Today, I’m talking with Peter Kafka, chief correspondent at Business Insider and host of the Channels podcast, about the gigantic Warner Bros.-Paramount merger and the future of the company now simply called Skydance.
Skydance is owned by David Ellison, son of Oracle CEO Larry Ellison, and its deal to acquire Warner Bros. Discovery officially closed the day Peter and I spoke.
There are some grand ambitions here, but the reality is that acquiring Warner never goes well for anyone. AOL failed, AT&T failed, and Discovery failed — although it did succeed in flipping these assets to Skydance. So I wanted to ask Peter if he thinks the Ellisons and Skydance have a real shot at succeeding where so many companies before them have hit the rocks.
Okay: Peter Kafka on Warner Bros. and Skydance. Here we go.
This interview has been lightly edited for length and clarity.
Peter Kafka, you’re the chief correspondent at Business Insider, and you’re the host of the Channels podcast, our sister podcast here on the Vox Media Podcast Network. Welcome back to Decoder.
Thanks for having me. It’s big media day again!
A big media day. It’s an auspicious day, as my parents would say. It is the day that the Warner-Paramount merger closes. We’ve all been calling it Warner Mount, but I’m told this company will instead just be called Skydance.
Skydance!
Every time I see the word Skydance, I assume it is foreign-owned, which is maybe true in some way.
Another way to think of it is that there are iconic names in Hollywood. Paramount is such an iconic name that Viacom turned itself into Paramount years ago. Warner Bros. is a legendary studio. Let’s get rid of those names. Let’s add Skydance, which no one’s ever heard of.
Let’s just start at the start. There was Paramount. There’s Warner Bros. The deal closes today. That is all going to be a new company called Skydance. Is Skydance just a holding company? Are we as consumers meant to know that this thing exists?
I think for the near term, you’re still gonna think of companies like Paramount, Warner Bros., and HBO as brands you know, but this is going to be one company. They’re going to merge everything. They’re likely going to merge the streaming services, Paramount and HBO, into a thing, not right away, but eventually. So I do think Skydance will be a name that consumers will probably know at some point.
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I just have to ask, what are the chances that HBO Max will be rebranded yet again into Skydance?
There’s probably gonna be some branding stuff. Not again. In the near term, because this is still a cable TV company, there are actually some limits on what these guys can do with their brands and their services. And they won’t come out and say, “We’re gonna mush this stuff together.”
But there’s likely to be one mega streaming service, and maybe you can get HBO separately, or maybe you can only get HBO or only Paramount. Still, it’s gonna be one thing, and one movie studio. It’s all gonna get mushed together, and it’s all gonna be run by David Ellison.
David Ellison is just the latest to believe that he can buy Warner Bros. and make something good happen. I have joked many times on this show that maybe the only antitrust policy this country needs is to make it illegal to buy Warner Bros., and that would just solve a lot of problems. Why does he think he will be successful?
Well, his dad’s the eighth richest man in the world, so that’s not nothing.
That Oracle stock is tied up in a bunch of AI stuff. It’s moving up and down.
We can talk about that. But one, that means that he literally has the money to buy this, and two, that this is a public company kind of in name only. David Ellison and Larry Ellison, his father, control this company effectively. They don’t really need to worry that much about equity shareholders. Debt’s a different issue.
And he’s 43. He’s got a long run backed by tens of billions of dollars of his father’s money to take a stab at this. And as you said, he will not be the first person to do this. There’s a long list of failures. I think maybe that’s appealing to guys like him. It’s like, “Everyone else is dumb. I’m the smart guy who’s gonna figure it out.”
“Everyone else is dumb, and I’m smarter than everyone else is,” is very appealing. But that long list of failures, if you just look at it — they’re all shaped like this idea. We’re gonna take iconic Warner Bros. content, we’re gonna marry it to new distribution, we’re gonna reduce the overhead and costs and decadence of Hollywood. Where does new revenue come from?
There’s no plan for new revenue. There’s no announced plan for new revenue. Right now it’s shrinking; it’s cutting costs. It’s when we merge these two companies together, we’re gonna save $6 billion over the next three years. We promise that most of that’s not gonna come from layoffs, but a lot of it’s gonna come from layoffs.
