What to do with Paramount+?

If the rumors are true

If David Ellison takes over Paramount, what should he do with Paramount+?

The rumored model (h/t Lucas Shaw) for the Paramount deal is that David Ellison buys National Amusements, Paramount merges with Skydance, and National Amusements and Paramount merge to form one entity including:

• What used to be Viacom (Nickelodeon, MTV, etc.)

• CBS

• Paramount+ (hereafter: P+)

• Paramount Pictures

• Skydance

With David Ellison as CEO. At the end of the deal, Shari Redstone would be cashed out. Paramount holders would roll over into NewCo, which is a merger of National Amusements, Skydance, new capital from KKR and Redbird, and Paramount. Jeff Shell, former NBC Universal CEO, would have a major TBD role. Maybe Jeff Zucker too. This would still be a public company. 

Makes sense. 

Plan A: Get Out of SVOD

So the company breaks down into three parts:

• The movie studio (Paramount + Skydance)

• Networks (CBS + Viacom) 

• Direct to Customer/SVOD¹ (P+/Pluto)

As we have detailed previously, the studio, like most, throws off some money but not much (last year was bad but I would expect +$100MM to +$300MM), the networks group provides really all of the positive cash flow (~$5B – but has a negative growth trajectory), and the SVOD service lost ~$1.6B last year (positive revenue trajectory). In 2023 the company as a whole had OIBDA of $2.4B and Operating Income of -$341MM. 

The consensus view has been that P+ is subscale on its own. If you wind down the video service and license your content to others, you will, at minimum, double your cash flow from $2.4B to ~$5B just by not losing the money on the SVOD service and licensing your content to third parties. 

So the major decision is whether to wind down the SVOD service or not, and it is expected by many that they will (but they would probably keep Pluto, their AVOD² service, alive). 

Once you do that, it is actually not mandatory that you keep CBS, Viacom and the studio together. The synergies with Paramount Pictures are minor. Maybe you would lose the occasional show that Paramount TV might have sold to CBS or the occasional Rugrats movie but that is all fairly marginal. 

If you hang on to CBS, Nickelodeon, et al., you are hanging on to them … in anticipation of what? You’re going to ride them down as linear declines? You could. Or are you anticipating that linear will stabilize? Without taking a position on that issue, maybe you could just get out of that business, pocket that value now, and maybe pay down some debt and/or take care of some of the impatient private equity investors. I would say, if you have a strategic vision for the business, or a way to turn it around, then keep it. If not, why not redeploy the capital somewhere where you have an edge? 

Getting out of SVOD is the consensus, reasonable, point of view and I cannot fault it. Selling the TV assets as well, if possible, would leave one with a well-capitalized version of Paramount Pictures (and possibly Pluto).  

If the company is essentially pared down to the studio, it will be best to follow a franchise/star strategy, which management already understands, having created Skydance. Netflix and Amazon can create middling films on their own, and they do. Films that are ok and that aspire to be ok are not going to drive distinctive outcomes for Paramount. If you look at two of the latest films from Amazon and Netflix, Damsels and Ricky Stanicky, they received 6.1 and 6.2 respectively on IMDb (as a reminder, that is not good, though for Amazon I am starting to think it is above average), they did fairly well on the services, and I think everyone has already forgotten them. Let’s be honest, these are TV movies. The streamers have TV-movified the middle part of the movie business such that it is going to be difficult for a studio to cut a distinctive path or to capture a lot of value in that sector. 

Skydance has focused on films that are more distinctive – major franchises and animated films by John Lasseter (or that is the plan anyway). That is the correct path and it aligns with what I have been saying since the very beginning of SVOD – in an on demand world, the returns on “solid” decline. Everyone and everything merely “good” has to go. It’s all about the most distinctive titles, the best talent, the most innovative and insightful execs. Set a high bar. 

I am ok with that plan. 

Plan B: Stay in SVOD But Focus

There is an alternative approach which involves keeping P+, focusing its programming, and honing the P+ brand to target a large, underserved global market.

