(Welcome to the “Most Important Story of the Week”, my bi-weekly strategy column analyzing the most important (but often not buzziest) news story of the last two weeks. I’m the Entertainment Strategy Guy, a former streaming executive who now analyzes business strategy in the entertainment industry. Please subscribe.
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As soon as I sat down (well, technically, I stand) to brainstorm ideas on the monumental Netflix-Warner Bros. deal last Friday, it hit me that I could have two articles with provocative headlines, both “Why I LOVE” and “Why I HATE” Netflix’s proposed purchase of Warner Bros. The duality of those headlines captures my feelings on this sale.
Sure, I like the strategy of buying Warner Bros, but I feel like anyone who has followed me over these last seven years knows my feelings on markets and Hollywood:
More competition is better, and we need less consolidation!
And this belief goes back to the very beginning of this newsletter. After the 2023 strikes ended, I urged the unions to take up the cause of antitrust. Here’s the seven-point plan I wrote up last year.
Yet some readers definitely didn’t read the introduction to my last article, where I said I was “holding my nose” when it came to writing about the strategy. Frankly and unfortunately, using M&A to acquire market power or, heck, gain a monopoly position is smart business strategy. That’s why monopolists do it! And I have to write about that. But I’ve also been writing about the dangers of consolidation for—checks notes—years!
I don’t want to say I was the only one arguing for more antitrust in the Hollywood press, but I was one of the few voices making that case, way before it was cool. And to be clear, I’m stoked that so many people are now on board this movement, something I’ll write about more in the future.
Today, in Part II of my Netflix-buying-Warner-Bros. analysis, I’m going to look at the impact such a deal will have on competition. If strategy is “Should the company do it?”, this part looks at the broader impact on Hollywood, as in “Should society let this deal happen?” In that framing, absolutely society should oppose this. Markets are created by man, and they need to stay “markets”. True markets need lots of competition, not less.
And given the news of the last couple of days—specifically, Paramount trying to outbid Netflix by appealing to shareholders directly—I’ll mention that I don’t want them buying Warner Bros. either. I’m team “Let Warner Bros. exist independently”.
Taken together, my first two takes on this Netflix deal won’t be for everyone. Reality is nuanced and moderate, as is the Netflix buying Warner Bros. Deal. If you can handle nuanced takes, this piece is for you.
Also, I did an interview with Kasey Moore for his great website, Whats-On-Netflix, a terrific resource I use every week to write my Streaming Ratings Report. Read it here.
Before We Start: A Recommendation/Call to Action
Now, if you support the Netflix (or Paramount’s) purchase of Warner Bros., skip ahead to the next section (and hopefully come back once you’ve finished).
But for those of us who oppose this possible merger, let’s get busy. In screenwriter terms, I want to give you a “call to action”. And I mean “call” literally. I want you to take action and call your US senators and representatives to tell them how you feel about Warner Bros.’ sale.
For context, on Friday, Adam Schiff sent out this statement:
Does that mean he opposes the deal or doesn’t? Or that he wants to see which way the political winds (and donations…) are blowing? Probably the latter. But guess what? Thousands and thousands of phone calls could change his mind. (Which is way more effective than just posts on social media.)
So I’d highly, highly recommend calling your representatives in the Senate if you live or work in New York, California or Georgia and care about this issue. In fact, here’s their contact information:
California
Alex Padilla Los Angeles Office: (310) 231-4494
Adam Schiff: Los Angeles Office (818) 303-3841
Georgia
Jon Ossoff Atlanta Office: (470) 786-7800
Raphael G. Warnock Atlanta Office: (770) 694-7828
New York
Kirsten Gillibrand New York Office: (212) 688-6262
Charles Schumer New York Office: (212) 486-4430
If you want, you can also contact California’s candidates for governor, like Katie Porter, Xavier Becerra, Tom Steyer, Eric Swalwell or the current governor! LA’s mayor Karen Bass’ contact info is here. If you want to reach members of the House of Representatives, go here.
