Here's What Investors Need to Know About Amazon's Acquisition of MGM Studios

With Amazon (AMZN -1.64%) set to close its acquisition of MGM Studios some time this year, how should investors respond to this latest of a long line of deals the tech/entertainment/e-commerce giant has made? In this segment of Backstage Pass, recorded on Dec. 17, Fool.com contributors Rachel Warren, Toby Bordelon, and Jason Hall discuss. 

Rachel Warren: This deal really excited me. In May of this year, Amazon announces that they're acquiring MGM Studios. For anyone who is not familiar, MGM Studios has a pretty storied history going all the way back to the 1920s.

Part of the reason I was so excited about this is I'm a classic old movie buff. I pretty much spent my entire growing up years watching nothing but classic old films and my grandfather worked in the film industry in the golden age of Hollywood, including at MGM.

This was an interesting story that I had a little bit of a personal take on. Amazon announces in May they're acquiring MGM Studios for a purchase price of $8.45 billion. Definitely on the smaller end of some of the deals we're talking about today. What's interesting is, I saw report by the New York Times.

The New York Times reported that, that $8.45 billion number, that was still about 40% more than companies like Apple or Comcast who supposedly were in talks with MGM Studios were willing to pay.

There has been this thought that maybe Amazon is overpaying. We know that Amazon has a history of being an industry disruptor. The company has broadly been expanding within the entertainment space, really building up its streaming platform.

For MGM side, the companies had a really tough time financially over the years. They filed for bankruptcy protection in 2010, ended up implementing a reorganization plan. But it's had it's fair share of financial woes.

When Amazon announced this acquisition, they essentially said that the thought behind this deal was to preserve MGM's vast library of film titles and TV shows. I think part of the thought being to bring it to a new generation of viewers. In the press release, the company noted MGM's vast library has over 4,000 beloved film titles. These include classics like "12 Angry Men", "James Bond", "Basic Instinct", "The Magnificent Seven", "Pink Panther".

The company also has released a lot of notable films that have come out in the past year including, "House of Gucci" and "No Time To Die". Then MGM also has a really broad catalog of about 17,000 TV shows. Some of the newer ones that have been really popular include "The Handmaid's Tale" and "Vikings".

When they announced the deal, Mike Hopkins who's the Senior VP of Prime Video in Amazon Studio said "the real financial value behind this deal is the treasure trove of IP in the deep catalog that we plan to reemerge and develop together with MGMs talented team. It's very exciting and provides so many opportunities for high-quality storytelling."

I think one could argue that Amazon doesn't necessarily need MGM's treasure trove of films to succeed, it's streaming platform has been a vast success and it continues to eat up market share in that area. But I like the idea that it is planning to build off of this classic trove of films and TV shows and bring it to a new generation.

Jason Hall: They're going straight up Disney that stuff. There's no doubt about it.

Rachel Warren: Totally. Well, and that will also give them more competition in that space as well. What's interesting is Amazon Studios was only founded about 11 years ago. As of 2020, Prime had about 200 million paying members worldwide. I myself am one of those members, so I'm really excited to get all these films.

Jason Hall: Raises hand.

Rachel Warren: Raises hand [laughs]. I'm sure many of us are. What's interesting is there's been a lot of mixed reactions to this acquisition. I think from the customer standpoint, a lot of us have been really excited that we're going to have access to all of these great films and shows.

But there's been some anger that's come out from unions, from writers guilds. Deadline reported that 34 groups from the Writer's Guild of America had appealed to the FTC to block Amazon's proposed acquisition of MGM.

Reuters actually reported late last month that four major unions, "including the Service Employees International Union, were urging the FTC to oppose Amazon's plan to buy MGM citing, concerns that it would reduce competition in the streaming video market". Interestingly, the deal which I believe is set to close sometime next year, we don't have an exact date.

The FTC has been looking into the merger for months now, as overarching concerns of ongoing probes into big tech and concerns that companies like Amazon could be monopolizing perhaps the entertainment space and other spaces. It'll be interesting to see if this goes through. I think in the end it probably will. I don't really see why this would be blocked in practice.

Jason Hall: Labor is making a stink because it's Amazon [laughs] and Amazon's labor practices. It's not exactly like they've done a whole lot to stop this acquisition of 70% of the entire industry.

Rachel Warren: Right. Because it's like if you're worried about entertainment monopoly, you'd be seeing a lot of other companies getting backlash. I think part of it is just Amazon. It's one of those names in big tech and that's part of why you're seeing such.

Toby Bordelon: I think it probably goes through. I think the advantage here that Amazon has is they don't have their own movie studio or at least not a major one.

Jason Hall: They're big wheel of time when they partner with Sony, actually -

Toby Bordelon: Right. It's more of a vertical than a horizontal integration here. They're buying a studio and they have a streaming platform versus something like Comcast. You've got the NBCUniversal versus MGM.

Rachel Warren: It's interesting because I haven't been following this deal before this point so I didn't realize that Apple was talking about acquiring them. But all that to say is I think it's a good deal.

I think it will vastly expand Amazon's capabilities within the entertainment space and just from a personal level, I love that we're, preserving a piece of history and classic old films. That's a little bit of a warm, fuzzy take on it.