Paramount spends ~$8.3B annually on P+ and P+ lacks identity. My impression is that CBS makes what works for CBS and Paramount Pictures makes what makes sense for Paramount Pictures and then everyone just dumps whatever they have into P+ which therefore just becomes a bunch of random stuff with no identity. There are also a few original series mostly revolving around the Taylor Sheridan universe, but, all in all, it just doesn’t add up to a coherent brand that America understands and loves. Too bad. I am going to hold back here, but whoever conceptualized the strategic move of launching P+ in this way does not understand SVOD well. You will do best if you know who your target customer is and you offer them a brand.

It is an extreme inconvenience to attract 65MM subscribers, which P+ has today. Many come from a deal Paramount has with Walmart+, many come from the Amazon Channels program, which cuts into the revenue, and the ARPU (Average Revenue per User) is low, but I will tell you – if you had zero subscribers, you would love to have 65MM instead. So let’s not throw all of this away too casually lest one day we change our mind on the desirability of having an SVOD service. 

One could, after all, have a few concerns about the studio strategy:

1. How many truly distinctive, marquee, franchise films can Paramount generate per year? Is it 15? Is it 12? What if it is 4? What is the lower bound of Paramount Pictures revenue over the next ten years?

2. The cash flow of movie studios – as a general matter – tends to plateau at a not very high level. A successful SVOD network can create much more value. 

3. The long term trend is that streamers will want to do less business with third parties because it is more expensive than producing internally. And since they control commissioning original series and the pay one window for films, that is an issue.    

4. As a customer platform, an SVOD network has much more optionality than a movie studio. That is, if we have an app with millions of daily visitors seeking entertainment, we can add engaging social features, we can add VR and AR features, we can experiment with AI driven guides, we can add games as a category, etc. It’s hard to say what the ceiling is on the product but it could be quite high. I am not sure the same can be said of the movie studio. 

Are there opportunities in SVOD that P+ has itself not explored? I would argue there is at least one. There is a fairly significant underserved gap in the market, which is some combination of comedy (The Hangover, Tropic Thunder, etc.), which just isn’t getting made except in the most anodyne and boring form, and what you might call just red stateish drama and action (think everything from Cannonball Run to American Sniper). This is a big audience that Hollywood doesn’t serve. There is no brand for this audience and nothing you can subscribe to. I do not think of this audience as “niche” or “fringe” at all. I think it is just the center of the American (and overseas) entertainment audience. Paramount already has CBS, South Park, and the Yellowstone spin offs. I presume it has a strong family film pipeline at Skydance. It literally has a deal with Walmart. Is it me or does this seem incredibly obvious?

The SVOD strategy would be to pare down P+ to focus on this brand. Right now there is no brand but the new version would have a consistent brand and vibe. Everything “off brand” gets jettisoned from the service. 

In this case of course, one would not sell or spin out CBS. Their shows tend to be well aligned with the brand we are discussing (in fact, CBS+ would be a better name than Paramount+). 

There would have to be one organizational change. There would have to be one global head of content. All heads of content divisions – the head of CBS, the head of Paramount Pictures, etc. – would have to report to that person. This is important in order to achieve brand consistency and to optimize content investments, and it is an appropriate prioritization given that 50%+ of the enterprise value in year five could easily be attributable to the SVOD service. At Netflix, you don’t have autonomous people managing film, TV, etc. Likewise, that would not be the case here. 

Which Path Will be Chosen?

I would vote for Plan B. I think it creates more value in the medium and long term and it fills a real gap in the market. 

However, I suspect that Plan A, the “default option,” would be preferred by private equity investors and will prevail. It is, in the short term, lower risk. 

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Roy Price was an executive at Amazon.com for 13 years, where he founded Amazon Video and Studios. He developed 16 patented technologies. His shows have won 14 Best Series Emmys and Globes. He was formerly at McKinsey & Co. and The Walt Disney Co. He graduated from Harvard College in 1989.

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