Megamerger Dreams Are Dying — and Hollywood May Be Better Off

Winston Cho
·9 min read
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In July 2023, near the peak of animosity between scribes and studios during the writers strike, a picket outside ABC’s The View in New York welcomed an ally: Federal Trade Commission chair Lina Khan. Behind closed doors, the writers union had been sharing concerns of a wave of mergers that it said left just a handful of studios like Disney, Warner Bros. Discovery and Amazon as the lone arbiters of which movies and TV shows are made, what consumers watch and how they can watch it. Flanked by protest signs name-checking WBD boss David Zaslav to “just give up one yacht” and chants embracing themes of “exploitation,” “concentrated power” and “corporate giants,” Khan delivered a fiery speech that also effectively served as a signal to moguls seeking more mergers and acquisitions.

Since that time, feverish speculation has centered on Shari Redstone relinquishing control of Paramount Global in a megadeal or Warner Bros. Discovery undergoing another big merger (with Paramount? With Comcast-owned NBCUniversal?) when it is legally allowed to do so without taking a tax penalty, beginning in April. But there may be more hesitation to pull the trigger now. Tasked with a mandate to invigorate competition after decades of lax antitrust enforcement, regulators are taking to court to block deals.

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“We’ve seen over the last few decades significant consolidation and a wave of mergers and acquisitions, not all of which have ultimately served the American public,” Khan tells The Hollywood Reporter. “We’ve seen mergers that were allowed to go through that ended up consolidating power and resulting in higher prices, lower wages and quality, less innovation and just more stagnant markets.

“Generally speaking, TV and movies and entertainment are just such an important part of American cultural life, as well as our economic life,” the FTC chair adds, “so it’s an especially important area of the economy to get right.”

Gone are the days of rubber-stamping iffy megamergers that, some critics say, have allowed companies to suppress wages, engage in self-dealing via self-preferential agreements (think a studio giving a sweetheart deal to its network arm) and even shelve finished content for tax write-offs à la WBD’s handling of Batgirl and Coyote vs. Acme (Disney has done the same with unnamed titles). Hollywood may be better off for it, these observers contend. “I started working in TV during a time when you’d come up with a pitch and you actually had a marketplace to sell your concept to,” says Dan Gregor, a writer and producer on Chip ’n Dale: Rescue Rangers and How I Met Your Mother. “Now that the studios and networks are functionally the same, it’s almost always a take-it-or-leave-it offer.”

The opening salvo from competition regulators came in 2021, when the Department of Justice antitrust division sued to block Penguin Random House’s $2.175 billion proposed acquisition of rival Simon & Schuster from Paramount Global in bid to crack down on so-called monopsonies, a dynamic in which a buyer with outsize market power can purchase labor and goods at prices under market value. Less than a year later, the Jonathan Kanter-led DOJ unit secured a major victory in the first successful merger challenge that went through a full trial in half a decade when a federal judge found that combining two of the world’s largest book publishers would hurt competition for best-selling books. Since around that time, the DOJ and FTC have successfully broken up deals in the airline, pharmaceutical and hospitality industries — securing guilty pleas in criminal monopolization cases along the way.

Amid this sea change in competition regulation, big tech — which aims to further encroach upon Hollywood with the rise of generative artificial intelligence tools — is bracing for a wave of antitrust rulings involving Apple, Meta, Google and MGM parent Amazon this year that could upend the traditional approach of growth through M&A.

Even in cases antitrust enforcers have lost, there is an argument to be made that they sent a message to the market and undercut prevailing theories around antitrust law that has largely protected tech giants. Before Khan and Kanter were appointed, regulators rarely questioned “vertical” transactions, which refers to mergers between firms that are not direct competitors, under the assumption they generally do not create monopolies. This thinking can be traced back to University of Chicago conservative economists and legal scholars Robert Bork and Richard Posner. Their work led to a wave of deregulation and the eventual elimination of the FCC’s “fin-syn” rules that blocked broadcast networks from owning primetime programming, which gave Paramount, Universal and Disney a roadmap to cement their market power by acquiring CBS, NBC and ABC, respectively.

Led by Khan, the FTC in 2022 sued to block Meta from buying game developer Within in a lawsuit advancing relatively untested and novel theories arguing that antitrust laws account for actions taken by a firm that is not yet a monopolist but is positioned to become one. Although it allowed the deal to go through, the court made a point to note that mergers between companies that do not currently compete against each other can violate Section 7 of the Clayton Act, which bars transactions “whenever the effect would substantially lessen competition and tend to create a monopoly.”

“Given the actual potential competition doctrine’s consistent, albeit distant, history of judicial recognition, the Court declines to reject the theory outright and will apply the doctrine as developed,” wrote U.S. District Judge Edward Davila in the 65-page order, rebuffing arguments from Meta that the agency’s theory is “dead-letter doctrine.”

