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20 May 2021

Studios slide further down SVoD path as Amazon courts MGM

Amazon is reportedly in talks to acquire one of Hollywood’s last independent studios, MGM, for an estimated sum of between $7 billion and $10 billion. Amazon spent $11 billion on acquiring content for Prime Video last year, up from $7.8 billion in 2019, so a hefty spend while we are still not halfway through the year would demonstrate a determined content expansion strategy.

The acquisition would certainly make sense considering that Amazon seems to be preparing for the swing of the antitrust axe, in the event regulators try to break up the giant. Legendary Amazon lieutenant Jeff Blackburn has returned home after just a few months leave, to lead the newly organized Global Media & Entertainment wing, which houses Prime Video, Amazon Studios, Audible, and Twitch, as well as podcasts and games. Sounds like a perfect home for MGM, no?

Although still below Netflix in terms of subs, Prime Video is catching up fast with Netflix’s 208 million monthly active users, with Bezos revealing a few weeks back that 175 million of Amazon Prime’s members have streamed content on the Prime Video service in the past year. A smattering of new premium content could be the boost that the service needs to make it neck and neck.

Assuming the purchase goes ahead, it is highly symbolic of the path which the film industry seems to be irreversibly pursuing since HBO Max went D2C at the tail-end of last year. Faultline is running out of metaphors to describe the numerous death knells for cinemas that have rung in recent months, but perhaps they are not needed as the overall picture is undeniably clear. Premium content is moving into the hands of major OTT players, and that has immediate knock-on effects for how films will be consumed in the years to come.

MGM has been looking for a parent for years now but seems to have had a habit for overstepping the mark in negotiations. Netflix held talks with the studio to take the much-delayed new James Bond film direct to locked-down consumers, but these reportedly went nowhere due to an unreasonably high price tag – perhaps because MGM was expecting Netflix to cough up the equivalent of box office revenues.

Equally, Apple and MGM have apparently been in talks since 2018, but a hefty price tag – a reported $6 billion – has consistently been the obstacle to multiple acquisition opportunities over the years. While 2020 saw commentators wait for MGM to be snapped up by a media giant, the expected continuation of the consolidation trend never came to be.

MGM reportedly slashed its own valuation to $5 billion in late 2020, but clearly Apple, nor Comcast – another highly suspected bidder – did not take the bait. If Amazon is willing to pay $9 billion for the studio – much closer to the $8 billion price that MGM Chairman Kevin Ulrich was after in 2018 – it raises questions about what Amazon knows that Apple does not.

With MGM’s franchises boasting top tier contemporary movie titles such as Fargo, The Hobbit, James Bond and The Handmaid’s Tale, Amazon may have unlocked a content treasure trove. Founded in 1924, MGM also has a horde of classics among its 4000 titles, including Gone With the Wind, The Wizard of Oz, Rocky and West Side Story.

Unsurprisingly, all of MGM’s segments saw revenue decline over 2020, with Film Content the most dramatic, down 4% to $588 million. Total contributions were up 30%, largely due to a 248% increase in spend in the Media Networks segment.

Yet despite this imbalance, MGM managed to emerge from 2020 with a slim, and slightly deceptive, $33 million net income. This was up 108% from the $427 million loss in 2019 that was driven by a seemingly one-off $482 million impairment of non-content intangible assets in 2019.

If the acquisition comes to pass, it would mark one of the last events of major consolidation in the entertainment landscape. With Warner Bros now merging with Discovery, Fox under Disney, Universal within Comcast, and Paramount inside ViacomCBS, MGM is one of the last remaining bastions of independent US studios.

The suspected price tag would put the deal relatively low in the rankings for the frenzied media mergers and acquisitions. AT&T tops out, acquiring Time Warner for $85 billion, while Disney’s acquisition of Fox was at $71 billion. Even the other big news piece this week regarding content – WarnerMedia and Discovery merging – is valued at $43 billion.

The $9 billion figure puts this deal in the ballpark of the ViacomCBS merger, or Discovery’s acquisition of the Scripps Network, both of which went for $12 billion.

Although Amazon enjoyed strong debut showing at the New Fronts, where its sprawling AVoD muscles were flexed, this news shows that the giant is not taking its foot off the gas when it comes to SVoD. While MGM’s content could be bundled into IMDb TV, we cannot imagine the business case for such a move, other than the classic titles would be quite ‘on brand.’