Matthew Belloni on the Ellison media empire: Hollywood's production exodus, AI's limited role, and why the Sopranos won't land on Netflix

Strike secures AI and stop breaches. And we have Matthew Belly from Puck. How are you doing? Well, what's going on? Doing great. Thanks for having me. Thanks for hopping on. Great to meet you. Um uh I enjoyed uh your your your podcast with Dylan earlier today and I wanted to dig further into the actual uh merger.

I mean, it seems like we're sort of done now. Um, but uh how how has how has the process of covering this been for you? Uh what were the key turning points? Like what was most exciting for you? Well, I'm learning a lot. Certainly didn't know what a ticking fee was until covering this deal.

Uh learning a lot about the debt market, learning a lot about uh the contours of raising money in the Middle East. All sorts of fun things. Um, but yeah, it's I mean it's been a wild moment in Hollywood for the past five years. Basically, it's it's a time of tremendous change, tremendous disruption.

A lot of people are really scared and don't know what's going to happen. So, it's I mean, it's been it's been interesting for sure. Is that uh is that just a combination of like COVID plus streaming plus consolidation plus AI or is there like one story that sticks out to you?

It you can throw in a pretty crippling labor strike in the middle of that and uh it's been one thing after another. about 5 years ago, the end of the peak TV era, the Netflix correction, where the market decided that Netflix had to make money, streaming subscribers was not the end all beall.

That created a an absolute correction and pretty much I would call it a content recession within Hollywood. And that's trickled down throughout the industry. Fewer jobs, fewer productions.

You add that in with the flight of productions overseas, the everything from the strike that happened in 2023, which gave these companies an excuse to really re-evaluate the level of production. Um, throw in the LA fires that disrupted so many different people. And it's, you know, you guys are in LA.

It's it's it's a really interesting and and for many people scary time. Yeah. Uh, explain the overseas thing because I I'm I'm familiar with Atlanta and I believe Toronto. Uh, but are productions really moving to other continents now? Oh, yeah. I mean, the UK has been extremely aggressive.

They have for many productions a 40% incentive and they're willing to give you incentives on what's called above the line costs. Those are the actor, director, writer. Those are the main talents in the film.

That is a huge incentive because it essentially subsidizes you for Tom Cruz of a salary, Ryan Gosling's salary, and even in some of the more aggressive US states. You won't get that in California. Um, so you know, it it just it's a game changer when they are doing the line.

I just reported on this movie today, Project Hail Mary, an Amazon movie that's coming out in two weeks. The gross budget for that movie is $248 million. The actual net budget is a little under 200. Okay. So, you're saving 25% by shooting this movie overseas? Interesting.

And uh and do those come as like tax credits upfront or is it more like a tax deduction on profits where if the co if the movie costs 250 to make and it makes 500 then I'm saving 25% or do I just get the money basically upfront? It it's a rebate. I'm actually not sure. I think it depends on when you actually receive it.

But it's a rebate for the qualified spend in the jurisdiction that is giving the incentive. Yeah. So if you are going to get an incentive from the UK, you actually have to have the work done in the UK. And that means hiring local crews.

It means using a sound stage in the UK and having the, you know, the production actually shoot there. And you can have films with multiple incentives from multiple jurisdictions for multiple aspects of the production.

Everything from the post-prouction to visual effects, those can be subject to incentives for doing the work in a particular jurisdiction. Uh, really quickly, I think we have the wrong mic selected. Would you mind adjusting it?

Uh, because I think we're on your laptop mic and I'd love to get that Shore SM7B working because I know it has higher audio quality if you can switch it. And while you look at that, I will tell the audience about Shopify.

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How about this? Is this Oh, that's much better. There we go. There we go. I really Wow, you you have sound effects. I'm very Yes. Yes. Everyone I wish I had an air horn. Some of these are not sound effects on a soundboard. Some of these are real folks in the studio clapping with their hands. We have both. That's true.

I I can't be trusted with an air horn. Yeah. Yeah. We had a lot of fun. So, uh talk about the reaction.

I know that uh we we talked to Ashley Vance who's a documentary filmmaker and he was voicing a little bit of worry that if Netflix acquired uh Warner Brothers Discovery that there would be one less buyer and is this any better for the average filmmaker who wants to go out and get the best price for their product for their for the film that they've been working on?

Are we still telling the same consolidation narrative or is this somehow structurally a little bit different? Um, I it depends who you talk to, but I would argue that this is actually worse, okay, for creatives because this is the actual smooshing together of two legacy studios.

