Paramount (seemingly) prevailing over Netflix for WBD brings back scale as an argument, with CBS Sports/TNT Sports implications

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A Paramount acquisition of WBD could make CBS Sports and TNT Sports a joint behemoth

The long-running saga of who will buy Warner Bros. Discovery (and what part of it they'll buy) has been an interesting one to follow. As I wrote in a premium post in December, Paramount Skydance's competing offer to take over all of WBD marked a sharp contrast to the Netflix offer the WBD board initially accepted, which would have purchased just WBD's streaming and studios businesses and let their cable networks (including most of what's currently in the TNT Sports division) continue with a planned spinoff into a separate Discovery Global company. That Netflix offer looked like the one that would prevail for quite some time, especially considering WBD's tepid reaction to Paramount's first counterproposals, and that led to many people making bold claims about what was ahead after that deal.

But on Thursday, WBD announced they'd accepted Paramount's latest (and much higher, $31-a-share versus an initial $19-a-share bid) counteroffer, and Netflix quickly declined to counter it. Thus, we're now in what looks to be a Paramount-WBD timeline rather than a Netflix-WBD one (although this could still change with regulatory oversight/challenges and/or financing issues). Here's more on the deal from Dominic Patten at Deadline, including how it seems to have happened while Netflix co-CEO Ted Sarandos was in meetings at the White House:

There are lots of notable parts to what could happen under a Paramount acquisition of WBD, from implications for CNN to what's ahead for streaming services Max and Paramount+. But the sports part of this has its own remarkable dimensions. And the first key part of this is the strategy behind this move, with it being a return to scale-based thinking.

A scale-based blast from the past

I've been covering U.S. media industry moves for the past 14 years, and a couple of larger strategic rationales have dominated during that time. The first is "scale," the second (and opposing) is "focus." The idea of scale always makes me think of the 30 Rock "vertical integration" bit:

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As an aside, it is remarkable that a show that repeatedly and blatantly mocked Comcast/"Kabletown" as it took over NBC aired on NBC. And it's an open question how many media executives have better ideas than Jack ("Vice President of East Coast Television and Microwave Oven Programming") Donaghy (Homonym was a banger, but Sports Shouting and MILF Island weren't things I'd want to watch, even if they are quite reminiscent of what's actually on TV these days). But on a more serious note, there is merit to the scale theory well beyond connections between corn chips and anti-diarrhea medication. (By the way, long-time Pepto-Bismol owner Procter and Gamble did literally launch their own corn chip brand Torengos in 2001, and they also launched Pringles themselves and owned that brand until 2012, so there was quite a factual setup for this joke.)

The idea of scale is essentially about "synergies," which is a word used by too many middle managers in PowerPoint presentations without a full understanding of what it means. But for media companies, scale-based synergies tend to come in two forms. The first is cross-promotion, which has a lot of merit. It's sometimes done in cringeworthy fashion, as with some Marvel and Star Wars promos/altcasts on ESPN (all Disney-owned) that have been trying too hard. But there's a whole lot of value to advertising ABC shows on ESPN, to say nothing of fitting actors who appear in Disney content into various promotional sports things (such as College GameDay guest pickers, SportsCenter interviews, and highly-publicized Disney World trips for athletes).

And there's a lot of simple power to having as many networks and streaming services as a company like Disney does. It's vital in carriage negotiations, allowing them to get even less-desired college networks wide penetration thanks to bundling with desired networks like ESPN. It also ensures they not only always have places to put live sports, but can also promote the other broadcasts currently underway at a given time.

There's also cross-promotion in how many different services one company can sell you and how they can bundle them. A key streaming driver for Disney has long been the various versions of the Disney+/Hulu/ESPN+ bundle. And there are ways to tie that in with their linear channels, multichannel video programming distributor services (cable alternatives Hulu+Live TV and Fubo), theme parks, and more.

The more problematic "synergy" is about job overlap and resulting layoffs in the wake of mergers and acquisitions. This is unquestionably bad for the people who lose their jobs, and it's also negative for consumers in many cases by reducing their choices and diminishing opportunities for innovation. But there are financial benefits to this for the companies, and that's why it's a part of scale-based thinking. That doesn't make that scale-based thinking "good" overall, but it helps explain why it can work, and why we continue to see scale-based moves.