These are companies that have had many, many rounds of layoffs prior to this. And you could argue, well, there’s probably not that much more to cut. I think reasonably you could say, look, if you combine two big streaming operations, two big studio operations, there probably is stuff [to cut]. You can probably sell off some real estate. You probably don’t need all the executives you currently have. There’s some savings there. But how do you grow? No idea. And no one’s really articulated that.
Growth is required for a couple of reasons here. One, yes, there are going to be shareholders; people will be looking at it. There’s David Ellison’s ego. Then there’s debt. This deal is levered to the max, right?
Eighty billion dollars [in debt]. Eight zero. More important than the number is the reason that David Ellison was able to buy Warner Bros. was that the last owner couldn’t deal with the debt that he took on to buy the company. And that was a mere $43 or $50 billion, depending on who was counting. This is David Zaslav, the former CEO of Warner Bros. Discovery, who spent his entire tenure running that company telling Wall Street that, yes, he was gonna get the debt down, and that was his main focus, and debt, debt, debt, reduce, reduce, reduce.
I mean, he did reduce some debt, but he never convinced Wall Street that he had a plan to grow. Wall Street gave up on this company years ago, which is why when David Ellison decided he wanted to buy it, the stock was, like, seven bucks or something like that. Eventually bought it for, you know, many, many times that.
And now David Zaslav is considered — or he considers himself — a genius for selling the company at such a high price. You could also argue, as someone told me yesterday, that a unicorn sort of manifested itself and allowed David Zaslav to exit the situation he had put himself into.
I don’t know who the next unicorn will be for this company if David Ellison at some point decides, “Ugh, actually this is a lot of debt and a lot of pain. I don’t wanna do this anymore.”
I want to come back to that because I have a little bit of a conspiracy theory. It’s a little bit supported by the attitudes of some of the players here, but we’ll come back around. Even the previous owner, AT&T, which is remarkable that AT&T was the… Somewhere in this chain of ownership, AT&T owned Warner.
Yes.
They could not deal with these assets. Their plan was to distribute Warner content on AT&T phones, which never made any sense. But they were a more aggressive owner.
It also wasn’t really their plan. Their plan was, “Hey, Netflix is a really valuable company. The stock is very high. We’re this boring telecoms company. Our stock is not moving. What if we owned a [version of] Netflix? I bet Wall Street would reward us as a high-flying tech company all of a sudden.” And Wall Street didn’t.
Within a couple of years, AT&T said, “Uh, oh yeah, no, we’re out of this.” And yes, they had said a bunch of stuff about mobile, connectivity, ads, and targeting, and none of that ever went anywhere
I will never forget covering their antitrust case when they had to get approval for that deal. They convinced the judge that they had a vision of the future. The judge in that case, in the appeals court opinion, wrote, “This is a vision deal.” And I thought, “We’re doomed.” Like, I don’t know what’s going on in our judiciary [system].
I want a Vision deal. How do I get one of those?
I don’t know. I was like, “I don’t know what that is at all.”
So, we have a lot of debt. The FCC had to waive the cap on foreign ownership. There’s 49 percent of the money from the Gulf in this company. Then there’s the Oracle of it. I’ve always wondered why anyone would trade what amounts to an AI stock for a media stock, especially right now.
But the AI trade is a little shakier than it was before. Oracle has been punished a little bit for this deal. What do you make of that? Is that an effective backstop?
I don’t know if Oracle was punished for this deal. I mean, there was a period a year ago when Larry Ellison’s net worth was double what it is now. And you could say, “Well, that was just a weird AI blip.” It’s still a very highly valued company. He is still the eighth richest man in the world because of his Oracle holdings.
Wall Street is a little bit nervous now about the fact that Larry Ellison’s source of wealth is Oracle. He’s borrowing from Oracle. He has backstopped the Warner Bros. deal by pledging to come up with $40 or $50 billion if he needs to. And there is a question of, like, all right, not only is Oracle sort of intimately tied into this new media company, but Oracle’s also entirely dependent on one AI company, OpenAI, for its new plan.
