Why Is Warner Bros. for Sale at All?
The Golden Globe nominations came out on Monday, and two films dominated: One Battle After Another with nine nominations and Sinners with seven. On the television side, The White Lotus led with six nominations.
These productions have something in common: They are all products of Warner Bros. Discovery (WBD), which has also dominated the box office this year. A record seven straight Warner Bros. releases debuted with more than $40 million in receipts in their opening week this year, the most consistent run of success in movie history.
This all begs the question: Why did a critical darling and commercial juggernaut publicly auction itself off, and why is it now caught in a bidding war between Netflix, with which Warner Bros. agreed to a merger last week, and Paramount, which made a hostile takeover bid on Monday? What is a successful movie and streaming studio, whose finances are going to look better once it sheds its dying cable channels as planned, so desperate for a new corporate parent?
Understanding why demonstrates the pathology of the modern economy, Wall Street’s drive to consolidate, and why Americans feel helpless in an age of corporate power.
THE SIMPLEST ANSWER FOR WHY Warner Bros. wants a merger is to cover for other failed mergers. The history is long and complex, but here’s a short version: Warner Communications was formed out of the historic Warner Bros. studio and other assets in the 1970s, and merged with Time, Inc., to form Time Warner in 1990. Time Warner merged with AOL, known famously as the “worst merger in history,” in 2001, leading to a decade of downsizing and spin-offs; Time Warner was eventually left with Warner Bros., HBO, and the Turner network of channels that included CNN, TNT, TBS, TCM, and others. AT&T then bought Time Warner in 2016, surviving a protracted challenge from the Trump administration. If that wasn’t the worst merger in history, it was the second-worst, leading to a spin-off within a couple of years and yet another merger with Discovery Media. We know how that worked out, since WBD is on the block once again.
These mergers created a horrific financial legacy: $53 billion in debt as of 2022. Each was attractive in its time to executives and corporate synergists, but bad for the actual business. The creative talent managed to thrive despite the mismanagement, building on the reputations of HBO and the Warner Bros. studio. But the debt left the company in constant crisis. And the real driver of the merger wave was not the promise of creating a successful end product, but money. David Zaslav, who only took over WBD three years ago, is promised up to a $500 million payday if a sale closes, because his contract allows his 21 million share options to immediately vest in that circumstance.
Alongside this, we have the disruption of the entertainment business in general. The industry moved headlong into streaming without a business plan for how to make it profitable. It retained legacy cable assets that now exist as zombified entities that play an endless loop of reruns and old movies. That devalued the WBD conglomerate even more, as eyeballs drifted from its cable offerings.
Before the merger announcement, Warner Bros. was planning to follow in Comcast’s footsteps and split off its cable channels into a separate company. The proposed Netflix deal is only for the Warner Bros. studio, HBO, and HBO Max; Paramount wants the whole shooting match, presumably so they can MAGA-fy CNN in the same way they did CBS News, or perhaps because David Ellison is ridiculous enough to think he can reverse time back to 1986 and make a cable network conglomerate work.
Why did companies switch to streaming without a business plan? In part, that’s a story about Netflix, Amazon, and Apple forcing the industry’s hand. But it’s also in part the culmination of a long game to marry production and distribution, the way it was in the early days of film. Theaters back then were owned by the studios, with Warner Bros. pictures on display at Warner Bros. theaters and nowhere else, and so on. This vertical integration ended with the Paramount decrees of 1948, which separated film production and distribution. Television, through the financial syndication rules, had similar structures to prevent monopolization and ensure people were paid fairly for the value they created.
But 70 years later, the first Trump administration, under the direction of Justice Department Antitrust Division chief Makan Delrahim, ended the Paramount decrees, explaining that the studios weren’t major theater owners anymore and distribution channels were varied and resistant to monopolization. Delrahim, now a lobbyist, has been hired by Paramount in its bid to acquire Warner Bros.
Delrahim’s insincerity in dropping the Paramount decrees is now on full display. It turns out there is a way to consolidate film production and distribution into one company: That’s through streaming. Netflix licenses, produces, and exhibits its own programming, as do the other major streamers. And if Netflix acquired Warner Bros., it would be able to consolidate even more, including by hoarding the Warner Bros. film library, which would undoubtedly be restricted to only them and not their competitors.
