Consolidation is a 'requirement' in the streaming industry

Paramount (PARA, PARAA) is reportedly looking to merge its Paramount+ streaming service with another platform after previous merger discussions failed to materialize in 2024. Third Bridge Group sector analyst Jamie Lumley and Manhattan Venture Partners head of research Santosh Rao join Market Domination to discuss what's next for the media giant.

Lumley notes that Paramount+ trails behind other streaming competitors, the company might consider Warner Bros. Discovery (WBD) or Max as a "good partnership." Rao adds that consolidation has become a "requirement" in the sector as he believes it's necessary to scale.

"As we think over the last few years, this streaming space overall has lost billions and billions of dollars. And it's clear that while there might be some companies here which can reach profitability, it is unlikely that all of them will be able to rebuild these streaming companies or these streaming businesses to offset, for the traditional media companies, the declining revenue and earnings that they had on the traditional linear businesses," Lumley says. He adds that bundling services is a way to retain customers and become profitable.

Santosh believes that consolidation is "not going to be a threat" in the sector: "There's not going to be a monopoly of search. It's sustainability. And these companies will just not last. So I think it's going to be healthy for the industry."

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This post was written by Melanie Riehl

Video transcript

Paramount is searching for a streaming partner that's according to a new report out from C NBC.

Now, the entertainment giant is reportedly looking to merge its Paramount Plus service with another platform.

The news coming after previous merger talks had failed to materialize in the first half of 2024.

Now with the second half of the year in focus, we are discussing how to navigate the big picture for streaming stocks more broadly with the Yahoo Finance playbook.

Now joining us, now we have Jamie Lumley, a sector analyst at Third Bridge Group, also Santos Arrau, head of research at Manhattan venture partners.

Great to see both of you, Jamie, let me start with you this new report that we're getting out here from C NBC.

When we talk about the streaming space in the second half of 2024 I think a lot of people, their first thoughts is going to Paramount exactly how that is going to play out.

What do you think is the most likely option or end game here for Paramount at this point?

It's a really good question.

And with Paramount, I mean, it's been a whirlwind of a year for them.

It seems we have a different headline each week about what might be the future for this company.

But if we think about the future of purely paramount plus and where they're at and streaming right now, a lot of people when they hear paramount plus, it's not really on the top of their list of must watch streaming platforms in terms of his business fundamentals, it's at considerable scales just up to 71 million subscribers is making improvement on profitability, but it really hasn't gotten to the same size, the same profitability metrics like a Netflix or where Disney is now with their direct consumer business to really make it uh a mainstay in that top tier of streaming players.

So to think about what might be the future from them, they could look maybe out of Warner Brothers discovery, perhaps a max might be a good partnership to really build out the offering they have there or perhaps a Peacock is over at Comcast.

They're still trying to figure out what the best route for it is for that platform and together they might have a bit of a broader reach.

But as we've seen for the last few months, nothing is set in stone for Paramount and where they exactly end up is still anybody's guess Santosh, I want to bring you in here as well.

Same question Santosh Paramount Paramount.

Plus, what do you see as the future there?

Yeah, I mean this flows right into my theme that there is a transition going on.

Uh and consolidation needs to happen and this is the right thing to do.

Uh They're on their own, they're just not going to be able to make it.

Uh We have the undisputed champ which is Netflix out there uh And uh Disney behind them.

So I think these, these companies need to consolidate, need to get together and put up a fight, so to speak, they're way behind.

So you're going to see a lot of this.

Uh it is required, it's healthy for the sector.

And uh I think you're gonna see that that's going to be the theme going forward as we move out of this kind of slump, so to speak, in the media space, we need to get out there and uh with a better, better alignment of companies in this space right now, there is uh there's not much scale in these two companies on their own.

JB.

What do you think?

Do you agree that consolidation essentially needs to happen?

And is this potential paramount outcome here?

However, this ends up just the start of what is going to be a larger trend?

Well, it's interesting because there's been consolidation discussed for a while at this point.

