Comcast and ViacomCBS Consider Partnership to Boost Streaming TV

The prisoner’s dilemma is a standard game theory situation often taught in business schools. Comcast CEO Brian Roberts and ViacomCBS President Shari Redstone experience it in real time as they plan to work together.

Comcast’s NBCUniversal and ViacomCBS are struggling to keep up with the biggest players in streaming video. While Netflix, Amazon, and Disney all have over 100 million subscribers to their flagship video services, NBCUniversal’s Peacock has 42 million US signups – most of which don’t pay for the service – and ViacomCBS’s Paramount +. has less than 36 million subscribers. ViacomCBS doesn’t reveal the specific amount of Paramount + paying customers, but it said earlier this year that it has 36 million streaming subscribers, including Showtime and other niche products.

AT & T’s WarnerMedia and Discovery also offer small-scale streaming products. They announced their intention to merge earlier this year. This left NBCUniversal and ViacomCBS as the biggest remaining streaming players.

Roberts and Redstone have had conversations to explore ways companies can work together, according to people familiar with the matter. Investment bankers are injecting ideas into the two companies in hopes of securing what could be the last big mainstream media merger commission for some time, said the people, who asked not to be named because discussions are private. Spokesmen for Comcast, National Amusements and ViacomCBS declined to comment.

One option being considered is to bundle Peacock and Paramount + in international markets, as The Information reported earlier this year. The two companies are planning global expansions and the partnership is relatively fluid.

Another option is a merger or acquisition, but there is a litany of complications down this road. Neither ViacomCBS nor NBCUniversal are actively pursuing a merger at this time, according to people familiar with the matter.

While there may not be any rush to merge, the two companies will ultimately need more scale to compete with larger players. They could partner or merge, or they could attempt to merge with Warner Bros. Discovery when / if this deal closes in mid-2022. A merger with Warner Bros. Discovery might be more suitable for both ViacomCBS and NBCUniversal.

But only one of the two could join Warner Bros. Discovery. It would leave the other company out in the cold – maybe for years.

This is the essence of the prisoner’s dilemma.

Working together can ensure that the two companies are better off than they started out, but standing against each other can be the best scenario for one company and the worst for the other. (This isn’t the perfect example of the prisoner’s dilemma, as companies can’t really betray each other, finding themselves in a situation where both are worse.)

Regulators are unlikely to allow a combined NBCUniversal-ViacomCBS to own the two broadcast stations, NBC and CBS. It is likely that any merger will have to include a divestiture of one of the broadcast networks as well as any local NBC or CBS TV subsidiaries that overlap in the same markets.

This immediately decreases the value of both companies. If CBS is divested, NBCUniversal would get Paramount + without CBS programming, including live National Football League games and NCAA March Madness. If the companies decide to sell NBC, ViacomCBS will not get “Sunday Night Football” and other popular NBC shows.

While it is possible that companies will try to argue that broadcast networks are like cable networks and do not need separate ownership, regulators may not take this as a reasonable argument. According to Horowitz Research, about 40% of Americans own a digital antenna to get free live programming as well as streaming video. Broadcast networks have historically fought against each other for valuable programming. Putting two under one roof would stifle these tendering situations.

The second obstacle is structure. Comcast could simply acquire ViacomCBS, repurchasing the voting shares of Shari Redstone as part of a deal. But ViacomCBS has an enterprise value of around $ 40 billion and would charge a decent-sized premium to sell, two people said. Even with large divestitures, a deal would be costly.

Comcast shareholders, who are more likely to encourage a split between NBCUniversal and Comcast, according to MoffettNathanson analyst Craig Moffett, might not like a decision to buy ViacomCBS and divest one of the networks.

Roberts could create NBCUniversal and merge with ViacomCBS, similar to the WarnerMedia-Discovery deal. This could force him to relinquish control of NBCUniversal. If Redstone ends up having more economic control over a merged NBCUniversal-ViacomCBS, it may want to run the business, or choose who is in charge, for at least a number of years. Roberts and Redstone will have to come to an agreement on economic control and voting if that option is chosen.

A bundle through a commercial partnership circumvents M&A issues – and ultimately is the most likely “first step” scenario – but it gives companies less flexibility over offers than a merger. The needle may also not move enough for either business.

NBCUniversal or ViacomCBS could theoretically correspond to Warner Bros. Discovery, because David Zaslav’s future company will not have a broadcast network. This would eliminate the need for an assignment. Combining with HBO Max and Discovery + would also arguably be a more robust streaming offering, in terms of content, than simply bundling the assets of NBCUniversal and ViacomCBS.

But the size of Warner Bros. Discovery combined with ViacomCBS or NBCUniversal could potentially pose regulatory problems, depending on how regulators in the Biden administration view the entertainment market. Even WarnerMedia’s agreement with Discovery is not guaranteed.

The choice to strike a deal with Warner Bros. Discovery is forcing NBCUniversal and ViacomCBS to wait another two or three years, given how long it would take to merge to get regulatory approval – first for WarnerMedia and Discovery, then for the second merger. There would also be integration costs and issues with two big deals going so quickly.

For the company that did not merge with Warner Bros. Discovery, the way forward would likely be the rollout of some of the smaller streaming players. like Lionsgate and AMC Networks, or push for an acquisition of Sony Pictures.

Merge or wait both present headaches. This is why investment bankers are paid dearly.

Disclosure: NBCUniversal is the parent company of CNBC.

WATCH: Tom Rogers on the future of media, games and more