Making sense of the risky Netflix-Warner Bros. deal

Whether or not Netflix’s $82.6 billion acquisition of Warner Bros. goes through, the deal encapsulates a fraught moment for Hollywood, as the entertainment business is increasingly overshadowed by tech giants.

On the latest episode of the Equity podcast, Kirsten Korosec and I discussed the deal’s implications, both for Netflix and the larger Hollywood ecosystem. Kirsten noted that it’s just the latest move bringing more consolidation to the media business, and she wondered whether it’s “too big a risk” for Netflix.

Meanwhile, I discussed a call with Netflix executives where Wall Street analysts also seemed to be struggling to wrap their heads around the deal. And then of course there’s Paramount’s competing hostile bid — whatever happens, Warner Bros.’ days as a standalone company seem to be numbered.

You can read an edited preview of our conversation below.

Kirsten: I remember when Netflix was just a little baby startup and I got their [DVDs] in the mail. Here they are, all grown up, bidding for a legacy company. Did that run through your head when you saw the news?

Anthony: Certainly symbolically, it’s this moment where the upstart has eaten Hollywood. There’ve been all these articles, even before this deal, saying, “Netflix is eating Hollywood, Netflix is transforming Hollywood.” Regardless of whether or not this deal ends up going through, Netflix will have transformed Hollywood, but this seems like the biggest — both symbolically but also substantively — one of the most dramatic things that can happen. 

Then there are all these other questions about: Will Netflix get regulatory approval? Will Paramount’s hostile bid succeed?

What jumped out to you is you were catching up on it, Kirsten?

Kirsten: Well, the first thing was I was like, can there be any more consolidation in this market? I mean, that was the big one for me, because if memory serves, Warner Bros. already went through like this consolidation with Discovery, right? So here we are again. There’s been so much consolidation that I have lost track of all of that.

But the second thought was what I immediately thought, what I kicked [off our discussion] with, which is really thinking about how Netflix [has grown], and there have been these dips in the road along its way, where the headlines have been about how it’s struggling, and will it remain relevant, and how can it do that? If they’re successful in the actual deal, [it would] potentially reflect [that] they have made it.

But then again, they have to execute on [running] an even bigger company than ever before. And so I guess my third thought on this is: Should they be buying this? Is this what it takes for them to expand? Is it a risk for them to take on so much? Why not just stay as they are? And I don’t know if you agree with me on that one. Is it too big of a risk? 

Anthony: I can see how it makes sense for Netflix. It’s a way to take a [content] library that is already quite large, and they’ve obviously had some very successful TV shows — less so on the movie side — [but] potentially, they just become so much stronger on the content side.

[And] they’re suddenly now involved in all these other businesses, although the question is to what extent are they going to invest in things like the theatrical business, theme parks, making TV shows for other streaming services and networks, which are all businesses that Warner Bros is in, and Netflix says it will continue to support. But we’ll see to what extent that’s true.

So it seems like something that can really benefit Netflix in some ways, but, at the same time, it does seem like this is a huge risk. If you go and look at the analyst call that Netflix’s executives did after announcing the deal, you can see that the analysts are wrestling with it and wondering “Okay, I can see that this grows your business, but does it grow your business [so much that it’s] worth an $82 billion deal?”

And then of course, beyond the Netflix perspective, you have everybody else in Hollywood. There are all these maybe accurately hyperbolic headlines about: Is this the end of Hollywood? Is this the end of the movie theater business? All the unions are basically saying either, “This deal should be blocked” or “We’re very, very, very worried about this deal.” The theater owners are saying that

And so I think there’s A) Is this a good deal for Netflix? And B) is this a good deal for the entertainment business? I don’t have a good answer for either, [but] I think it’s more likely to be a good deal for Netflix than it is to be a good deal for the entertainment business.

Though again, part of what to keep in mind as people weigh those options or think about possible outcomes here, is that because of the way that Paramount has forced Warner Bros. to consider these acquisition offers, it seems unlikely that Warner Bros. is going to be able to continue as an independent company — which, if you’re not a fan of media consolidation, that is disappointing.