When it comes to political issues, sure, we can write newsletters or complain online, but if you really want to solve the issue, you need to make sure your voice is heard by the people who can actually do something about it. My team and I have already called our reps; you should too.
Okay, back to the strategy thoughts…
How Does This Impact the Consumer, the Economy and Competition?
In his earnings call with investors and journalists after this deal closed, Ted Sarandos offered this key description of the deal:
“This deal is pro-consumer, pro-innovation, pro-worker, it’s pro-creator, it’s pro-growth…”
Notice how he used words to pre-but the major criticisms of this deal. It’s pro-consumers, pro-innovation, pro-talent and pro-market.
But think about that for a moment: if this deal benefits all those players, then why would Netflix want to do it in the first place?!?!?
When it comes to economic activity, economic growth is shared by three groups:
- Consumers
- Labor (in Hollywood’s case, this is the split between above-the-line and below-the-line talent.)
- And capital
My working assumption—and this has a fairly strong economic foundation—is that consolidation benefits capital, since they then have greater bargaining power over both suppliers and buyers. And so antitrust law tries to guard against that.
To understand if this deal will close, we need to understand if it will likely only benefit capital (ergo the executives/owners of Netflix, Paramount-Skydance, and Warner Bros.) versus consumers and labor. I’ll analyze this looking at the ascendant legal theory (the “consumer welfare standard”), my preferred lens (“value creation standard”), and just plain old “competition”.
As a reminder, I’m absolutely not a lawyer, so no one should consider what follows to be legal analysis. This is my economic analysis using these legal/economic frameworks.
The Consumer Welfare Standard
Let’s start with the reigning legal theory of the “consumer welfare standard” from the Borkian school of antitrust. This standard simply focuses on whether deals benefit consumers in the long run. They do this by focusing on “consumer welfare”, and since economists focus on what they can measure, they usually boil this down to two elements:
- Does it increase prices?
- Does it increase supply?
The narrow understanding of monopoly law assumes that if monopolists don’t restrict supply, then it’s not raising prices and hence, consolidation benefits consumers.
But notably, this deal likely wouldn’t pass either of those two tests.
First, I think everyone understands that, at some point, Netflix will raise prices. As Matthew Stoller pointed out, Netflix has raised prices 125% since 2012, or 9.6% per year, well outpacing inflation. To pay for a deal of this magnitude, more price increases are coming.
Again, the debt load Netflix takes on will impact their bottom line for years to come…unless they raise prices. The same would apply to a new Warner-Paramount-Skydance mashup.
Supply will be constrained as well, in terms of the amount of content—films, shows and specials—being made per year. As What’s-on-Netflix has shown, the number of originals has declined for Netflix since 2022. Other data I’ve seen indicates 2025 is already down as well.
Well, heck, I made that chart here:
That’s all of streaming, but Netflix has been making fewer shows and films, too.
If Netflix buys Warner Bros., they’ll almost certainly reduce their output compared to the before times. Sure, together the total amount of shows and films will go up, but the total output will absolutely decline compared to both studios’ production of the last few years.
If Paramount buys all of Warner Bros. Discovery, they’ll use the expanded number of cable channels in their portfolio to raise prices for their cable channels. Like Disney after they purchased Fox, they’ll almost certainly send fewer films to theaters.
Ultimately, I struggle to see how this deal even passes the low (and easily massaged) bar of the consumer welfare standard. Of course, both sides will make statements about avoiding price increases, and may even enter into consent agreements with regulators to ensure they don’t increase prices, but as soon as those deals expire, the prices will jump. (As we saw with the Sprint-T-Mobile merger.)