So late in life — Larry Ellison is 82 years old — he’s decided he’s kind of putting the entire company on AI and on OpenAI specifically. And while he’s not doing that, he’s going to use some of that money to fund his son’s media empire. I don’t know if it’s rickety, but it’s definitely a question mark.
I open Instagram. Right now my Instagram algorithm is crazy because I keep looking for Instagram’s tolerance for copyright infringement, and it is high. Instagram has basically unlimited tolerance for copyright infringement. Mark Zuckerberg is posting deepfake memes of himself doing rap videos now.
These are details. By the way, Nilay, you know who’s figured out the Instagram and Reels algorithm? You! I get so much Nilay front-facing video. You’re very good at it. You should consider being an influencer. You have figured this out.
I try to deeply understand the things that are gonna kill me, and so that’s… We’re just looking at that one, and I’m looking at my daughter. I’m like, “I should know what’s going on here.”
All this AI makes it impossibly cheap and easy to just take the IP from these movie studios. I watched a video last night of the Heath Ledger Joker and the Christian Bale Batman just doing a Justin Bieber video, and then I was served 5,000 more videos like this.
That’s the OpenAI business. They’re gonna destroy the creative foundations that make the IP valuable that Warner Bros. makes, and somewhere in there is a big problem that I can’t quite figure out.
Yeah, I think it maybe is simpler than that. You’re right, there are all kinds of copyright issues. The value of your library may be much less if someone can just take it without paying you. But I think the bigger issue for David Ellison and anyone in the media business is that what you really want is people’s attention.
You have this company saddled with $80 billion in debt because it makes all kinds of entertainment, really expensive movies, all this sort of stuff, and now anyone can make anything that will at least get your attention for a few seconds on Instagram and TikTok. And so there’s this flood of stuff, whether it’s copyright infringement or not, it’s just stuff that the David Ellisons of the world have to contend with because your daughter and my kids might easily watch that stuff rather than the original Batman movie.
I think that is sort of the existential problem [not just] for Skydance, but every media company today.
But the Skydance purchase is being funded by the OpenAI deal with Oracle money. OpenAI just took all the stuff, right? This is a thing I can’t quite square: If OpenAI succeeds at the level that is necessary for the Ellison family to stay wealthy, then they will have massively profited from overwhelming IP theft, and they will have a product that can make anyone a movie at any time for zero dollars, rendering Warner effectively useless.
Maybe you’re right! Again, I think there is a core tension here in that the reason you say that Skydance is worth what it’s worth is because of its existing library and its ability to make new stuff. And a lot of that may be much, much less valuable going forward. There’s a counter that says, look, you know, people were stealing music for decades, and somehow Spotify and the music industry figured out how to actually sell $120 worth of music per year to people who were only buying two CDs per year prior to that.
So maybe there’s a way to math yourself out of this, but we don’t know yet.
There are other constraints on this deal. This deal is actually marked by constraints and challenges, in a particular way. The big one is that in order to settle the antitrust lawsuit filed by California and a bunch of other states, they agreed to put out 30 films per year or pay $30 million per film that they missed into healthcare and retirement funds managed by the unions. After two years, they have to go up to 32 movies per year, and if they don’t hit that, they’ve gotta sell their 49 percent stake in Miramax.
This is a pretty intense constraint, right? They’ve gotta just make a bunch of movies; they do not make this many movies right now. So how are you gonna cut costs to make more movies?
I think the math there is that we have these two studios. If you sort of totaled up what they were gonna do already, it’s close to 30. And, to be clear, this is not really a constraint from California. This is a pledge that David Ellison was shouting from the rooftop for months and months and months. And if you want to, we can talk about the non-settlement he extracted from California. But this has been David Ellison’s pitch for a long time.
I think the main thing is that David Ellison has proved that he can sort of get California and regulators around the world, and definitely federal regulators in the Donald Trump era, to go along with whatever he asks for. I don’t think they’re gonna be constrained by regulation.
I think they’re gonna be constrained by math and debt, and are you shaving that debt down fast enough to make bondholders happy?