After years of flirting with a merger, CBS (NYSE: CBS) and Viacom (NASDAQ: VIAB) have finally agreed to come back together after 13 years apart. If successfully completed, the merger will be a major step forward for the two relatively small media companies and Shari Redstone, president of National Amusements, which owns both companies.
The media landscape has changed a lot in the last 13 years as U.S. pay-TV subscribers peaked with the rise of direct-to-consumer streaming services like Netflix (NASDAQ: NFLX). Meanwhile, other media companies have merged or sold themselves to bigger companies and deep-pocketed tech titans are entering the space. It's a world dominated by giants, and in order to compete, ViacomCBS Inc. will need to get bigger still.
What Viacom brings to the table
First and foremost, Viacom brings with it a permanent CEO in Bob Bakish. CBS' Joe Ianniello has filled in as interim CEO since Les Moonves' ousting last fall, but Bakish could provide a more stabilizing force as the head of the combined company. Ianniello is expected to stay on as CEO of CBS Networks, which doesn't include Showtime premium cable network or its Simon & Schuster publishing arm.
As a television media company, Viacom produces content targeted at a complementary audience to CBS. Viacom's networks like VH1, MTV, Nickelodeon, Comedy Central, and BET attract a younger audience compared to CBS' broadcast network. That can help make CBS' ad sales team more efficient.
The addition of cable networks should also give the combined company additional pricing power when it comes to retransmission and carriage fees. CBS has historically been hard-nosed when it comes to negotiating the rates it charges pay-TV companies to carry its channel, and that power only gets amplified when Viacom's networks join the party.
Viacom also owns Paramount Pictures, which could provide a film library to CBS' Showtime after its current licensing deal with Epix expires.
Overall, the content catalog Viacom brings to the table could help boost CBS' direct-to-consumer efforts. The company already has 8 million subscribers between CBS All Access and Showtime, and it expects to reach 25 million by 2022.
Still, that number pales in comparison to the projections AT&T's (NYSE: T) WarnerMedia and Disney (NYSE: DIS) are putting out. Disney expects as many as 90 million subscribers for its Disney+ service by 2024, along with 40 million to 60 million Hulu subscribers and millions of ESPN+ subscribers. WarnerMedia says HBO Max will reach 50 million subscribers in five years. Netflix already has over 150 million worldwide subscribers.
The company needs to get bigger faster
With the growing amount of competition in streaming video, ViacomCBS is at risk of getting drowned out by bigger rivals with bigger budget productions and the ability to produce vast amounts of content.
Disney, for example, has already produced four billion-dollar box office films in 2019. Plus, Toy Story 4 is nearly to the milestone, and it likely has two more billion-dollar releases on the way this year.
Netflix is spending huge sums of cash producing hundreds of original films and series. It's attracting big-name Hollywood talent, too, most recently signing a deal with Game of Thrones showrunners David Benioff and D.B. Weiss. And AT&T already plans to boost HBO's content budget, and it's spending even more on HBO Max.
The budgets for various other competitors are comparably massive. If CBS and Viacom expect to compete, the combined company needs to get bigger so that it can control lots of content and create big-budget productions.
The competition has already mastered the art of mass appeal. And in a market where consumers are able to pick and choose which content they want, mass appeal is the key to growth. Dedicated niche audiences worked well in the age of the big cable TV bundle, but it's not the same in a direct-to-consumer world.
Investors should expect the combined $30 billion company to pursue more deals with other media entities in order to broaden its content library and stock its war chest with production capabilities.
Adam Levy owns shares of Walt Disney. The Motley Fool owns shares of and recommends Netflix and Walt Disney. The Motley Fool is short shares of CBS and has the following options: long January 2021 $60 calls on Walt Disney and short October 2019 $125 calls on Walt Disney. The Motley Fool has a disclosure policy.
This article was originally published on Fool.com