When you talked about Netflix buying Warner Brothers, Netflix is not in the theatrical movie distribution business currently. They do not do movie theaters. So, there was a certain class of movie that was going to remain a Warner Brothers movie. Now Netflix makes a lot of movies on its own but those are often smaller.

They are not they don't have as much ambition as the big theatrical movies. They do some of those too but that Netflix was at least positioning it as we are going to leave Warner Brothers alone. They also were not in the production business in television for other buyers. Everything that Netflix made was for Netflix.

Whereas Warner Brothers makes shows for its own platform HBO Max, but also for Apple and for Netflix and for many other different platforms. So they claim that that would be at least another opportunity for buyers.

Here with Paramount buying Warner Brothers, this is going to be the combination of two television studios, the combination of two film studios, and ultimately down the line that is going to mean fewer jobs.

Now, if you talk to the Paramount people, they say they are committed to making 15 movies for theaters for each Warner Brothers and Paramount. That's 30 movies a year, which would be an escalation for both of those companies. So, they're saying they're going to be more.

But the history of the movie business has shown that when two studios merge, ultimately the output is reduced and that trickles down to creators. What do you think about ne Netflix's future theatrical plans? Ted Sarandos was talking about the future of movie theaters, painting a more optimistic fe uh vision.

Do you think any of that sticks? 2. 8 billion burning a hole in the pocket. Yeah, I mean uh I I don't think TED is going to use that $2. 8 billion to all of a sudden make movies for theaters. Yeah, I I just don't think so.

I think it's going to be a continuation of their current model, which in many ways is designed to put the theaters out of business. It's designed to give you first run A-list filmmaker A-list star movies at home.

Even 10 years ago, a movie like The Rip with Matt Damon and Ben Affleck, that would have had a nice robust theatrical run before hitting home video. Not true with Netflix. Now, what Ted is saying is that they have had some constructive stunt experiences with theaters lately. They put K-pop Demon Hunters in theaters.

They've done a couple of other things. They did Stranger Things in theaters. And I could see Netflix doing more of that.

Using theaters essentially as a marketing device for Netflix, but I don't see TED all of a sudden saying, "Oh, you know, through this process of looking at Warner Brothers, we have determined that the theatrical model is a good one, and we're going to all of a sudden give our movies a 45day theatrical window.

" Don't think that's happening.

And do you think uh how much of that do you think is Netflix uh just well if we have the we have a crown jewel asset we want people to go subscribe to Netflix and see it there first versus a lot of times they don't know what's actually going to work and the beauty of the Netflix model is they can stuff something like K-pop Demon Hunters on there it can effectively like go viral in their algorithm and they don't need to do the billboard campaign the theatrical rollout and take all that risk.

So focusing more on like downstream, we got something that's already working. Let's make a musical singalong version or a promotional version for theater. That is absolutely the benefit and Sarandos has said multiple times that the best marketing platform for Netflix content is Netflix.

Now I I recently had the head of Sony Pictures on the town and he I think correctly said you do not make stars on Netflix. You do not make franchises that last for decades on Netflix. And the way you do that is in movie theaters with a big robust marketing campaign that tells the world about the product.

So that even if you don't see the movie, you're at least aware of it so that when a sequel comes out in four years, maybe you see that one, but if a sequel to a Netflix movie comes out, nobody except the people on Netflix know about it. Yep. Yeah. Yeah.

I I saw Ryan Gosling on the Hail Mary billboard and I was like, "Oh, like we should go see that. " And somebody was like, "Well, what is it? " And I was like, "It's a Ryan Gosling movie. " Like, right, what else? And that's a that's a perfect example.

I mean, Amazon had the choice whether to make movies just for Prime Video or to do theaters. They are going big on theaters this year with a full slate of theatrical releases.

and they and many others in town believe that the best way to create movie franchises and to create demand is to first put the movie in theater and then debut it on the service. Yeah, it's interesting.

It reminds me of uh like a apparel brand doing popups specifically not not as like a real revenue driver but to just deepen relationship uh with their Now don't get me wrong, these traditional studios, they need these movies to make money in theaters. That's their whole business.

And the reason you are spending $50 to $100 million on a marketing campaign globally is to generate profitability in theaters.

And then you get the waterfall, we call it in Hollywood, the waterfall of revenue that first you go to premium video on demand, then you go to subscription video, then you go to TV, then you go to free TV, then all of a sudden you're syndicating the content all around the world and it's in your library forever.

The reason why Warner Brothers is going for $111 billion is not because they had a nice run in theaters last year or because HBO has had some hits lately. It's because they have a 100year-old library of films that is incredibly valuable to exploit across all platforms and because HBO has an amazing brand. Yeah.

