Talking myself into a Netflix-Warner merger

I still have concerns.

Warner Bros., the storied American media conglomerate, is currently up for sale, but the company has been on an intriguing mergers and acquisitions journey for years now.

After re-emerging in the mid-aughts from the fiasco of the AOL-Time Warner merger¹ and various divestments, it had a good run as a smaller conglomerate. This corporate entity paired one of Hollywood’s premier movie studios with a number of cable channels, notably including HBO (a creative powerhouse) and CNN (a major news brand).

Then in 2016, AT&T (a telecommunications infrastructure company) announced that it wanted to buy them. The Trump administration sued in court to block the merger, which I think was a lowkey fascinating story of recent American politics. On the one hand, a good amount of evidence indicated this was Donald Trump abusing his power to try to punish CNN for negative coverage. But on the other, you had people like obsessive Obama-hater Matt Stoller who hailed Trump’s actions as part of a bold and bipartisan new aggressive approach to antitrust policy that would free us from the shackles of neoliberalism.

At the time, I said that the deal was a business mistake.

There’s a long tradition of American business leaders deciding it would be fun to be the CEO of a movie studio. That’s how the oil company Gulf+Western came to own Paramount at one point and why Columbia Pictures (now part of Sony) was owned by Coca-Cola. AT&T’s ownership of Warner ended badly, and they spun the entertainment conglomerate out via a new purchase that created a new larger conglomerate called Warner Bros. Discovery.

This company has had some success recently as a movie studio,² but I would say it’s failing at its main strategic objective, which was to compete head-to-head with Netflix.

Way back in 2012, around the time Netflix started investing in original shows, Ted Sarandos, who is now the co-CEO of the company, said “the goal is to become HBO faster than HBO can become us.” For Netflix, that meant learning to produce quality original content. For HBO’s owners, it meant they needed to leverage the HBO brand into a full-service “our app could be your life” streaming service full of content from Warner’s extensive library of films plus Discovery’s big pile of basic cable staples.

I watch a lot more HBO Max than Netflix and feel, on a personal level, that their strategy has been pretty great. But the marketplace clearly disagrees with me —Netflix is a dramatically more popular service.

Now that Warner Bros. is again soliciting bids, it has received interest from three potential buyers. One was Netflix itself, one was Paramount (a smaller movie studio that was recently purchased by David Ellison, whose dad happens to be the second richest man in the world), and the third was Comcast, which already owns NBCUniversal.

Warner accepted Netflix’s offer. But, this is now being countered by a hostile takeover offer from Paramount, which is offering all cash and participation from Jared Kushner and the sovereign wealth funds of Saudi Arabia, Abu Dhabi, and Qatar.

There’s obviously something quite alarming on a political level about regime-aligned billionaires teaming up with Persian Gulf autocracies to gobble up American media properties. I would much rather see Netflix, whose executive chairman Reed Hastings is a great moderate Democrat and whose CEOs seem largely apolitical, grow than see this Ellison-Kushner behemoth expand. I’m also very worried that once again leftist antitrust enthusiasts are going to be useful idiots for a Trump administration abuse of power that gift wraps the prize for his political allies.

But for the sake of world culture and movies — especially theatrical movie-going — my first instinct was definitely to prefer Paramount. And yet after debating it with myself for a few days, I think I talked myself into Netflix being fine.

Antitrust in two-sided markets

Closer to my real bailiwick of public policy, I don’t think there’s any serious antitrust issue here.

Yes, it’s a big merger that needs to go through a review. One of the realities of antitrust enforcement is that getting sued by the government is a big, expensive pain in the ass, so a company might reasonably drop a merger that the government objects to even if they think they can prevail in court. But if they did take this court, it seems to me that the companies have a very strong argument. Even though a Netflix-Warner combo would be a dominant player in the “subscription streaming video market,” the actual market here — “videos you can watch” — is extremely competitive.

In other words, while Sarandos might have been talking about competing with HBO 13 years ago, today they’re competing with YouTube and Meta and TikTok. In a world where everything is television, you can’t really monopolize the streaming market. What’s more, OpenAI’s Sora service is around the corner and will feature Disney characters.

