Paramount Needs A Strategy, Not a Strategic Investor

Under pressure from investors to “do something” about its plunging share price, Viacom has agreed to sell a minority stake in Paramount Pictures in hopes of boosting Wall Street’s valuation of the studio, which has lagged its peers for much of the past decade. But CEO Philippe Dauman has made it clear he intends for Viacom to remain in firm control of Paramount and is interested only in “strategic” partners.

“We have received indications of interest from potential partners seeking a strategic investment in Paramount Pictures and I have decided to pursue discussions with a select group of potential investors,”  Dauman said in a statement. “In this time of change and enormous opportunity in tom_cruise_MIour industry, a partnership will bring significant benefit to Paramount and Viacom, both strategically and financially, provide new opportunities for Paramount’s employees and talent, and enhance long-term value for all Viacom shareholders.

“Paramount Pictures has been a leading motion picture studio for more than a century and is among a select few that has significant reach and scale, a deep library, a robust pipeline with proven global franchises, and a high potential television production operation,”  Dauman added. “In addition, the value of motion picture content continues to increase with the explosion of screens and the rapid expansion of the global theatrical market. This is the perfect time to explore new strategies to capitalize on Paramount’s content expertise and global platform, maximize opportunities for its continued growth, and unlock the value of the business for the benefit of shareholders.”

Exactly what those new strategies might be, however, Dauman did not say. And therein lies the challenge for Viacom.

For the better part of a decade now, Paramount, under the tight control of Viacom, has exhibited a singular lack of strategic imagination. At a time when the movie business was becoming ever-more of a winner-take-all proposition, Paramount was focused on laying off risk, by cutting back production to a mere 11 films a year and giving up upside through co-financing deals to hedge the downside.

Over the past two years Paramount has placed only three films among the top 20 global box-office grosses, and two of those were from the aging “Terminator” and “Mission Impossible” franchises built around aging stars. It’s peers among the major media conglomerates, meanwhile, has invested aggressively to acquire or build new franchises based around characters or concepts that can be carried by multiple actors and continually refreshed and renewed. Those types of franchises, from Universal’s “Jurassic World,” “Furious 7” and “Minions,” to Disney’s “Star Wars: The Force Awakens” and Avengers: Age of Ultron” dominated the global box office last year. Only “Mission Impossible – Rogue Nation,” from Paramount, developed by and for Tom Cruise, cracked the top 10.

Dauman is now vowing to ramp up production at Paramount, to about 15 films a year, and the studio has begun to build up its fledgling TV production unit to feed the binge-happy OTT market, but it’s starting from well behind its peers.

Paramount’s big distribution play — EPIX — did break some ground in 2010 in its deal with Netflix, which carved out a third-party SVOD window for digital platforms, but it lost that deal five years later when Netflix declined to renew and has struggled to deliver the promised returns.

Much of the speculation about potential suitors for Paramount has centered on major technology companies, particularly Amazon and Apple, and on investors from outside the U.S., particularly China. But it’s not immediately obvious how much strategic value either could add to Paramount as a minority stakeholder, particularly given Dauman’s insistence that Viacom remain firmly in control of the studio.

Amazon has been ramping up its original productions but has not yet moved heavily into feature film production. It’s main streaming rival, however, Netflix, has begun to move into feature films and Amazon could potentially be attracted to Paramount’s production capabilities. But any digital-native distributor would almost certainly be keen to engineer major changes to the current arrangement of movie release windows, just as Netflix has done with its own feature films. That might not be acceptable to Paramount, however, and Amazon is unlikely to invest in making movies only to take a back seat on the distribution side.

Apple doesn’t really have a movie or TV strategy to speak of yet beyond the Apple TV app store so it’s hard to say what it would bring to the table apart from cash and perhaps a bit of a halo effect on Viacom’s share price. In any case, Apple has shown no interest in the past in being a minority shareholder in any strategically important venture.

As for the Chinese, there is certainly a lot of hot money coming out of China these days looking for someplace to go as that country struggles with an economic downturn and currency woes. Parking some of that money in Hollywood could certainly hold some appeal to any number of Chinese investors. But simply sheltering money would not add much of strategic value to Paramount.

Chinese e-commerce giant Alibaba is looking to become a major player in video streaming in China and could be very interested in Paramount’s film library. It’s also a known quantity to Paramount having helped co-finance “Mission Impossible — Rogue Nation.” But given it’s streaming ambitions, it might have the same windows priorities as other digital players, making things awkward for Paramount.

Chinese conglomerate Dalian Wanda Group might be a better fit. It already owns U.S. theater chain AMC Entertainment as well as Legendary Entertainment, and owns a major theater circuit in China. Those interests might make it less anxious to start playing around with windows and more willing to let Paramount run the show.

Having a Chinese partner could potentially add genuine strategic value for Paramount if it helped the studio crack what is projected to be the largest movie market in the world by 2017. But it’s unclear whether even a major Chinese company like Alibaba or Dalian Wanda would have that leverage.

The Chinese government maintains its strict limit on the number of western films allowed into the country each year, both for political reasons to help build up the domestic Chinese film industry. The Hollywood studios actually lost market share in China in 2015, in fact, falling from 45.5 percent of grosses in 2014 to 38.4 percent last year. Whether Alibaba’s Jack Ma can become the Jack Warner of China is a decision that will be made in Beijing, not in Beverly Hills.

Make not mistake: Some deal will get done. Dauman is under enormous pressure from investors and has now put himself publicly on the hook by announcing the search for an investor. And whatever that deal ends up being it will be spun as “strategic,” even if it looks suspiciously like financial engineering.

If you really want to find a strategic partner it’s a good idea to have a strategy to guide the search.

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