The streaming world has recapitulated the pre-Paramount decree era, and its biggest companies are positioned to profit in much the same way, by fixing prices and muscling out competitors. Netflix, the nation’s number one streamer, has raised prices 125 percent in the past decade, and you can bet it will continue that trend if it gets HBO Max, the number three streamer, in its fold. Just as in the early motion picture era, a lid has been kept on the number of movies produced, and now theatrical windows have shortened, which threatens the financial viability of thousands of screens nationwide. Every movie theater is a competitor to Netflix’s potential dominance of distribution through streaming, so claims that Warner Bros. will continue to release films to theaters on the same schedule it’s followed up to now are just not credible.
Once ensconced as the main channel to access entertainment, Netflix can control what stories are told and how much the storytellers will make; already, we’re seeing it draw more from cheaper international sources of content and shortchange talent in the U.S. Higher prices for consumers and lower wages for producers is a recipe for a dead industry that looks nothing like it did as the global entertainment leader since the invention of the moving image.
The oligarchs and Trump hangers-on coming together to try to bully their way into giving Warner Bros. to Paramount instead of Netflix have different designs but will fundamentally lead to the same outcome: ruining Hollywood. A merged Paramount and Warner Bros., with Jared Kushner and a bunch of Middle East sovereign wealth funds behind the scenes of the financing, simply wipes out one major Hollywood studio entirely, just like the sale of Fox assets to Disney. We can expect the same drastic impact on theaters that the Netflix acquisition will have. Paramount+ is the number five streamer, and while not immediately presenting as drastic a consolidation as the Netflix bid, it still reduces options for consumers for streaming and for producers for bids for their services. There’s nothing much better here, and then you add in the MAGA attempt to control information flow through corrupting news media.
By the way, both deals lead to the creation of more debt. The Paramount proposal is predicated on a $54 billion bank loan, and the Netflix bank loan is $59 billion. For decades, failed mergers have created a wall of debt for Warner Bros., and a new wall of debt is being built through yet another merger.
FOR SOME REASON, THE PERVASIVE REACTION to this bidding war between Netflix and Paramount has been to choose sides, based mainly on your political persuasion. A Netflix deal, liberals believe, at least doesn’t put CNN and CBS under the thumb of Trump allies. To conservatives, that’s the promise of a Paramount deal. And in the Trump era of politicization of antitrust, we hear about secret meetings between the president and Netflix or Paramount executives, and gauge our preferences accordingly.
Yet this blinkered way of thinking about the economy, this idea that we simply must tolerate more Hollywood consolidation, and the best we can hope for is something that aligns in some way with our political beliefs, is completely wrong. Functionally it’s wrong, because state attorneys general can choose to use the Clayton Act to challenge either of these mergers, and they would have good precedent to block this attempt at monopolization. What the Trump administration wants is immaterial to the opportunity state AGs have to scrutinize either a Netflix or Warner Bros. deal.
But more than that, it presumes that Warner Bros., a historic American company that is doing about as well as it ever has, simply must sell itself. This “there is no alternative” mindset, sold by Wall Street for 40 years, has warped our thinking. Especially if the cable channels are split off, Warner Bros. can be a profitable company, with no need to indulge its executives’ dreams of a quick payout.
It is incredibly distressing that practically no leading California Democrats outside of Rep. Ro Khanna said a word about this situation until yesterday, when gubernatorial candidate Tom Steyer spoke up to oppose any merger with Warner Bros., either from Netflix or Paramount. “There are two ways to win in a competitive business: do a better job or kill your competitors,” Steyer said in a statement. “Were either Paramount or Netflix to buy Warner Bros., they would be doing the latter—dramatically reducing distribution options in the process. That’s the definition of what antitrust is supposed to address.”
Good for Steyer, but where is everyone else? It’s their constituents in Hollywood, to say nothing of every entertainment viewer, who are going to get hurt by this. But the executives who want to keep the consolidation train going are donors or potential donors to these pols, so they stay silent.
We have to break this poverty mindset, that all we can get, all we deserve to get, is the best possible consolidation under the circumstances. Illegal deals are illegal deals. The best outcome for all involved would not only be a reinvigorated Warner Bros. whose creative talent is allowed to make compelling entertainment people want to watch, but a renewed commitment to structural separation of production and distribution. State enforcers can ensure at least some of that by committing to challenge whichever merger emerges. That’s the beginning of the only avenue to a brighter future for Hollywood.
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