As we think over the last few years, this streaming space overall has lost billions and billions of dollars.

And it's clear that while there might be some companies here which can reach profitability.

It is unlikely that all of them will be able to rebuild these streaming companies or these streaming businesses to offset for the traditional media companies, the declining revenue and earnings that they had on the traditional linear businesses.

So if we look over some of the smaller players, we could very well see some consolidation.

But one thing which is interesting is before we talk really about consolidation, we're seeing a lot more of aggregation and just working together amongst these different platforms.

We have lots of new bundles to talk about.

We have Disney with Warner Brothers, Discovery Netflix, with Comcast and Apple.

There are different ways looking at building strong relationships with consumers and dealing with another real hurdle that these businesses have been facing, which is serial churning behavior by audiences.

Once they are done with the platform, there's no qualms for most viewers of cutting their subscription and jumping to another one.

And then coming back when there's a new show they want to watch.

So finding new ways to manage some of these viewership and just consumer behavior challenges is also these businesses are trying to do while they sort out some larger issues of how they exactly either find a good partner uh from uh an M and A perspective or find a really good path forward to become profitable and also a strong business to offset the continuing declines in linear uh TV.

Santosh, you know, it's interesting consolidation.

I I get, I get the reasoning Santosh because you listen, streamers want to get profitable and linear TV is shrinking.

And so you can certainly make the case strategically and financially Santosh, but there are, there are also challenges, right?

Including most obviously the regulatory backdrop, those trust busters in Washington have a much more skeptical eye toward consolidation.

Unless Santosh, what you're saying is you're suggesting that maybe there's a change in the White House and the administration coming and we maybe get a more friendly regulatory backdrop.

Yeah, I think the consolidations that I'm talking about is not going to be a threat.

There's no, there's not going to be a monopoly of such.

It's, it's sustainability and these companies just not last.

So I think it's going to be healthy for the industry and the, and the regulators are not against that and it's, they're not just against consolidation for the sake of being against it.

There's a reason behind when they are against something.

So in this case, I think it's a healthy thing.

The consolidation needs to happen.

The many sectors, I've been following the telecom sector for a long time.

I've been a telecom analyst and I've seen a lot of acquisitions and m and a activity there.

So there are, there are areas where the regulators do agree.

So all this is going to happen in the face of consumer is slowing down, consumer preferences are changing.

So it's not just uh there's not enough to go around.

The consumer doesn't want already, the average consumer is spending about 60 bucks on streaming service.

This is according to one data from one of the services.

So I think that has to come down.

So the demand for all these services is going to come down.

It's going to consolidate in few companies, good companies that have depth and to have with and have a global presence.

So I think uh distributed presence.

So I think you're going to see a lot of things playing out.

Uh Consolidation is the healthy part, but it's not just someone just taking out competition, it's coming increasing competition and making the competitive landscape much more healthier.

So Jamie given the consolidation that maybe we could potentially see the changing dynamics within the streaming space.

Who do you view then as best positioned right now in streaming, well, for the players who are best positioned, they're likely the ones who probably don't need to do any consolidation if we've looked at uh there's just a Nielsen data shown right there.

Netflix, Amazon and Disney are all commanding very substantial numbers in terms of market share.

And when we look at each of these players, Netflix, larger scale of any streaming platforms out there, they've already cracked the profitability piece.

They continue to bring hits uh to their platform, Bridgerton is doing quite well right now.

You know, if you think about where they are today, it's quite healthy as they continue to also build out other revenue drivers such as their ad supported tier.

If you look over at Amazon, while they're dealing with certainly a different uh business model, they don't have to break even or be profitable within their streaming.

They have this new really exciting business with their introduction of ads and combining that with their much stronger live sports uh segment two.

There's a lot of opportunity over the next couple of years to drive growth and Disney continues to really drive strong market share when it comes to viewing.

So they definitely stand out in front of the pack today.

All right, Jamie Santosh, great discussion guys.

Thank you both for joining the show.

Thank you.