Chapter 1: What is the main topic discussed in this episode?
Support for the show comes from L'Oreal Group, the global beauty leader, defining the future of beauty through science and technology. L'Oreal Group, create the beauty that moves the world. Hello and welcome to Decoder. I'm Nilay Patel, editor-in-chief of The Verge, and Decoder is my show about big ideas and other problems. Today, let's talk about the big Paramount-Warner Bros. Discovery merger.
This deal could reshape all of media and entertainment if and when it closes. That's still an if, which we're going to come back to. Right now, Paramount head David Ellison is very much acting like he's over the finish line after outbidding Netflix, which walked away after what seemed like a done deal.
There's a lot going on here, including the biggest question I've had throughout this entire saga. Why would anyone want to buy Warner, which has basically killed every acquirer it's had for the last quarter century? I'm serious. First AOL, then AT&T, then Discovery. A lot of people have tried to change their fortunes by acquiring Warner Brothers.
Yet while the individuals may have walked away richer, their companies usually ended up saddled with a brutal combination of debt and regret. So why? Why do this? And why now? Back in January, I asked Puck's Julia Alexander to walk me through Netflix's reasoning.
And today I'm digging into Paramount's with Rich Greenfield, a media and entertainment analyst and co-founder of research firm Lightshed Partners. You'll hear me ask Rich a lot about the structure of this deal and the strategy that's supposed to help David Ellison pay for it. But there's no getting around the numbers.
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Chapter 2: What is the significance of the Paramount-Warner Bros. Discovery merger?
Paramount is roughly 40 times smaller than Netflix by market cap, yet it offered to pay 30% more for Warner Brothers. You don't need a fancy finance background to see the bigger picture here. At its core, this deal is about debt. A lot of debt. Paramount is borrowing tens of billions of dollars to make this deal happen.
It has nowhere close to the amount of money needed to buy Warner for the price it had to offer to scare away Netflix. A vast majority of that money is coming from David Ellison's billionaire dad, Larry Ellison, the founder of Oracle. His personal fortune depends almost entirely on his Oracle stock, the same stock that's tied up for better or worse with AI hype.
So why is Larry Ellison willing to trade his lucrative Oracle shares for shares in a media company? And what exactly is David Ellison's plan here, besides slashing huge amounts of jobs when that debt bill comes due? Certainly, the Ellisons think they can succeed where many, many others have failed with Warner Brothers. And surely they think AI has something to do with their plans.
But Paramount won't be the first company killed by a Warner deal. then it really might not be the last. Before we start, a quick reminder that you can listen to this episode or any episode of Decoder completely ad-free by subscribing to The Verge. Just go to theverge.com slash subscribe. Okay, Rich Greenfield of Lightshed Partners on Paramount Steel to buy Warner Brothers. Here we go.
Rich Greenfield, you are a co-founder and analyst at LightShed Partners. Welcome to Coder. Thanks for having me. I'm excited to talk to you. We have not podcasted together.
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Chapter 3: Why has Warner Bros. been a challenging acquisition for past buyers?
We have spent a lot of time- Long-time listener. I appreciate that. I feel like you and I have spent a lot of time writing and posting around each other. So it's really exciting to talk to you, especially about Warner Brothers Paramount, where I think you have a depth of knowledge and expertise. Here's my first question for you. My thesis, it might be the core thesis I have,
for the entire media industry, maybe the entire telecom industry, is that if you buy Warner, you kill yourself. And yet everyone always wants to buy Warner. Why doesn't the industry understand that buying Warner is what leads to a quick and speedy demise? I mean, because you're going back to AOL, which, you know. Yeah. I worked at AOL when they were spinning off Time Warner.
I remember this very clearly. I mean, to be fair- AOL was the thing that died, not Time Warner. No, Time Warner persists, like a zombie that will kill again. It will do it again, even after this, I'm sure. It is crazy how many times this asset has been traded around and sort of... I do think it is fair that sort of merging with this company has been historically the kiss of death.
Obviously, the Ellison family is out to prove that isn't true. And, you know, look, I think the reality is... This industry is undergoing massive transformation. And, you know, the pace of change in media is moving at a pretty incredible rate for a business that, you know, if you went back to the mid 90s, like cable networks were a good, solid business.
The movie studio business was growing and international was exploding for decades. Think about where we are now. Linear TV is dying. Yes, sports, news, still doing very, very well. The NFL is an incredible property.
Sports and news are fine, but traditional linear television, the people that are listening to us on this podcast are not going home and watching their favorite show on NBC Thursday nights the way we did, you and I did when we were growing up. They wouldn't even come across You wouldn't even think of doing that, right?
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Chapter 4: What is David Ellison's strategy behind acquiring Warner Bros.?
Like, there is so much in terms of streaming, let alone this, you know, small little company called YouTube, right, that dominates TV time spent. You think about going to the movies. I mean, think about the movie business, Nealey. Attendance is down 27% from pre-pandemic levels, and that's box office. ticket prices are up over 25%.
So literally butts in seats are over 50% lower than just six years ago. That's mind-bogglingly, like think about how much this business is under distress right now. So why buy it? I mean, this is my core question. There's the history of it, which is buying Warner will kill you. And you better have a good thesis about why it won't.
But historically, everyone's idea is we're going to take Warner's assets and come up with some new distribution. and Warner's assets will make our distribution powerful. That was AOL's thesis. That was AT&T's thesis. Down the line, that was even to some extent Discovery's thesis, right?