So, talk about content licensing at the new entity, the combined entity. Uh it feels like with 79 billion dollars of debt, cash flow is going to be important in the short term. What's the probability that we're watching Sopranos on Netflix or watching something from the catalog on Netflix in the next couple years?

It's funny because Sopranos has been the one title uh that Netflix has not gotten. Yeah. And HBO has kept that. Not the not the one, but the one big one that everyone's waiting for. And you the this is the debt issue is not new.

the Warner Brothers Discovery transaction, putting those two companies together, that created 50some billion dollars in debt and they needed to make money fast. And the past three years have largely been about servicing that debt and bringing it down.

So, you've seen tons of Warner Brothers shows and movies on Netflix and they do it because they have to. I mean, at one point, I looked on the Netflix top 10, and six, I believe, of the 10 movies in the top 10 were Warner Brothers titles, and they do it because they need the money.

I mean, we know Sony Pictures just did a reup of their Pay One deal. We call it Pay One because it's the first pay platform for subscription viewing of these movies. They got $7 billion out of Netflix over a long period and globally. But that is for the first run pay one window for Sony Pictures movies to go to Netflix.

Incredibly lucrative. That's what Netflix was buying when they wanted to buy Warner Brothers. So Sony and Netflix already have this relationship. Is there any chance that Sarandos goes shopping with his 2. 8 billion bonus and all the cash flow that he has? he's sort of, you know, kick the tires on one big deal.

Is Sony Pictures in play at any point in time? The Sony Corporation in Japan has said that they are not interested in selling Sony Pictures. Um, it would seem to be the obvious choice because Sony is the one Hollywood studio, the traditional studio that does not have a general interest streaming platform.

They chose not to enter the streaming wars. And that would make it an attractive buy for Netflix because Netflix doesn't need a global streaming service. They already have one. They could pick off the Spider-Man franchise.

They could pick off, you know, all the production and distribution capabilities that Sony has for theaters. Would seem to make sense for Netflix, but there has been no indication that Japan is willing to sell. Yeah. Uh is any part of the Ellison's strate is does AI kind of factor in at all?

I've had this kind of like uh uh loose theory that uh this this IP, Warner Brothers IP, uh could potentially be more valuable as AI gets better because you can create so many different variations on top of that IP. Uh but it's also unique. It's not replicable. That's it. That's it.

It's like you have a monopoly on the IP and if it becomes substantially less expensive to create uh new film and and television, you know, uh TV shows, movies, etc. , maybe the IP is more valuable. Uh but but what's your take?

Yeah, I have always thought that one of the reasons why Netflix wanted Warers was because they saw what's going on with YouTube and the volume of content that YouTube is soon going to be able to host and eventually create themselves and Netflix is saying to themselves, okay, so if anything is possible in streaming and with AI you can create AI generated shows, music content, movie stars, whatever what are we doing?

What do we have that is defensible here? And they're looking at Warers and they're saying, "Okay, well, we don't have a Batman. We don't have Harry Potter. We don't have, you know, this hundred-year-old library of known quantities that cannot be replicated by AI, at least not yet. So, we need that.

" And Netflix has had a hard time creating franchises. If you can count on one hand the Netflix franchises, the things that they own that are meaningful in the world. Stranger Things they own. Wednesday, they don't own. Amazon actually owns the Adams family because they bought MGM. There are not that many franchises.

You guys probably don't even know what they are. Yeah. Yeah. Yeah. Yeah. That's fascinating. Uh, can you take us on a tour of who is actually involved financially in this deal? You mentioned that it's it was sort of like a whirlwind tour in the Middle East. A lot of different funds coming in.

I imagine that it's some overlap with the tech investors that we typically talk about in this show, but yeah, Apollo is in this. Yeah. Um I believe Blackstone is. I'm not I'm not 100%. There are three big PE firms that are providing a lot of the the debt financing here.

Um, and then there's an interesting question of whether the Middle East money that was initially floated as being part of this deal is still in there. There was there was a Saudi fund, there were Qataris, there was one other fund and they were not in the press release. Okay.

So, uh, I actually need to ask Jerry Cardnali of Redbird whether they are still in this deal. Sure. Because, uh, Redbird has been kind of the the, you know, big con financial backer and consultant on on raising this bid together. And obviously Larry is backstopping the whole thing. this.

We would not be having this conversation about a a company with a $15 billion market cap, which is Paramount Skyance, acquiring a company like Warner Discovery in $111 billion deal if not for the backstopping of Larry Ellison himself. Yeah. And that was the key factor. He didn't want to personally backs stop it.

