CEO of Comcast Brian Roberts arrives for the Allen & Company Sun Valley Conference on July 06, 2021 in Sun Valley, Idaho.

Kevin Dietsch | Getty Images

The prisoner’s dilemma is a standard game theory situation often taught in business school. Comcast Chief Executive Brian Roberts and ViacomCBS chairman Shari Redstone are living it in real-time as they consider working 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 more than 100 million subscribers to their flagship video services, NBCUniversal’s Peacock has 42 million U.S. signups — most of which don’t pay for the service — and ViacomCBS’s Paramount+ has fewer than 36 million subscribers. ViacomCBS doesn’t reveal the specific amount of paying Paramount+ customers, but it said earlier this year it had 36 million total streaming subscribers, including Showtime and other niche products.

AT&T’s WarnerMedia and Discovery also have subscale streaming products. They announced plans to merge earlier this year. That left NBCUniversal and ViacomCBS as the largest leftover streaming players.

Roberts and Redstone have held conversations to explore ways the companies can work together, according to people familiar with the matter. Investment bankers are pumping both companies with ideas in hopes of getting what might be the last large traditional media merger fee for quite some time, said the people, who asked not to be named because the discussions are private. Spokespeople for Comcast, National Amusements and ViacomCBS declined to comment.

One of the options under consideration is to bundle Peacock and Paramount+ together in international markets, as The Information reported earlier this year. Both companies are planning global expansions, and partnering is relatively frictionless.

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

While there may be no rush to merge, both companies will ultimately need more scale to compete against larger players. They could partner or merge, or they could attempt to merge with Warner Bros. Discovery when/if that deal closes in the middle of 2022. A merger with Warner Bros. Discovery may be a cleaner fit for both ViacomCBS and NBCUniversal.

But only one of the two could join Warner Bros. Discovery. That would leave the other company out in the cold — possibly for years.

That’s the essence of the prisoner’s dilemma.

Working together may ensure both companies are better off than they started, but holding out against each other may be the best-case scenario for one company and the worst-case scenario for the other. (This isn’t a perfect prisoner’s dilemma example because the companies can’t really betray each other, ending up in a situation where both are worse off).

Merger issues

Regulators probably won’t allow a combined NBCUniversal-ViacomCBS to own both broadcast stations, NBC and CBS. It’s likely any merger will have to include a divestiture of one of the broadcast networks along with all local NBC or CBS TV affiliates that overlap in the same markets.

That immediately diminishes the value of both companies. If CBS is divested, NBCUniversal would get Paramount+ without CBS programming, including live National Football League games and NCAA’s March Madness. If the companies decide to divest NBC, ViacomCBS wouldn’t get “Sunday Night Football” and other popular NBC broadcast shows.

While it’s possible the companies could attempt to argue broadcast networks are like cable networks and don’t need separate ownership, regulators may not view that as a reasonable argument. About 40% of Americans own a digital antenna to get free over-the-air programming along with streaming video, according to Horowitz Research. Broadcast networks have historically battled each other for valuable programming. Putting two under one roof would stifle those competitive bidding situations.

The second obstacle is structure. Comcast could simply acquire ViacomCBS, buying out Shari Redstone’s voting shares in a deal. But ViacomCBS has an enterprise value of about $40 billion and would ask for a decent-sized premium to sell, two of the people said. Even with major divestitures, a deal would be pricey.

Shari Redstone, president of National Amusements and Vice Chairman, CBS and Viacom speaks at the WSJTECH live conference in Laguna Beach, California, October 21, 2019.

Mike Blake | Reuters

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

Roberts could spin out NBCUniversal and merge with it ViacomCBS — similar to the WarnerMedia-Discovery deal. That might require him to give up control of NBCUniversal. If Redstone ends up owning more economic control of a merged NBCUniversal-ViacomCBS, she may want to run the company or choose who’s in charge, for at least a number of years. Roberts and Redstone will have to reach an agreement on economic and voting control if this option is pursued.

A bundled offering through a commercial partnership skirts the merger and acquisition issues — and is ultimately the most likely ‘step one’ scenario — but it gives less flexibility to the companies on offerings than a merger would. It also might not move the needle enough for either firm.

Wait for Warner Bros. Discovery

Either NBCUniversal or ViacomCBS could theoretically fit with Warner Bros. Discovery because David Zaslav’s future company won’t own a broadcast network. That would eliminate the need for divestiture. Combining with HBO Max and Discovery+ would also arguably be a more robust streaming offering, in terms of content, than simply pushing together the assets of NBCUniversal and ViacomCBS.

But the size of Warner Bros. Discovery combined with either ViacomCBS or NBCUniversal could potentially pose regulatory issues, depending on how the Biden administration regulators view the entertainment market. Even WarnerMedia’s deal with Discovery isn’t assured approval.

A choice to hold for a deal with Warner Bros. Discovery forces both NBCUniversal and ViacomCBS to wait two or three more years, given the length of time it would take to merge to gain regulatory approval — first for WarnerMedia and Discovery and then for the second merger. There would also be integration costs and issues from two large deals happening so quickly.

For the company that didn’t merge with Warner Bros. Discovery, the likely path forward would be rolling up some of the smaller streaming players. like Lionsgate and AMC Networks, or pushing for an acquisition of Sony Pictures.

Merging or waiting both present headaches. This is why investment bankers get paid the big bucks.

Disclosure: NBCUniversal is the parent company of CNBC.

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