Making sense of the risky Netflix–Warner Bros. deal

Regardless of whether Netflix's proposed $82.6 billion acquisition of Warner Bros. ultimately succeeds, the deal highlights an increasingly turbulent moment for Hollywood — an industry steadily being eclipsed by powerful tech companies.

On the latest episode of the Equity podcast, Kirsten Korosec and I broke down the implications of the potential acquisition for not only Netflix but also the broader entertainment ecosystem. Kirsten pointed out that the move continues a long-running pattern of consolidation within the media landscape and questioned whether the deal may ultimately be "too big a risk" for Netflix.

Meanwhile, I discussed a recent call with Netflix executives on which Wall Street analysts also struggled to grasp the strategic rationale fully. And, complicating matters further, Paramount has put forward a competing hostile bid — making it increasingly clear that Warner Bros., in one form or another, is unlikely to remain an independent entity.

Below is an edited preview of our conversation.

Kirsten:

I remember when Netflix was just a small startup sending [DVDs] in the mail. Now here they are, all grown up, bidding for a legacy studio. Did that cross your mind when you saw the news?

Anthony:

Symbolically, it represents the moment the disruptor fully overtakes Hollywood. Even before this deal, countless articles had been written about Netflix reshaping the industry. Whether or not the acquisition goes through, Netflix has already transformed Hollywood — but this feels like the most dramatic example yet, both symbolically and in real terms.

Then there are the obvious follow-up questions: Will regulators approve the deal? Could Paramount's hostile bid succeed?

What stood out most to you as you were catching up, Kirsten?

Kirsten:

My first reaction was: Is there any room left for further consolidation in this industry? Warner Bros. already merged with Discovery, and here we go again. There has been so much consolidation that it's hard to keep track.

My second thought was about Netflix's journey. Over the years, we've seen headlines questioning whether it can remain relevant. If Netflix successfully pulls off this deal, it might signal that the company has firmly "made it."

But then the question becomes: can they operate a company this large? Should they even be trying? Is this truly the right path for expansion, or is it simply too risky? Why not stay the course instead of taking on so much? I'm not sure where I land on that.

Anthony:

I can see the logic for Netflix. Absorbing Warner Bros. would expand a content library that is already sizable, and while Netflix has had breakthrough TV successes, it hasn't matched that momentum in film. This acquisition could significantly strengthen its content arm.

But it also pulls Netflix into a variety of businesses it doesn't currently run — theatrical releases, theme parks, and producing shows for outside networks and streamers. Netflix says it intends to continue supporting all those operations, though the extent of that support remains to be seen.

So yes, the upside is enormous, but so is the risk. If you listen to the analyst call after the announcement, it's evident that analysts are wrestling with the same question: Does the potential growth justify an $82 billion price tag?

Beyond Netflix, the rest of Hollywood is reacting intensely. Many headlines paint this as a potential death knell for Hollywood or the theatrical business. Unions are warning that the deal should be blocked or expressing deep concern. Theatre owners are raising alarms as well.

So there are really two questions:
A) Is this a smart deal for Netflix?
B) Is this a smart deal for the entertainment industry?

I don't think either answer is clear yet — though it may ultimately favour Netflix over Hollywood.

What complicates the calculus is that Paramount's approach has forced Warner Bros. into a position where remaining independent seems unlikely. For anyone opposed to further media consolidation, that is troubling.