The Value Creation Standard
Now, if I had my druthers, any pundit, journalist, commentator, and, especially, economist would differentiate between two crucial ways to grow top, bottom and cash flow lines:
- Value creation
- Value capture
Of my economic/strategy explainers, this one remains my favorite. A company creates value by figuring out ways to make products that either customers will pay more for, or more customers overall want to buy, or to make them for cheaper internally. Value creation grows an economy’s productivity.
Value capture, on the other hand, does not do those things. Instead, it’s when a firm (or financial entity) identifies ways to simply take value from elsewhere in the value chain. The most common form is when a company grows by M&A, and the newly formed company by M&A uses their new found market power to pay suppliers less or charge customers more. Note: the company didn’t create value there; it simply took it from suppliers/customers. Folks who call this “efficiency” are utterly mistaken that this adds value to the overall economy.
Notably, this deal would really hurt suppliers, known as talent. With fewer buyers for projects, the remaining streamers/studios can pay less. That’s just basic economics. And The Ankler already is sounding the alarm about this. So did The Wrap today, discussing residuals.
Theaters would likely also lose out. As Lucas Shaw said on Matt Belloni’s podcast, Netflix would likely be able to force theaters to take their suboptimal windowing conditions because they’d have too much market power with Warner Bros. movies to be ignored. Again, the resulting size would give marketing power that allows them to hurt suppliers. (Though they could argue that this benefits consumers.)
Now, a Netflix/Warner Bros. merger could actually create a better product for consumers if…
- …Netflix does keep prices flat, adds in all of HBO’s content, makes the same number of TV shows overall, and keeps releasing 8-12 films in theaters each year. Yeah, that really would add value to customers.
- … But if they manage to end theatrical windows, and that wipes out 5,000 theatrical screens, that’s a lot of value capture from theaters! Same for charging the same monthly price to customers but releasing fewer TV shows per year. Then customers would be losing out. Or paying talent much less, since the combined Netflix-Warner Bros. entity would be so powerful in terms of bargaining.
Another variable is what Netflix does with Warner Bros.’ content library. Currently, Warner Bros. licenses it out to other distributors, including Netflix! Will those deals continue, or will the content stay locked behind Netflix’s vault? I’d bet they continue, but I can’t be certain, especially for top properties. That, too, would be value capture.
In other words, the value comes from capturing value in the value chain.
The Competition Standard
The major criticism of the consumer welfare standard is that companies just hire economists who will say, “Sure, this deal will lower prices,” even if that never happens. Historically, just making that argument usually gets deals past certain judges. One could say the same thing for the “Value Creation” standard I just invented. Both sides will hire economists and consultants to say, “Yes, we create value, we never use market power to boss suppliers.”
Which is why there could be a simpler standard:
Does this deal lower competition?
In fact, Matthew Stoller made this case in his newsletter:
“The relevant doctrine here is the Clayton Act, which bars combinations that “may substantially lessen competition or tend to create a monopoly….It’s a merger in a highly consolidated market that’s already been consolidating, one of the merging firms already has a dominant position that the merger may reinforce, it could cut off the supply of products its rivals use to compete, it fosters buying power against workers, creators, suppliers, or other providers, and so on and so forth.”In this case, it seems obvious that, yeah, merging these two companies would result in less competition.
Why does competition matter? As I like to emphasize, it’s the engine that truly drives innovation in the economy. If firms don’t have to compete, they focus on capturing or extracting value; if they have to compete, they focus on better products and innovative processes.
Looking at these three standards, it’s clear this deal shouldn’t go through.
But Will Anyone Try to Stop It?
That’s the big question, and probably too big for this article. Anyone from Federal Antitrust authorities to State Attorneys General to the EU could try to oppose it. But that also requires the political will to pull off, a topic I hope to explore more in the future.
For other good pieces on the antitrust, I’d recommend my usual antitrust experts, Matthew Stoller (here or here) and Tim Wu, plus the analysis at Hard Reset on what Californian politicians have spoken out about this deal. Former FTC member Alvaro Bedoya had a strong take on Twitter, too.
