Skydance reveals $6B cost savings plan for Paramount merger

Skydance outlined how it plans to achieve at least $6 billion in cost savings over the next three years from combining Paramount and Warner Bros. Discovery, CNBC reported.

The company detailed the breakdown in a letter to shareholders Monday as part of its third-quarter earnings release. The savings come from four categories: at least $2.2 billion from eliminating redundant back-office and corporate functions, at least $1 billion from streamlining marketing and promotional spending, about $1.4 billion from unifying streaming businesses and broadcast architecture, and $1.4 billion from optimizing third-party spend and consolidating purchasing.

“By combining two global streaming services, two film and TV studio groups, two television portfolios, and overlapping corporate functions, we can reduce duplicative spend across an expense base of more than $50 billion,” Skydance wrote. The company said it is confident in achieving the savings, drawing on its playbook from the Paramount merger, which is on track to achieve over $2.7 billion in run-rate efficiencies by the end of 2026.

The cost-cutting has already begun. Last month, Skydance started offering voluntary buyouts to employees ahead of official layoffs and adopted a five-day-per-week in-office policy. Last week, eight executives departed, four from Warner Bros. and four from Paramount. The company plans to merge Paramount+ and HBO Max into a single streaming platform, with the first step coming early next year as a bundled offering of both services at what co-CEO Ynon Kreiz called “an even greater value,” according to CNBC’s media coverage.

Kreiz told investors that Skydance is also looking for ways to optimize its content budget, which exceeds $30 billion annually. “As one company, we can make smarter choices about how we distribute and monetize both new content and library content,” Kreiz said. Co-CEO and chairman David Ellison said the company will use AI to speed up production and decrease film costs. “We think these tools will help unlock more original storytelling by being able to make the budget more digestible to be able to take that amount of risk,” Ellison said.

The earnings report showed the legacy Paramount Skydance business generated third-quarter revenue of $7.03 billion, roughly in line with estimates, and adjusted EBITDA of $1 billion, topping estimates of $913.5 million. The results do not include the impact of the Warner Bros. Discovery acquisition, which closed after the end of the third quarter. Skydance expects a $200 million headwind in the fourth quarter from theatrical underperformance at the Warner Bros. studio.

The company said it will provide full-year guidance during its fourth-quarter earnings report early next year. “Going forward, we will provide guidance on an annual basis, as we prioritize long-term value creation, which we believe will be more consistent with our strategic approach,” Skydance told shareholders.

What I think

The $6 billion target is aggressive but achievable, and the breakdown shows where the money is. The $2.2 billion from corporate consolidation is the most certain. Two companies that merge always have redundant finance, HR, legal, and IT functions, and eliminating them is mechanical. The $1 billion from marketing savings is harder. Marketing spend is not purely duplicative. Two streaming services marketing to the same customer need different campaigns, and combining them into one platform reduces but does not eliminate the need to spend. The $1.4 billion from streaming integration is the most speculative, because merging Paramount+ and HBO Max into one platform requires technical work that has not been done and customer retention that is not guaranteed.

The $30 billion content budget is the number that should worry investors. Skydance spends more on content than almost any company in the world, and Kreiz’s promise to make “smarter choices” about distribution is a euphemism for cutting shows that do not perform. The streaming wars were fought with content spend, and the losers were the companies that spent the most on the least-watched programming. Skydance now owns two libraries that overlap in genre and audience, and the rationalization of those libraries will mean canceling shows, shelving projects, and writing down content that was expensive to produce and cheap to consume. The $200 million Q4 headwind from Warner Bros. theatrical underperformance is a preview of the write-downs to come.

The AI production strategy is the most interesting part of the plan. Ellison’s claim that AI tools will make budgets “more digestible” is the argument that every studio is making, and it is probably correct in the narrow sense that AI can reduce the cost of visual effects, post-production, and certain types of animation. What it cannot do is replace the writers, actors, and directors whose contracts were settled in the 2023 strikes, and those labor costs are the largest line item in the content budget. AI will reduce the marginal cost of production, but it will not reduce the fixed cost of talent, and the fixed cost is the problem.

The streaming bundle is the short-term play. Offering Paramount+ and HBO Max together at a discount is a way to reduce churn without merging the platforms, and it gives Skydance time to build the unified technology stack. The risk is that a bundle is not a merger. Customers who subscribe to a bundle are still two clicks away from canceling one service and keeping the other, and the churn data from bundles is worse than the churn data from integrated platforms. The full merger of Paramount+ and HBO Max is the goal, and the bundle is the bridge, but bridges have tolls and the toll is customer confusion about what they are paying for.

The eight executive departures are the leading indicator. When a merger closes, the first people to leave are the ones whose jobs are duplicated, and the second wave is the ones who disagree with the strategy. Skydance is in the first wave. The second wave will come when the layoffs hit the middle management and creative ranks, and that is when the cultural integration either works or fails. Mergers of creative companies are harder than mergers of industrial companies, because the output depends on people who can leave and take their talent elsewhere. The $6 billion in cost savings is a financial target. The retention of the people who make the content is the strategic one, and Skydance has not yet said how it plans to achieve it.