The "focus" argument is an alternative approach that says companies should center on their "core strengths" and sell off or spin off anything that doesn't particularly fit with that. This was advanced by a couple of oft-quoted market analysts as a "Disney should spin off ESPN" argument for much of the last decade, and even though the company went completely the other way by buying much of Fox's assets to improve their scale, those analysts continued to be quoted (and, somehow, the "spin off ESPN" discourse has returned in the past few years). It's found more success at places like Fox (it was behind that sale to Disney), and NBC parent Comcast, which did spin off its cable networks as Versant, and at WBD, which was set to spin off its cable networks as Discovery Global and sell the rest to Netflix.

The key argument with "focus" is it makes it easier for a company to drill down on what works for them. And it can sometimes work overall, perhaps especially with sales rather than spinoffs; many of the assets Fox sold to Disney are probably in better shape overall than they would have been under a company that wasn't all that interested in them, and while the one they sold that the Department of Justice then made Disney flip (the regional sports networks) wound up critically failing, a lot of that was about its new ownership with Sinclair. Disney/ESPN scale might have been significantly helpful to keeping those RSNs going or at least finding a smoother transition out of that model. But spinoffs are more questionable; yes, they make the new company "focused," but without much of the distribution or cross-promotion benefits from scale. And it's certainly not an easy landscape out there for a company focused on cable networks, the way Versant is and the way Discovery Global would have been under the Netflix deal.

Under the Paramount deal, though, even just looking at sports, the combination of CBS Sports and TNT Sports could be a staggering behemoth. And these are two companies that, on the sports side at least, fill each others' biggest gaps. WBD has two of the most-distributed basic cable channels out there in TBS and TNT, which have a strong sports history and a pretty good lineup of rights (MLB, NHL, NASCAR, some college football and college basketball, some tennis, some U.S. Soccer matches) even after losing the NBA. Paramount has the broadcast power of CBS and a whole lot of rights, including the NFL, the Big Ten, significant PGA Tour rights, and the UEFA Champions League, but their cable presence has always been more limited, with CBS Sports Network fine for what it is but not as distributed as TNT/TBS, ESPN, USA, or even NBC Sports Network (both the original and resurrected versions). Their two streamers (Paramount+ and Max) have both dove into sports a decent amount, and bundling or combination could help those gain more market share. And these two companies have a long history of working together on the sports side, especially around the NCAA Tournament (a unique partnership I've frequently covered their executives discussing), which could further ease a transition/integration.

CBS Sports wasn't necessarily in need of much more, especially after Paramount's acquisition by Skydance last August gave them additional capital. But there were questions about Paramount+'s plans in tough economic times that have many reducing their streaming service subscriptions, and the limitations of CBSSN have perhaps been a challenge for CBS in rights deals; they can (and do) put some content there, but it's not as attractive of a destination as a TNT or TBS. Meanwhile, TNT Sports faced some major challenges, especially if it was in just a "Discovery Global" company without WBD's streaming and studios; it's hard to negotiate rights only (or mostly) focused on cable at the moment, and it was not clear how well they could set themselves up beyond their current deals in a Discovery Global structure.

Putting these two entities together certainly won't be good for everyone. There will undoubtedly be plenty of "redundancy" layoffs, which are always painful and not always fully justified. But this proposed deal turns one big (CBS Sports) and one relatively-big (TNT Sports) players on the U.S. sports stage into something larger. And that could be helpful in competing with Disney/ABC/ESPN, Comcast/NBC (even with the scale of the latter somewhat diminished by the Versant spinoff), and Fox (which is its own interesting case as a company so focused on sports these days, and still in a strong position there, but without a whole lot of scale elsewhere to support that).

We're not counting this deal's chickens before they hatch, considering the twists in this sale so far and the regulatory hurdles ahead. But on the sports side, this could make the new company a very powerful player indeed. And it would solve many of the future problems for TNT Sports in particular, and boost CBS Sports even further along the way. We'll see if this does come to pass, but if it does, it should make for a remarkably powerful player on the U.S. sports stage.