Comcast CEO Brian Roberts arrives for the Allen & Company Sun Valley Conference on July 6, 2021 in Sun Valley, Idaho.
Kevin Dietsch | Getty Images
The Prisoner’s Dilemma is a standard game theory situation often taught in business schools. Comcast CEO Brian Roberts and ViacomCBS Chairman Shari Redstone live it real-time as they consider working together.
Comcast’s NBCUniversal and ViacomCBS are struggling to keep up with the biggest players in video streaming.
While Netflix, Amazon, and Disney all have more than 100 million subscribers to their flagship video services, NBCUniversal’s Peacock has 42 million U.S. registrations – most of which don’t pay for the service – and ViacomCBS’s Paramount + has fewer than 36 million subscribers. ViacomCBS does not disclose the exact number of Paramount + paying customers, but said earlier this year that it had a total of 36 million streaming subscribers, including Showtime and other niche products.
AT & T’s WarnerMedia and Discovery also have subscale streaming products. At the beginning of the year they announced a merger. That left NBCUniversal and ViacomCBS the biggest remaining streaming players.
Roberts and Redstone have held talks to see how the companies can work together, according to people familiar with the matter. Investment bankers are pumping both companies with ideas in hopes of potentially getting what may be the last big traditional media merger fee in a while, said people, who refused to be named because the discussions are private. Spokespeople for Comcast, Redstone’s private National Amusements, and ViacomCBS declined to comment.
One of the options being considered is to bundle Peacock and Paramount + in international markets, The Information reported earlier this year. Both companies plan to expand globally, and the partnership is relatively smooth.
Another option is a merger or acquisition, but there are numerous complications along the way. Neither ViacomCBS nor NBCUniversal are currently actively seeking a merger, according to those familiar with the matter.
While there may be no rush to merge, both companies will ultimately need more size to compete with bigger players. They could partner or merge or attempt to merge with Warner Bros. Discovery if this deal closes in mid-2022. A merger with Warner Bros. Discovery could be more suitable for either ViacomCBS or NBCUniversal.
But only one of them could join Warner Bros. Discovery. That would leave the other company out in the rain – possibly for years.
That is the essence of the prisoner’s dilemma.
Working together can ensure that both companies are better off than they were when they started, but it can be the best scenario for one company and the worst scenario for the other to compete against each other. (This is not a perfect example of a prisoner’s dilemma as companies cannot really give themselves away and end up in a situation where both are worse off).
Regulators would likely not allow a combined NBCUniversal-ViacomCBS to own both NBC and CBS. It is likely that any merger will have to involve the divestment of one of the broadcast networks as well as any local NBC or CBS television company that overlap in the same markets.
That immediately diminishes the value of both companies. If CBS were divested, NBCUniversal would receive Paramount + with no CBS programming, including live National Football League and NCAA March Madness games. If the companies decided to divest NBC, Viacom would not get CBS “Sunday Night Football” and other popular NBC shows.
While it is possible that companies could try to argue that broadcast networks are like cable networks and do not require separate ownership, regulators may not see this as a reasonable argument. According to Horowitz Research, about 40% of Americans own a digital antenna in order to get free over-the-air programming in addition to streaming video. Broadcast networks have struggled for valuable programming in the past. Uniting two under one roof would stifle these competing bidding situations.
The second obstacle is structure. Comcast could simply acquire ViacomCBS and purchase Redstone’s voting rights in a deal. But ViacomCBS has an enterprise value of about $ 40 billion and would charge a fair premium for the sale, two of the people said. Even with major divestments, a deal would be expensive.
Shari Redstone, President of National Amusements and Vice Chairwoman of CBS and Viacom, speaks at the WSJTECH Live conference in Laguna Beach, California on October 21, 2019.
Mike Blake | Reuters
Comcast shareholders, who MoffettNathanson analyst Craig Moffett said they are more likely to welcome a split between NBCUniversal and Comcast, may not like a decision to buy ViacomCBS and divest one of the networks.
Roberts could spin off NBCUniversal and merge with ViacomCBS – similar to the WarnerMedia Discovery deal. That could result in him giving up control of NBCUniversal. If Redstone ends up having more economic control of a merged NBCUniversal-ViacomCBS, she may want to run the company for at least a few years or choose who is in charge. Roberts and Redstone would need to reach an agreement on economic and voting control if this option is pursued.
A bundled offering through a commercial partnership avoids the merger and acquisition problems – and is ultimately the most likely “step one” scenario – but offers companies less flexibility in offerings than a merger. Or, the needle may not move enough for either company.
Wait for Warner Bros. Discovery
Both NBCUniversal and ViacomCBS could theoretically fit Warner Bros. Discovery, as David Zaslav’s future company will not own a broadcast network. That would make a sale superfluous. The combination with HBO Max and Discovery + would also be a more robust streaming offer in terms of content than simply merging the assets from NBCUniversal and ViacomCBS.
But the size of Warner Bros. Discovery combined with ViacomCBS or NBCUniversal could pose regulatory issues depending on how the Biden government regulators view the entertainment market. Even WarnerMedia’s deal with Discovery is not guaranteed.
A decision to make a deal with Warner Bros. Discovery will force both NBCUniversal and ViacomCBS to wait two or three more years as the merger would take a long time to get regulatory approval – first for WarnerMedia and Discovery and then for the second combination . Then there are integration costs and problems from two big deals that happen so quickly.
For the company, which did not merge with Warner Bros. Discovery, the likely way forward would be to pool some of the smaller streaming players together. like Lionsgate and AMC Networks or are pushing for a takeover of Sony Pictures.
Merging or waiting makes both a headache. It is because of this that investment bankers get big bucks.
Disclosure: NBCUniversal is the parent company of CNBC.
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