CBS (NYSE: CBS) is looking to make a deal that could help it compete in the increasingly consolidated media landscape. While the TV network is well positioned to survive an onslaught of direct-to-consumer streaming options and a rise in cord-cutting, it might do better if it had another premium network or a movie studio under its belt.
The company made a $5 billion offer to Lions Gate Entertainment (NYSE: LGF-A) earlier this month to take the premium network Starz off its hands. While Lions Gate rejected CBS' offer, the two companies are reportedly still in negotiations. Meanwhile, CBS is still flirting with Viacom (NASDAQ: VIAB) with an eye toward merging the two companies back together.
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Acquiring either Starz or Viacom would make CBS more capable of keeping up with the likes of AT&T's (NYSE: T) WarnerMedia or Disney (NYSE: DIS).
An answer to HBO and Cinemax
If CBS acquired Starz, it would be a natural complement to Showtime. The premium movie channels have scored some hits in recent years with their original series, including Power and Billions. HBO, meanwhile, captures all the attention among premium cable networks with its hit shows like Game of Thrones and Veep (both of which notably just aired their series finales).
At the end of 2017, HBO claimed 54 million total subscribers in the U.S. with HBO, Cinemax, and its direct-to-consumer options. AT&T hasn't updated that number since. By comparison, Showtime has about 27 million subscribers and Starz had just under 25 million as of the end of the first quarter.
Combining the two premium networks under one company could help CBS increase distribution with pay-TV providers. It could also open the door for CBS to sell a bundled package of the networks directly to consumers via their streaming services. CBS could offer a package of Showtime, Starz, and CBS All Access -- its streaming service that includes live programming, a wide selection of the CBS Network back catalog, and new originals exclusive to the service. Showtime and All Access each currently have about 4 million streaming subscribers, Starz has about 3 million.
Viacom brings more to the table than just cable networks
Viacom brings several important assets to the table for CBS. It owns Paramount Pictures and lots of content rights through its cable networks, and CEO Bob Bakish is a suitable candidate to run the combined company following Les Moonves' ousting at CBS.
Paramount Pictures could provide a steady source of films to Showtime and Starz. While movies aren't generally what people subscribe to premium cable networks for -- they come for originals -- viewers still spend a lot of time watching films. Lions Gate's film output has been a disappointment recently for Starz subscribers, not to mention its shareholders. None of its movies were among the top 50 for box office receipts last year. Paramount, by comparison, had five films in the top 50 in 2018 and three in the top 20 so far this year.
The bigger studios are certainly outgunning Paramount at the theaters, but it's probably the best option still available for a company seeking film output. HBO is taking Warner Bros.'s output, and Disney working to retain the output from all its movie studios' content for its streaming services. There's not much left after that.
Additionally, Viacom's television networks cater to an audience that complements that of CBS. Networks like MTV, Comedy Central, and BET cater to a younger audience, while CBS and its programming are often associated with older viewers. That could help round out CBS' ad sales efforts, as it can cater to a broader audience with Viacom.
Viacom also recently acquired Philo, a streaming television service that focuses more on entertainment networks (like Viacom's) than sports. Philo's streaming business may create some synergies with CBS and its streaming endeavors like All Access. Both require live streaming technology, and CBS could find ways to cut costs by combining the technology back-ends of both services.
Overall, there's a lot of opportunity for CBS if it can combine with Viacom. Adding Starz to the mix makes a lot of sense for the company as well, especially as it goes head-to-head with media giants like WarnerMedia and Disney in streaming and traditional TV.
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Adam Levy has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Lions Gate Entertainment Class A and Walt Disney. The Motley Fool is short shares of CBS. The Motley Fool has a disclosure policy.