(Bloomberg) -- During her trip to the Allen & Co. mogul retreat in Sun Valley, Idaho, this summer, Shari Redstone prowled the grounds with just one executive from the media empire she controls: Jim Lanzone, CBS’s chief digital officer.
Lanzone, who oversees dozens of web properties, helped build two businesses that will play a crucial role when CBS Corp. and Viacom Inc. complete their merger. The CBS All Access and Showtime streaming services, with more than 8 million subscribers, have delivered a rare bit of growth in a tough climate for old-line entertainment companies.
Stirred to action by the unrelenting loss of pay-TV subscribers, media companies are racing to build online services that can compete with Netflix Inc. On Tuesday, Viacom and CBS announced they’ll merge, creating a $30 billion conglomerate and fulfilling a goal long-held by Redstone, who will chair the combine company. With the deal, she is reuniting parts of the empire assembled by her father Sumner and pinning her hopes on streaming to ensure the companies survive an uncertain moment in media.
“Shari Redstone had a problem,” said Laura Martin, an analyst at Needham & Co. “CBS and Viacom are both sub-scale, and they are both hers.”
Netflix, the biggest player in streaming, has more than 150 million subscribers, making All Access and Showtime minnows in the online world. The pioneer in streaming, Netflix offers thousands of titles, including a never-ending stream of new scripted series, movies, documentaries, specials, and a vast library of reruns.
But together, Martin argues, Viacom and CBS “have a more reasonable chance of competing.”
CBS has already built a small, profitable streaming business, relying on a few original scripted shows, a deep library and a live feed of its flagship network. A united ViacomCBS Inc., as the new company is to be called, will control 140,000 TV episodes and 3,600 movies, and will spend about $13 billion on programming annually, close to what Netflix lays out each year.
Their combined library has breadth. CBS owns one of the largest archives of hit TV shows in the world, spanning “I Love Lucy,” “Star Trek” and “NCIS.” Viacom’s Paramount Pictures owns one of the largest movie libraries in the world, including “The Godfather” and “Mission: Impossible.” While CBS has a deep collection of sitcoms and scripted dramas, thanks to Showtime, Viacom owns kids shows through Nickelodeon.
“Look at what this brings together,” Bob Bakish, who will be the chief executive officer of the combined company, said in an interview. “We have tremendous content scale here across categories, demographics, geographies.”
Bakish plans to use Pluto TV, an advertising-supported video service he acquired at Viacom, to funnel customers to the paid services. He will also bundle all of the company’s subscription services, including Viacom’s kids offering Noggin.
Merging also opens international opportunities, where Netflix has an even larger lead. CBS already sells All Access in Canada and Australia, but could easily extend service to Europe and Latin America with help from Viacom’s Channel 5 in the U.K. and Telefe in Argentina.
The merger isn’t without risks. Paramount is one of the weakest studios in Hollywood and has struggled to keep its library fresh with new hits. The studio accounts for just 5% of domestic box-office grosses this year.
The new company may also need to take steps to keep the architects of CBS’s recent growth and other valuable executives, such as Lanzone, creative chief David Nevins, CBS Sports Chairman Sean McManus and recently appointed news chief Susan Zirinsky.
And even with new heft, ViacomCBS will still be much smaller than most of its competitors. Of the major streaming services already in the marketplace or due out in the net 12 months, All Access and Showtime are the only ones owned by a company worth less than $100 billion.
Over the past few years, entertainment companies and pay-TV distributors have responded to the challenges facing conventional media by consolidating into mega-corporations that dwarf CBS and Viacom. Walt Disney Co. bought most of Fox, while AT&T Inc. -- the parent of DirecTV -- purchased Time Warner, creating companies worth than $200 billion apiece. The combined ViacomCBS tips the scale at about $30 billion.
Those larger companies, along with Apple Inc. and Comcast Corp., are crowding into streaming this year and next to compete with Netflix and Amazon.com Inc. That led analyst Martin to say 2020 will be “The Hunger Games” for the media industry -- a reference to the dystopian film where youngsters fight to the death.
That’s why many analysts believe the CBS Viacom tie-up is just a prelude -- the first step in an effort to bulk up or cash out.
“We certainly will look at opportunities in the marketplace,” Bakish said. “ViacomCBS is one of the companies that matters, and will get a valuation that fits with that.”
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