And then once he did, the levers started moving. Yeah. What is uh Larry Ellison's history with uh investments in Hollywood? I know it's not just David that's been involved. He's he's invested before. Obviously, David has a, you know, almost multi-deade career at this point. Um, what what's been Larry's strategy?

What what can we learn from his past adventures in Hollywood? It's a good question because people think this is out of nowhere and it's all of a sudden Larry Ellison deciding to dip his toe into Hollywood. Although if you can call over hundred billion dollars dipping your toe. Big toe. She's dipping the big toe. Right.

But Megan Ellison, David's sister, she had a very artistically successful production company called Anna Pererna, which she still has, but there was a period in the 2010s when she was the dominant producer of so-called artouse and uh you know independently financed aurdriven movies.

And she actually got two Oscar nominations in the same year for herself for best picture when she had I believe it was her and the master in the same year. And she done I mean she's done a ton of movies with big time aurdriven filmmakers and then the wheels came off. She just lost too much money.

And Larry basically had an intervention with her and said the money's not coming in anymore. You're done. I'm not doing this anymore. And he had his people step in. They pulled way back. They downscaled the company. And Annaperna still exists.

They had a they had a big Sundance movie this year directed by Olivia Wild and starring Seth Rogan. But they're not doing a whole lot. So, if we learn from this, it's that Larry is happy to indulge his children, but there is a limit on what he's willing to do. And she hit that limit.

We, you know, we'll see what happens with David. Yeah. Is uh Sorry, Jordy, you can go if you uh just just I'm I'm curious if uh if I mean it sounds like Annaperna had a very different uh just financial underwriting strategy in the sense that Warner Brothers is very much like this basket of assets that are so proven.

Yes, it's high leverage. Yes, it's expensive. But it's this mortgage on land that if you pay the bills on time, you will get the value of because there's this catalog value that you can license. You can continue to merchandise these assets. So, it feels like a different financial strategy. Absolutely.

I mean, there aren't there are not a lot of legacy studios with 100-year-old libraries sitting around. It is a pretty unique asset. Whereas Annaperna was creating its library from the ground up which is a much diff more difficult business.

the the you know the corners of Hollywood are littered with the corpses of companies that try to take on the studios and do this on their own because you have to have that 100-year-old asset to float you when you have bombs because this is a portfolio business in the sense that if you release 20 movies 10 of them probably not going to make money if you're lucky and it's you got to make a lot of money on the ones that do make money and those will make money forever.

Yeah. Can you bridge that to A24? Uh, we're more familiar with that because there's some tech investors involved. I I personally like a lot of the movies, but what what is the strategy of A24? How do they fit into the modern Hollywood landscape? A24 has been incredibly successful on the low-budget model.

They they are one of the few film studios that have created a brand for themselves. I would argue that the A24 brand is more meaningful to movie goers than the Warner Brothers brand. I mean, everybody knows what Warner Brothers is, but what does Warner Brothers stand for? What is that brand? You don't really know.

And you never had to know because that was just the it wasn't a direct to consumer business. They put their movies on other branded platforms whether they are theaters or whether they were television or now streaming on HBO Max. But A24 has created a brand.

They sell you know branded candles and hats and things that are meaningful to their fans. But they succeeded they succeeded on uh betting small on specific aur filmmakers and they had a nice run.

They also raised a bunch of money as you mentioned and they have recapitalized a couple times now and because they got what I believe it was a $3. 5 billion valuation a couple years ago they have essentially now been forced to go bigger and they are releasing movies supreme cost $70 million. Yeah.

uh The Smashing Machine with The Rock that also cost a lot more than their typical A24 movie. And they're still buying the small movies at festivals and releasing smaller movies, but they now have more of a portfolio of bigger budgeted movies.

And the jury's out on whether that model is going to be successful for them because again once there's many companies that have had small level success in Hollywood and when they try to scale up and compete more directly with the traditional studios they've faltered and we'll see if 824 is able to pull it off.

They got really smart people there. So I I would hope so. What is actually what is Hollywood actually doing with AI today? Not like what do they want to do? not what are Silicon Valley companies pitching them on doing but how is it actually being used today?

Well, there's two answers to that question because there's one in the general what is AI doing for all businesses and that is you know streamlining processes and you know creating faster workflows. That's all the boring aspect.

What you're probably asking about is how is Hollywood using AI to create content instead of in place of a camera is right. Exactly. And there it has been much more limited there.

the the toe is in the water and each of these companies has a an initiative to incorporate more AI specifically and and more and more aggressively in the animation divisions.

