David Ellison is taking control of Paramount. Now the real work begins

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As a seasoned media industry analyst with over a decade of experience under my belt, I’ve witnessed Paramount’s transformation from a powerhouse entertainment company to one grappling with declining revenues and shifting consumer trends. Having closely followed the company’s progress, I can’t help but feel a sense of nostalgia for its storied history and iconic films that have left indelible marks on popular culture.

Tech scion David Ellison battled hard to get Paramount Global.

Last summer, the CEO of Skydance Media initially approached Shari Redstone, the non-executive chair of Paramount, with proposals. Subsequently, for several months, they engaged in extensive negotiations and renegotiations to create a deal that would gain approval from Redstone, Paramount’s board, and the company’s shareholders.

After successfully acquiring the company through a complex deal worth over $8 billion, Ellison is now prepared to take on the main responsibilities. He will serve as the CEO, while Jeff Shell, former NBCUniversal CEO, is appointed as president (Shell resigned following news of an inappropriate relationship with a colleague).

Once the acquisition of the legacy media and entertainment company by Ellison is completed in the first half of next year, he will face significant issues that require prompt attention to put Paramount back on a stable course.

Paramount, similar to other entertainment businesses, experiences a decrease in movie theater revenue due to fewer cinema goers since the COVID-19 pandemic. To make matters worse, Paramount grapples with losses from its streaming service and significant investments in cable networks that are under threat from cord cutting and shrinking ad revenues. Consequently, Ellison and his investors have a lot on their plates to address these issues.

“Jessica Reif Ehrlich, a senior media and entertainment analyst at Bank of America Securities, remarked, ‘This company truly possesses remarkable resources. Yet, they could be utilized more effectively.’ “

As a movie buff, I’d put it this way: I value Paramount Pictures’ iconic studio on Melrose Avenue, as well as their broadcast network CBS. Their cable channels, like Nickelodeon, BET, and MTV, once brimmed with prized content and recognizable names. But now, they’ve lost some of their former glory, according to Reif Ehrlich.

“At the current state, every aspect of the business is under threat,” she noted. “It’s crucial for them to define their identity and adopt a distinct approach to move forward promptly.”

Paramount’s heavy debt load

Above all else, focusing on repaying Paramount’s debts is priority number one. A portion of the company’s financial statement concerns will be eased through a $1.5-billion investment from Skydance and RedBird Capital Partners.

Getting Paramount on solid financial footing is key to its future success.

“Gerry Cardinale of RedBird Capital explained in an interview that the long-standing partnership between David Ellison and Skydance with Paramount (which spans over 15 years) significantly influenced their decision-making process. Instead of pursuing a typical deal, they found it more suitable to explore a strategic recapitalization.”

The three present co-CEOs of Paramount have initiated a $500-million cost-reduction scheme, which will persist following the completion of the Skydance deal. This strategy may lead to the sale of certain Paramount properties, such as BET, and an undisclosed amount of staff reductions. At a recent investors’ meeting, Skydance leaders announced identifying potential savings of up to $2 billion to boost cash flow.

In a note to investors, Kennedy Leon, CFRA Research’s research chief, expressed a hopeful but measured outlook regarding the proposed plan.

“He believed that the new company held great potential for creating and sharing content, yet faced significant competition in the unpredictable film and entertainment marketplace.”

Cable networks: Asset and liability

As someone who has worked in the media industry for over a decade, I’ve witnessed firsthand the seismic shifts that have transformed the landscape of television consumption. It’s no longer a secret that linear television revenue is on a downward trend as more and more consumers opt to “cut the cord” and abandon their traditional cable and satellite packages in favor of streaming services.

In the previous year, Paramount generated approximately $20 billion from its TV media sector, which comprises CBS and cable networks, representing around 68% of the company’s overall income as stated in their annual report. However, this figure represents a nearly 8% decrease compared to the earnings from 2022.

In the initial three-month span of 2024, TV media generated approximately $5.2 billion, signifying a 0.7% rise in earnings compared to the corresponding timeframe from the previous year.

According to Laurent Yoon, a senior analyst at Bernstein, Paramount’s business decline in a linear fashion isn’t automatically a negative scenario. This downturn is already reflected in the company’s stock price and isn’t solely Paramount’s responsibility to address. Essentially, they must effectively manage this decline.