Speaking of Disney, it’s also important to note that a Netflix-Warner merger would not create a bona fide streaming video monopoly — the Disney streaming service is a strong competitor, and while Peacock and Paramount+ are comparatively tiny, they do exist. The Ellisons and their partners are offering over $100 billion in cash in their hostile takeover bid. If they lose it, perhaps they’ll invest tens of billions of dollars in financing new Paramount content instead and build it into a more robust competitor. Or Paramount and Comcast could merge, which would create a more credible library, and then they could invest in lots of new content.

If you look at who is objecting to this Netflix-Warner merger, both the Writers Guild of America and the Teamsters have come out swinging against it. The Directors Guild and the Screen Actors Guild issued more measured statements expressing significant concerns.

And these stakeholders are right to be concerned. It is clearly better for creatives to have a larger rather than smaller number of outlets to pitch to. It’s better for creatives if companies contemplating spending money on buying Warner instead spend money on making more new stuff, while Warner either continues to exist independently or else gets bought (as it has been so many times in the past) by someone from outside the entertainment industry. If there has to be consolidation, the best buyer by far would probably be Apple, which is currently running only a modest original content business.

The prevailing legal doctrine is that these objections from producers don’t really matter, that antitrust law exists to protect consumers who are downstream from the merger, not producers who are upstream from it.

Years ago, I was intrigued by the idea that this is perhaps a mistake and that antitrust should consider labor interests even when doing so is bad for consumers.

But the post-Covid, post-inflation political environment has left me with grave doubts that it is possible or desirable to ask people to deliberately swallow higher prices for the sake of labor. And I’ve also been struck that the neo-Brandeisians who were early pioneers of the idea that antitrust should care less about prices have spent the past five years claiming that their ideas hold the key to low prices.

So if even the people who most vocally opposed the consumer welfare standard aren’t willing to actually bite the bullet and say “we’re doing something that is bad for consumer welfare,” I think that shows we’re in practice stuck with the standard. And I don’t see any real reason to think that mergers in this area will be bad for consumers, especially given the low barriers to entry.

The future of cinema

The lack of barriers to entry is especially relevant on the movie production side.

Consolidation of streamers is bad for the Writers Guild because it will probably lead to fewer scripted television shows being commissioned. I’ve heard cinephiles express the same concern about movies, but I don’t think it really applies to feature films in the same way.

Traditionally, distribution was a big barrier to entry in the feature film business. Independent films were stuck with limited releases on the “arthouse” circuit, not just as a matter of judgment about their box office potential, but because suburban cineplexes didn’t want to waste scarce screen space on them. A big movie studio, on the other hand, could use its clout to get something in theaters.

One consequence — I won’t call it an upside, but it is a consequence — of the general decline of theatrical movies as a business is that this is much less of a problem than it used to be.

As the traditional big Hollywood studios have consolidated, you’re hearing more and more about newer startup players A24 and Neon. That’s in part because they’ve made some savvy decisions about production and acquisitions. But it’s in part because theaters are hungry for inventory. The Chilean movie “A Fantastic Woman” won the Academy Award for best foreign language film and peaked on 190 American screens in 2018. The Norwegian drama “Sentimental Value” (which is great, you should see it) is currently playing on 334.

The thing that could squelch distribution would be consolidation of the movie theater industry — if Regal merged with Cinemark, for example. But that’s also probably going to be unavoidable in the future because the business of operating a movie theater has fallen on very hard times.

And this is where it seems to me that Netflix vs Paramount as a buyer makes a big difference.

Netflix says that if the deal goes through, they’ll honor all existing agreements with regard to theatrical distribution. And Netflix has, in fact, been putting more of its original movies in theaters, and I think they’ll probably continue to do so as long as there’s money to be made selling movie tickets. And if they decide they don’t want to commission feature films that play in theaters, directors who want to make such films will just make them elsewhere. On that level, it’s all fine.

What’s not fine is that buying Warner Bros. also meaning buying all of their intellectual property, which includes all the DC comics characters, the Harry Potter universe, Dune, Rocky, Godzilla, among other things.

I don’t think Netflix will, like, forget to make a Superman sequel. But generally speaking, their corporate culture is oriented around creating streaming television shows because that’s their core business. If Netflix decides to do a Dirty Harry remake, it would be a television show rather than a movie. For some reason, James Gunn decided it would be a good idea to try to make a Clayface movie and put it in theaters. That’s what movie studios do, they come up with ideas to put in movie theaters. Netflix would probably treat second-tier IP the way they treat their annual output of Christmas films and just dump them on the app, because the app is their core business.

