. And in the long term, the company would produce “a consolidated streaming environment with better technology and plenty of consumer options from a pricing perspective,” said the buyer. The cons That said, the technological benefits for advertisers would likely be far off, said the buyer. While the buyer said Paramount has had stronger capabilities in ad tech and streaming in their deals, “if they now attempt to move WBD and Max over to Paramount infrastructure and collapse it down, it will still take time and money ... I’m not sure how fast that can happen because Discovery+ still needs to be migrated too—there is just a ton of technical debt on the WBD side from the last merger in terms of too many streaming platforms still and too many ad servers.” The buyer added that the efficiency of the merged companies would also depend on how its new leadership would be structured. And should Warner Bros. Discovery choose to repeat its approach of maintaining Discovery’s legacy leadership rather than mixing the best of each, it likely wouldn’t produce “the best outcome for that company from a technical or streaming go-to-market perspective,” said the buyer. The inevitable wave of mass layoffs as the companies merge would also be a major downside of the potential merger, according to the three sources that spoke to Ad Age for this story. “Consolidation is always hard on everyone involved; it causes layoffs, which cause loss of institutional knowledge of media company offerings and brand insights,” said a second media buyer. “With consolidation, the business strategy of the newly formed media company changes to best suit their new needs—and their needs are generally cost cutting and increased revenue. Advertising is a go-to for that.” The second buyer also pointed to the operational downtime caused by mergers, in which agencies and clients have to “work harder to manage their campaigns” and keep a close eye on errors caused by the merging of systems and processes. The likelihood While the reported talks between Paramount and Warner Bros. Discovery are in initial stages and don’t indicate a done deal by any measure, the three sources said it’s not something to discount. While “Paramount needs this deal” to manage its debt and compete in a streaming-first future, according to Morgan, its options are limited. Paramount would clash with antitrust regulations if it were to try to merge with Disney or NBCUniversal because each operates one of the core broadcast networks (ABC and NBC, respectively). And while Paramount and Warner Bros. Discovery each operate leading production studios, “no way this is an antitrust issue given the rise of Apple, Amazon and Netflix as studios—there is too much competition here to claim antitrust concern,” said the first buyer, also accounting for competition in the theatrical space, which includes Sony, Disney and Universal. Entertainment lawyer Bryan Sullivan, a founding partner at Early Sullivan Wright Gizer & McRae LLP, said the potential merger would harken back to Disney’s acquisition of 21st Century Studios from Fox Corp in 2019 and that the “overall likelihood of regulatory interferences in this potential merger is low. “Federal regulators have shown a consistent pattern in recent years of not challenging mergers and acquisitions with the same interest they once did,” said Sullivan. “Neither of these two companies is the largest in the sector and this potential merger wouldn’t make them ... The presence of studios likely won't present an issue like broadcast would as the two companies are not the largest studio players in town and broadcast has fewer players involved than studio productions. If both had broadcast operations, a merger would eliminate one player from the landscape.” The prime hurdle in achieving a deal between Paramount and Warner Bros. Discovery is debt by all accounts. Warner Bros. Discovery reported approximately $45 billion in remaining debt in the third quarter, totaling $12 billion paid to date since its merger in April 2022. While it anticipates to achieve $5 billion in free cash flow by the end of the current fiscal year, Paramount’s $10 billion market valuation also comes with an additional $15 billion in debt. “No doubt Paramount needs to merge, but pragmatically, Warner Bros. Discovery is carrying too much debt,” said the first buyer. “So it’s a question of how the debt is structured and most importantly, who they put in charge of the combined entity. There are other suitors out there for Paramount that could be intriguing.”

The pros and cons of a Paramount-Warner Bros. Discovery merger, according to media buyers

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