At Monday’s investor conference, representatives from Skydance and RedBird highlighted the importance and influence of CBS for their business, stating that it significantly contributes to their success.

The studio: A new shine on the crown jewel?

Being an avid film enthusiast and a student of Hollywood’s history, I can’t help but feel a deep sense of respect and admiration for Paramount Pictures. Established over a century ago, this iconic studio holds a special place in my heart. Much like Sumner Redstone, the late father of Shari, I view it as a precious gem in the entertainment industry.

The company is known for producing iconic films such as “The Godfather,” “Chinatown,” and “Breakfast at Tiffany’s.” It also ventured into the contemporary era with successful franchises like “Top Gun” and “Star Trek.” However, its studio business has been inconsistent in recent times.

I was thrilled to learn that Paramount’s film entertainment segment, encompassing Paramount Pictures, its animation division, Nickelodeon Studios, and Miramax, generated approximately $3 billion in revenue for the past year, as reported in their regulatory filings. However, this figure represented a disappointing 20% decrease compared to the previous year’s earnings. On a more positive note, during the first quarter ending March 31, Paramount’s film entertainment sector recorded a revenue of around $605 million – a modest 3% increase from the same period last year.

The entertainment industry, including the studio, is facing similar challenges from external factors. For instance, box office revenues in 2024 have declined significantly compared to last year and are significantly lower than before the pandemic. According to Reif Ehrlich of Bank of America, both the creative approach and film budgets require reevaluation for the studio to adapt and thrive.

Rethinking the studio strategy means leaning into franchises, Shell said in an interview.

In Hollywood, earning significant revenue involves having large franchise projects and successfully exploiting them. Unfortunately, Paramount has not achieved this level of success. For instance, there isn’t a “Top Gun” themed ride at any amusement park globally.

I believe that if our studio managed to reduce costs effectively, we could potentially grow into a business worth between $3 billion and $4 billion. With careful financial management, we might even achieve a profit margin of around 10% to 15%. (Yoon of Bernstein’s perspective)

“He acknowledged that Paramount boasts an impressive filmmaking legacy. Yet, despite this, it seems they could be performing better. Nevertheless, there’s still a chance for them to regain stability.”

As a passionate cinephile, I’m thrilled about Ellison’s announcement regarding the Skydance deal. This collaboration will undeniably enhance our animation prowess, enabling Paramount to broaden its horizons in the realm of family entertainment. In simpler terms, it means we’ll be able to produce even more captivating animated films for audiences of all ages!

Paramount+: The struggles of streaming profitability

Paramount’s entry into the streaming industry came with significant financial consequences. They entered the market later than rivals such as Netflix and Disney, and upon joining, invested heavily in their service.

As a devoted cinema enthusiast, I’ve noticed that Paramount+ has been facing some challenges in attracting new subscribers recently. This predicament has resulted in approximately $2 billion in losses for the company since its launch. However, during the first fiscal quarter of 2024, there was a glimmer of hope as Paramount’s streaming division reported impressive revenue of nearly $1.88 billion. This figure represents a substantial 24% increase compared to the same period the previous year. Despite this progress, the segment still incurred a quarterly loss of $287 million.

On Monday, Ellison announced plans for enhancing Paramount+ with advanced tech updates. These improvements include refined advertising methods and an enhanced recommendation system to keep subscribers engaged and extend their platform usage duration.

Paramount executives have mentioned that one potential approach the company is considering for its streaming service is entering into a partnership for it. By collaborating with another entity, Paramount hopes to generate profits from this venture, according to Yoon.

A collaboration of this kind is not unheard of. In May, it was announced that Warner Bros. Discovery and The Walt Disney Company would team up to provide a bundled subscription deal for Max, Disney+, and Hulu starting this summer. Independently, Disney, Warner Bros., and Fox are readying a streaming platform specifically for sports.

According to Yoon, there’s a common assumption that Paramount+ could turn a profit by the year 2025. However, what constitutes a profit can vary greatly – from just making a dollar in revenue to earning billions. The key for Paramount is to ensure their margins are growing.

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2024-07-18 21:51