My concern is that the movie theater industry is in such a weak state that we don’t need to worry about consolidation — we need to worry about lack of inventory leading to total collapse.

We’re a long way off from the era when the screens were so crowded with blockbusters that it was hard for a serious drama to reach audiences. We’re instead in a world where if we don’t get a few big hits per year out of the DC Universe, we’re going to see more and more theaters close and there will be literally nowhere for movies of any kind to play.

That’s not to say zero movie theaters. But it will become something more like live theater or ballet, something available to niche audiences in major cities but basically nonexistent as part of the mainstream experience. This is quasi-inevitable over the long term (eventually we’ll all have something like VR headsets or special glasses that replicate the big screen experience at home). But I think Paramount would be inclined to continue with the current corporate strategy of “managed decline,” while Netflix would accelerate it.

I also have to say that while I don’t share the Ellison family’s politics, if you’re just trying to do propaganda on behalf of the Trump administration, you could just buy CNN; there’s no need to buy a giant movie studio. David Ellison is clearly the kind of ego-driven rich guy who wants to own a movie studio because he thinks that’s a fun idea — which is the kind of owner cinephiles should want for movie studios.

The case for Netflix

On the other hand, even though I like going to the movie theater, I think it’s a little bit ridiculous for people to get overly precious about this.

As is the case for most millennial movie fans, my introduction to the great works of cinema came primarily at home, on VHS or cable, and primarily on low-definition television screens.

I have managed to see The Godfather and Blade Runner and Star Wars and The Rules of the Game and Apocalypse Now in movie theaters, but these are all films that I came to love at home. And I’ve never seen Reservoir Dogs or Goodfellas or Vertigo or a dozens of other great movies in theaters. When the 2002 Sight and Sound “greatest films of all time” list came out, I checked out a bunch of movies that I’d never seen before at home. And the great thing about watching Cléo from 5 to 7 or Beau Travail or Do the Right Thing at home in the 2020s is that the screen and sound system I have at home are so much better than the ones I watched movies on in the 1990s.

What really matters here is the art of film, not the business of movie theaters.

And even though Netflix absolutely churns out a lot of slop, to their credit, they have also worked with Martin Scorsese, the Coen Brothers, Noah Baumbach, Spike Lee, David Fincher, Jane Campion, Alfonso Cuarón, and other great directors on movies. This is actually not a company that is hostile to talent or creativity or art. If anything, I would say that the Netflix prestige plays have suffered from what seems like maybe not enough suits meddling with the creatives. They seem good at identifying people who audiences are interested in and letting them cook, but maybe these projects would actually benefit from bringing some traditional Hollywood development execs on board.

A friend also pointed out that people outside the core film bro demographic appreciate that Netflix, unlike the legacy studios, remains committed to the rom-coms, historical drama genres, and other programming that’s more popular with women.

My most optimistic take would be this: Netflix is a very smart and impressive company. They started in the relatively recent past as a company whose business was sending people DVDs in the mail, and the “net” part was that you could browse the catalogue on a website. They pivoted successfully into streaming, and then pivoted successfully into original programming, facing down haters and skeptics all the way. Warner has probably the single most culturally significant back catalogue of old movies, and HBO’s ability to reliably produce high-quality dramatic television is unmatched. These seem like great assets, but they haven’t produced a great streaming era business.

Netflix taking over could mean the end of movie theaters, a back catalogue that is never seen, and an endless parade of low-quality Batman television shows. But in principle, uniting the incredible cultural assets and know-how of WBD with Netflix’s business savvy and technology could be an incredible win-win for the concept of long-form scripted entertainment as it faces down competition from YouTube and endless parades of vertical video.

1. There’s of course a whole larger corporate history here involving Time Inc., its merger with Warner Communications to form Time Warner, and many other things, but we can only go back so far.

2. Warner put out the #1 movie of the year (Minecraft), finally beat Marvel in the superhero sweepstakes (Superman), delivered the surprise commercial success of the year (Sinners), made the Best Picture favorite (One Battle After Another), and also dominated the rank of solidly profitable midlist films (F1, Conjuring: Last Rites, Weapons, Final Destination: Bloodlines).