That we're going to build a new streaming platform and that distribution powered by Warner's assets will be successful. That never works. That might still be the Ellison thesis. It's unclear. I want to come to that. So there's the history there of these assets aren't good enough to overcome the distribution challenges. And then there's what you're talking about. And then there's AI in the corner.
And I, why, why take this gamble? You know, Netflix launched streaming in 2007.
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Chapter 5: How does debt play a role in the Paramount-Warner Bros. deal?
You know, I'm sure you remember the early days of Netflix streaming. I can't even tell you how many people would come up to us and say, Netflix has to buy a studio. There's no way they can do this. Like, this is crazy. Like if they want to be real in this business, they've got to go buy, you know, like, and I remember even Amazon, people were like, oh, Amazon.
And look, they ended up, they did buy MGM to be fair. Um, But there was this long-held view that there was no way that you could build a robust studio all on your own. And Netflix did it. Like they proved like overpaying for talent, you know, really like outbidding. I mean, remember, they outbid famously HBO for House of Cards. And the rest is history, right, in terms of building it.
There's no doubt in my mind David Ellison went out at Skydance and bought Paramount. That's sort of his stake in the ground, had a big Hollywood studio, had a streaming service. There was certainly the ability to just build, right? Like they did not need to buy another studio and a whole bunch of other linear TV assets for over $100 billion. I think in their minds –
Building it was going to take time, like replicating that Netflix model of ramping the technology, ramping the content, raising the price, having more money from the subscription to invest in more content, like that whole flywheel that is why Netflix is the size company that it is today. The Ellison family was not willing to be patient. They didn't want to wait and build it slowly.
They wanted to do it quickly. And the quickest way to do it was to leverage their family fortune to go out and buy Warner Brothers. They believe this is an accelerant to their plan versus just going out and building it brick by brick. And we'll see whether that ends up being successful. There is incredible IP sitting inside of Warner Brothers. Now, the flip side is you paid a lot for it.
You levered up to seven times, seven times debt to EBITDA leverage. That's a lot of debt that you've got to work off over the course of the next five years. Plus, you got a lot of linear TV. And we were just talking about earlier on the podcast, nobody's watching linear TV. And so you spent a lot of money to get assets that are in secular decline.
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Chapter 6: What risks are associated with the financing of this acquisition?
And so, look, I'm not David Ellison. I would not have done this transaction. I would have just invested and built. They did not want to. They did not agree with our view. And they went out and did this transaction. They ended up paying a lot more than they hoped to pay.
Not as much as – I actually thought it was going to go even higher, but Netflix obviously bailed out, and they got it for $31 a share, still sort of a crazy price. But you know what? They believe they can make the math work on this, and look, time will tell. Let's talk about the math for a second, and then I want to come back to the strategy of it.
Chapter 7: How is AI expected to influence the media and entertainment industry?
It's not all Ellison money, right? There's some amount of syndication going on. They could syndicate all of it. Like it could literally be zero Ellison money and it could be all syndicated. Now, we have no idea. We presume that Middle East money will still be part of this in a substantial way.
They've talked about several different sovereign wealth funds being involved, whether that ultimately happens or not, or whether they syndicate this to U.S. investors. Again, I think the challenge of syndicating this right now is with the stock trading – I know this is coming out in a few days after we record.
But significantly below the $16 price of where the Ellisons or their syndicated investors are investing, it's obviously trading at a meaningful discount to that. And so most people could go into the public markets. and build a position at a far lower price than where this transaction is occurring at. I think that's sort of the challenge on the syndication side, but we'll see.
I'm actually really interested to see what the ultimate investor base looks like. The key part of the puzzle for at least in the Ellison deal as it got bigger and more lucrative was the guarantee from Larry Ellison. 100%. The only reason this transaction went to Paramount is that Larry stepped up and said two things. One- I am personally on the hook for all of the equity of this transaction.
And then two, if for any reason the leverage is too high and the banks that are committing to the debt don't want to fund the debt, I will put more cash in to fix the leverage issue myself. So Larry effectively made this transaction switch from Netflix to Paramount. OK, here's my question about that.
And this is the first brush at AI that I think is going to come up several times in this conversation. If you're Larry Elson, your wealth is Oracle. And Oracle has been an unsexy but lucrative company for a long time. And suddenly it's sexy again because you run a bunch of data centers and – Maybe a little less sexy than six months ago, but go ahead.
Sure, but they just had earnings like this week. They did okay. I think a lot of people thought the catastrophe was coming and they overperformed estimates, right? So Oracle is doing fine. The AI multiple is real for Oracle on some timeline. Why on earth would you trade out of the AI multiple of your Oracle stock, which is your legacy and your wealth, for a media multiple with this much debt?
Because unless you just love your son that much, I cannot think of another reason to make that trade. Look, I think it really depends on how is AI going to transform these industries? You know, I don't think AI is going to mean a whole lot to the linear television business. So let's just leave that to the side. But, you know, there's a big open question. Does AI make studio IP?
the content, you know, does it make it far more valuable? Like, I don't, the funny thing is, is like, I love White Lotus. I think, you know, that show is such an original idea and the storylines are so crazy. It's hard to imagine AI coming up with that Walter Goggins scene, you know, in the restaurant. Like, I don't think AI is going to come up with an original idea like that.
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