Netflix’s stock jumped nearly 14 percent on Friday, a day after it stunned Hollywood by backing out of its $83 billion deal for Warner Bros. Discovery.
Netflix’s bank account grew by $2.8 billion on Friday, too, when Paramount paid a breakup fee for sideswiping the Warner deal.
And two of Netflix’s top competitors, Paramount and Warner Bros., now have the daunting task of forming one successful company out of their two struggling businesses, all while managing a huge pile of debt. Sounds like a huge distraction.
Did Netflix just win by losing?
Netflix certainly lost Warner Bros. Discovery to Paramount. Its top executives made clear that they would have loved to own the Warner Bros. studio and HBO. But in the end, the company said, it wasn’t willing to pay the price necessary to outdo Paramount.
And it is entirely possible, analysts say, that Netflix will be better for it.
“There are certainly investors that believe that Netflix’s content engagement flywheel is broken” and that it needed the deal, said Richard Greenfield, a media analyst. “But the truth is, Netflix is still producing more hits than everyone else combined.”
Since its founding close to 30 years ago, Netflix has built itself organically into a $400 billion streaming behemoth, hiring away the best talent in technology and entertainment to create a global force that upended the entertainment industry. That is why it surprised so many in the industry in December when the company successfully bid to buy much of Warner Bros. Discovery and take on a lot of debt. The deal also meant that Netflix would be entering a business it had long stayed away from: the shrinking theatrical movie business.
Though the regulatory process was still in the early stages, Netflix had already opened itself up to antitrust scrutiny, both in the United States and overseas, that it hadn’t experienced before. One person with knowledge of the talks said recent conversations in Washington had made it clear that the process was going to be difficult and, coupled with having to raise its bid in response to Paramount’s offer, made Warner Bros. less attractive.
“Our decision not to increase our offer reflects our disciplined financial approach and our clear assessment of value, and was not driven by regulatory considerations of any kind,” said a Netflix spokeswoman, Emily Feingold.
Netflix’s co-chief executives, Ted Sarandos and Greg Peters, held a companywide remote meeting on Friday morning that reiterated why they had wanted Warner Bros., calling it “a unique asset,” but said they weren’t willing to overpay to get it. They reaffirmed that Netflix was a “company of builders, not buyers,” and urged everyone to get back to work.
Now all of those concerns — the debt, the theatrical business and the regulatory pressures — are gone. So is the opportunity for the tech-forward company to exploit Warner Bros.’ 100-year-old library. Many inside the company were excited about the possibilities.
Now they are left with a lot of questions. Will Netflix look to buy something else? Will it now take a genuine interest in the theatrical business? Will it try to poach executive talent from Warner Bros.?
Netflix spends a lot to create shows and movies — $20 billion this year. And that has generated some very successful franchises, such as “Squid Game,” “Stranger Things” and “Wednesday.” Some investors, though, have expressed concern that the company needs to get more out of that spending, and suggested that Warner Bros. could help with that. And there was some expectation that Warner Bros. would bolster some of Netflix’s weaker business offerings: consumer products, video games and its burgeoning out-of-home experiences at Netflix Houses across the country.
Yet Netflix can find other ways to get more out of its money. Many movies and television shows produced by other companies often perform better on Netflix, and those companies are often eager to make licensing deals.
The streaming giant already has significant agreements with many of the major studios, including Sony Pictures and Universal Pictures, where theatrical movies land on Netflix after they end their run in theaters. In December, Amazon announced a surprise alliance with Netflix, which will have access to the James Bond catalog of films, a way to “broaden global reach and re-engage audiences,” as Amazon produces a new Bond movie.
“By moving on so quickly and avoiding further uncertainty for the company — reflected in the recent stock price — Netflix is signaling confidence in the underlying strength of its core business,” MoffettNathanson, a financial research firm, said in a recent analyst report, referring to the $60 billion in lost market value since the deal with Warner Bros. was announced in December. “And the fact that this opportunity was much more offensive than defensive in nature.”
To some, walking away does much more to help Netflix competitively. It asserts to the industry that it is confident in its own business and can now watch from the sidelines while Paramount and Warner Bros. combine into one.
That process will not be simple.
The companies could be locked into regulatory scrutiny for months — the Warner Bros. chairman David Zaslav said Thursday that the deal would take six to 18 months to close. And senior leadership will have to figure out how to deal with $90 billion in debt, a number that will almost certainly force layoffs of thousands of employees.
And then there is the history of it all. Warner Bros. has changed hands frequently for decades. A $182 billion merger with AOL is widely considered one of the biggest disasters in corporate history. AT&T’s deal in 2018 and then Discovery’s in 2022 weren’t much better.
Nicole Sperling covers Hollywood and the streaming industry. She has been a reporter for more than two decades.
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