The goal is to bring down the cost of animated movies significantly and you do that by using AI to automate a lot of different functions and they're being koi about exactly how but I have heard like the storyboarding process and the physical production of the animated images once the artists have have done their work to create the character design and the movements they want.

AI can be used to essentially effectuate a shot. And you're seeing more and more of that. Where they're treading a little bit more cautiously is where the traditional labor unions are involved, where actors and directors and writers are involved. You're not seeing studios greenlighting scripts that are written by AI.

You're just not. Screenwriters are using AI as a tool that they know of. That they know of. Sure.

But they are screenwriters are using AI as a tool and they will freely admit that much like they were very happy to use Google when it first came about and they didn't have to have a researcher that would go to a library and tell them what the interior of the FBI looked like. They don't have to do that anymore.

And with AI, they can create scenarios or create drafts or create things that they that will help them. And the all that the guilds want is for their members to get paid. So the studios are not allowed to buy a script or greenlight a script without paying a human writer. And that's a big deal. It's the same for actors.

You can use AI to accentuate or to uh you know do a a a quick re-shoot shot, but you have to pay the people involved.

And we're headed into a new labor negotiation where the studios will try to chip away at that and the guilds are going to try to be more aggressive and make sure that their members are getting paid for any use of AI here. Mhm. Uh where do you think AI what kind of scenes do you think AI will end up coming for first?

Is it the the Is it the stunt well animation but then what what about stuntmen? I feel like there's a there there's like Transformers level CGI where it's so expensive. scene, visual effects.

is do do you think that the dynamic between the studios and the guilds could allow kind of like an entirely alternate kind of uh like industry to form that that is sort of broken away from from traditional Hollywood norms like you know you could imagine a group of uh people and you know uh some suburb of LA that that aren't a part of the guilds that have never never engaged with the unions in any capacity just decide we're going to start making movies ourselves and kind of just ignore uh the legacy process.

I think that's already happening, right? I mean, you see it, but the difference is I mean, we all went nuts over that uh that seed dance video of Brad Pitt and Tom Cruz fighting. Um but that's because it was Brad Pitt and Tom Cruz.

If it was two dudes fighting, nobody would care if it was two AI generated dudes that did not look like Brad Pitt and Tom Cruz. And that's the power the Hollywood people have. Yeah. Yeah.

It's I mean there's going to be I think what's going to happen is there is going to be a class system of AI generated content that will live and have an audience and generate revenue at scale but it will be perceived as lesser than the more professional and unionup supported Hollywood style work.

And I could be wrong about that. It could just bowl over everything. But there's still value in Ryan Gosling's face. And for now, the unions and the Hollywood studios have been able to protect that from AI. Yeah. Yeah.

You can imagine, you know, the the luxury houses versus fast fashion, like a similar dynamic playing out where like, yeah, you can get a jacket that like functions in the same way as something that Gucci made.

Maybe it's the same even material but it costs less and it has obviously much less prestige and and I think that there there will be a middle ground too where movies the cost of movies are is brought down because of advances in AI where things can be done without you know outsourcing something to five artists to work on at a visual effects company for two months.

It could be done inhouse for less money with an AI tool. I think that's that the that's already happening and there are much lesser guild protections for that aspect of the business. Uh post the OpenAI Disney deal, I was expecting to see another deal of the similar shape happen. It hasn't happened yet.

Are you hearing rumors? Do you think other studios with big intellectual property uh and and character libraries will take a similar approach? I I think that there are a lot of talks going on. Yeah. And they're trying to figure it out.

Disney was in an interesting spot there because it was it that deal with OpenAI was as much about putting pressure on Google to come to the table and to not go rogue as Google has been doing. Sure. As it was to do uh open AI. Got it. Also, there was a pre-existing relationship there.

Bob Iger, the CEO, was he worked for Thrive, which, you know, is is a big investor in OpenAI. And Disney is, you know, if you're going to go after one company, that's the one to go after because they have the best characters.

And if you note about that deal, that deal does not include any voices or any likenesses of real people. Even the Luke Skywalker is the animated Luke Skywalker. So, it's a lot less compelling for people to play around with.

If you're playing around with Lightning McQueen or Yoda, and they don't sound like Lightning McQueen or Yoda, it's a lot less compelling than if they did. Interesting. Yeah, that'll be interesting to see how they roll that out. Uh, maybe that happens down the down the road. Uh, Jordy, anything else? This was great.

Thank you so much for taking the time. Great to finally meet. Great to finally meet any fantastic reporter and come in in person next time. Yeah, we'd love to have you here in LA. We'll talk to you soon. Listen on the town or you can read me at puck. Yes. Perfect. Uh thank you so much for hopping on the show.

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