The heightened threat of litigation has also played a part in discouraging megamergers. The FTC may have lost its lawsuit challenging Microsoft’s $69 billion proposed acquisition to buy video game publisher Activision Blizzard, but the company spent at least $80 million on the litigation, sources familiar with the situation tell The Hollywood Reporter. Microsoft, the world’s most valuable company, ate that cost in a bid to become a gaming behemoth. WBD may have a different perspective on the math of a megadeal, given its hefty debt load of $44.2 billion.

With Khan and Kanter watching, M&A in the tech, media and telecom sector has slowed. In 2023, deals in the sector had a 46 percent close rate, a seven-point dip from the previous year, and a 30 percent fail rate, a seven-point uptick from 2022, according to an M&A review by financial software firm Datasite. This tracks with observations from dealmakers and analysts consulted by THR. “There are certainly deals people have looked at that they’re thinking harder about in light of the current antitrust environment,” says Jonathan Davis, a partner at Kirkland & Ellis. Potential enforcement has been “brought to the forefront of the list of threshold considerations” when companies assess deals, he adds.

Bart Spiegel, an exec at consulting giant PwC U.S., notes: “People see the regulatory environment as a challenge to do a deal,” and it “makes them think twice.” The firm’s latest deals report highlighted that “the slowdown of deal activity in the media and telecommunications sector continued through the second half of 2023″ due to financing challenges and competition enforcement.

The regulatory scrutiny runs headfirst into studio bosses’ instincts to chase growth through dealmaking. The 12-year period between 2009 and 2020 saw more than $400 billion in media and consumer telecommunications megamergers amid a wave of consolidation that killed thousands of jobs and blurred the separation of studios and distributors, giving rise to behemoths that control both the content production and distribution pipelines. Five transactions make up a bulk of that figure — Comcast and NBCUniversal (2011); AT&T and DirecTV (2015); AT&T and Time Warner (2018); Charter, Time Warner Cable and Bright House (2016); and Disney and Fox (2018).

Writer-producer Gregor says he had a movie at 20th Century Studios he was set to direct before the project fell into a “black hole” when Disney acquired 21st Century Fox. “Consolidation created a marketplace of creators who don’t have leverage to negotiate,” he says. Dozens of writers shared similar experiences with the FTC last year in support of revisions to merger guidelines that signal a tougher stance on vertical transactions and, for the first time, take into account a merger’s impact on workers. “Media consolidation has made it exponentially more difficult to sell a television or movie project,” wrote Leonard Dick, a writer for Lost and House. “If I am partnered with, say, 20th Television (owned by Disney) and the Disney-owned streamer/networks don’t want to order it, chances are slim to none another network/streamer will buy it because they want to own their own shows.”

Andrew Nicholls, who was the head writer for The Tonight Show Starring Johnny Carson, warned, “There are fewer gatekeepers, and their vertically-integrated bosses — the final purchasers — overlap. If we aren’t careful, the taste and the range-of-knowledge of only a few dozen people could come to circumscribe everything developed for the American television audience.

For signs that regulators may be saving the studio system from devouring itself, look no further than Warner Bros. Discovery, whose stock has lost more than 60 percent of its value since the merger was consummated. Cuts are the norm after a merger, but the way in which Zaslav pursued a plan to cut $3 billion in costs has drawn ire. By shelving nearly finished titles, including Batgirl, Scoob!: Holiday Haunt and Acme v. Coyote, the company saved millions of dollars that would have went to completing and the marketing the movies, on top of collecting hefty tax write-offs. In an industry that runs on relationships with talent, the decision from WBD execs, whose bonuses are tied to free cash flow and debt reduction, alienated some creators. The backlash has been sustained after each disclosure.

“Is it anticompetitive if one of the biggest movie studios in the world shuns the marketplace in order to use a tax loophole to write off an entire movie so they can more easily merge with one of the other biggest movie studios in the world?” Spider-Verse writer-producer Phil Lord wrote Feb. 9 on X of WBD, which drew calls last year from lawmakers for the DOJ to reassess its decision greenlighting the megamerger. “Cause it SEEMS anticompetitive,” Lord added.

A merger may have made more sense when studios were being rewarded by investors for growth. It’s a tougher sell now. “When Wall Street valued scale at all costs, M&A was much more attractive,” says David Wisnia, managing director of consulting firm Alvarez & Marsal and a former MGM exec. “Now it’s about profitability, and you have to make sure your dance partner is a suitable one that will show you success.”

A version of this story first appeared in the March 14 issue of The Hollywood Reporter magazine. Click here to subscribe.

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