Amazon May Be Overpaying for MGM, But Does It Even Matter?

The reported $9 billion deal makes sense if you look at the steps Amazon's taken to get to it.

Amazon MGM James Bond Info Details
Making sense of the potential Amazon and MGM merger. Nicola Dove/MGM

Last week, it was reported that Amazon (AMZN) was in talks to acquire MGM for around $9 billion. Much like a pack of judgmental high schoolers, the greater Hollywood ecosystem rarely agrees on anything. But that jaw-dropping total was largely seen as an overpay when news first broke. Yet because we are living in the c’est la vie era of media mergers and consolidation, where well-resourced tech-backed companies are cannon balling into the entertainment industry and every company is reorienting itself around streaming, the rules of engagement have changed.

Dealmakers such as agents and finance folks have long attempted to lure the deep pockets of Silicon Valley to Hollywood. Yet Netflix (NFLX) and Amazon “decided to build their own studios, buying talent instead of companies,” Lucas Shaw wrote in his latest Screentime newsletter for Bloomberg. Now, Amazon may suddenly be changing course.

MGM has long been positioning itself for a sale with the repeated delays of Daniel Craig’s James Bond swan song No Time to Die muddying up those efforts. Despite several larger entities reportedly passing on the century old studio, Amazon has used the pandemic to rethink its film strategy. The studio is leaning into a more mainstream direction with outside acquisitions such Borat Subsequent MovieFilm, Coming 2 America and Without Remorse angling to broaden its attractions.

Studio head Jennifer Salke wants Amazon to become a home for mass appeal programming across film and television. Acquiring MGM’s library, at a price tag that is still relatively negligible for a trillion-dollar company, helps in that elusive endeavor.

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“The MGM catalog is fantastic and if successful, Amazon isn’t just acquiring existing films and television episodes, they are also acquiring valuable ancillary intellectual property rights and remake rights to thousands of titles,” Thomas Hughes, the Americas CEO of Vuulr, the global online content marketplace for premium film and TV rights, told Observer.

MGM’s 4,000 film library include the James Bond series (though 007 rights are entangled with Eon Productions), the Rocky and Creed franchises, RoboCop and The Pink Panther films. There’s also famous features such as The Silence of the LambsFour Weddings and a Funeral and The Magnificent Seven among its ranks. MGM also has a footprint in television with 17,000 episodes. The studio is behind scripted prestige players The Handmaid’s Tale and Fargo as well as popular reality TV series such as The VoiceSurvivorShark Tank and The Real Housewives of Beverly Hills.

Hughes sees the subscription business model of streaming as a sound one. The real issue, he explains, is what it costs to create content versus the content’s value to the company paying to create it. If a film costs $100 million to make, how many subscribers have to watch it on an SVOD platform in order for the $100 million investment to generate an ROI? From the outside looking in, it’s difficult to say. But given the mountains of user data Amazon has at its disposal, it must feel confident that MGM’s library can be safely plugged into that equation.

“When it comes to a combined Amazon Prime Video and MGM content catalog, we see a very modest overlap between the two engaged audience groups (2.3%),” Anjali Midha, co-founder and CEO of predictive content analytics platform Diesel Labs, told Observer. “This suggests that the MGM catalog will help bring new engagers to Amazon Prime Video content.”

For example, based on the audience anticipating the upcoming No Time to Die, Diesel Labs projections show that 88% of anticipators have not engaged with an Amazon Prime Video original to date, and that bringing all those anticipators onto the service would expand the total Amazon Prime Video engaged audience by 14%. Amazon claims that of its 200 million Prime subscribers, 175 million have sampled Prime Video content in the last year.

It’s important to note, however, that while MGM releases the 007 series, it does not control the rights. The Broccoli family says what goes when it comes to James Bond. But that doesn’t preclude a unique arrangement being agreed upon in the future should a sale go through.

Amazon has taken very precise steps in its development as a home for original programming. While struggling to create films in-house, the studio has turned to outside acquisitions for prestige movies. Its most successful movies, Manchester by the Sea and The Big Sick, were both purchased out of Sundance. On the TV side, niche programming hits such as Transparent and Mozart in the Jungle drew largely positive critical acclaim but not significant audiences.

Since then, Amazon has ramped up its original content production with more breakout hits such as The Marvelous Mrs. Maisel and The Boys. Upcoming big budget spectacle such as Lord of the Rings and The Wheel of Time are expected to further beef up Amazon’s genre footprint. As noted above, the company has more recently been experimenting with mainstream feature length movies such as Borat 2 ($75 million) and Coming 2 America ($125 million), both of which were acquired from theatrical studios in the pandemic for gobs of money. The two films together expanded Amazon’s engaged audience base by 25%, per Diesel Labs. In addition, acquiring broadcast TV rights to Thursday Night Football is poised to deliver another boost in audience this fall.

“Snapping up a top tier studio for roughly half of Netflix’s content budget for this year alone would be a worthy investment, especially as the streaming wars begin looking beyond subscriber acquisition and toward metrics like share-of-hours-watched to solidify the value of their services (prices) and to establish robust ‘bases’ on which to develop next-gen advertising strategies,” Midha said.

The Amazon-MGM news came directly on the heels of AT&T’s WarnerMedia and Discovery Inc. announcing their intentions to merge into a newly formed entertainment media company. It is believed by many that further consolidation within the industry looms on the horizon as the arms race for content and explosive streaming growth continues. Perhaps MGM is just the latest in a series of dominoes to fall.

“Vast catalogs of content combined with audience attention is currency,” Hughes said. “My former company Lionsgate has a content library of 17,000 titles and a pay network, STARZ, with about 10 million U.S. subs and about 15 million and growing globally. That asset isn’t going to be around for long. It’s too valuable.”

UPDTE 3:07pm ET: The Wall Street Journal reports that an Amazon-MGM deal could be announced as soon as this week.

Amazon May Be Overpaying for MGM, But Does It Even Matter?