Netflix Just Avoided a Huge Headache

When the news broke yesterday that Netflix had dropped out of the monthslong bidding war to control Warner Bros. Discovery—including its massive film library, range of TV networks, and news empire—the streamer’s stock immediately jumped. It was a curious market reaction, but one that seemed to reflect the deep mistrust that Netflix’s investors, and much of the media industry at large, had about the proposed deal. The company has built up huge profits and a gigantic market share partly by avoiding businesses such as movie theaters, cable television, and 24-hour news channels. Why would it suddenly be interested in them?

We may never know what Netflix had planned to do with Warner Bros. Discovery, a conglomeration that houses movie-production companies, HBO, DC Comics, CNN, and various other cable properties, such as Discovery Channel. (In its deal structure, Netflix was going to purchase HBO and the Warner Bros. film studios, while WBD would spin off the less-profitable linear cable networks separately.) But the combination of Netflix’s streaming assets with the HBO Max platform’s prestigious offerings, for example, would have created a force to be reckoned with in the TV world. Some analysts also thought that the Netflix co-CEO Ted Sarandos wanted to take advantage of WBD’s deep media library to accelerate the streamer’s AI-training efforts going forward. No matter what the strategy, Netflix’s final offer of $82.7 billion was steep—and it was unclear if the company would have even surmounted growing regulatory concerns about the possible merger.

Instead, Netflix walks away with a $2.8 billion termination fee, which has been paid by WBD’s new presumptive owner: Paramount Skydance, David Ellison’s company, which encompasses a streaming service, production studios, and several TV networks. The corporation will end up spending $111 billion on the takeover. Paramount initially lost out to Netflix, but finally triumphed after a harried campaign of ever-increasing bids, political gamesmanship, and financial assurances provided by Ellison’s father, Larry, who is the sixth-richest person in the world. That President Trump seemed to favor Ellison in the bidding war may also have helped. (Sarandos visited White House staffers the day that Netflix decided to pull its offer, but reportedly not the president.) Ellison’s desire to purchase the entirety of WBD—CNN included—must have been particularly appealing to Trump, who has said it is “imperative” that the news network be sold.

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Theater-chain owners may breathe a sigh of relief at this turn of events. David Ellison has been publicly committed to the idea of putting movies on big screens for a minimum of 45 days, if not longer; though Sarandos had also loudly claimed that he would honor a traditional release for Warner Bros. movies, many industry analysts were deeply skeptical of this promise. Sarandos has in the past been openly hostile to theatrical exclusivity, prioritizing the at-home viewing experience—a dissonance that spoke to the ultimate confusion swirling around Netflix’s pursuit of Warner Bros. Discovery. Why would the streamer be interested in a business that made money in a completely opposite way from how Netflix made money? Why add a giant company to one with an entirely different philosophy?

There is a long history of media businesses overpaying for movie studios that they ultimately don’t know what to do with. Warner Bros. has already been at the center of multiple transactions that didn’t work out for the buyer, such as the famous AOL–Time Warner merger of 2001, and AT&T’s shambling transformation of the company into WarnerMedia in 2018. Netflix, meanwhile, has grown from a DVD-rental service to a streaming titan by staying very focused on its at-home model; adding a company with far more diverse operations would have created a million new economic headaches for Sarandos and his fellow executives. Netflix’s opportunities for greater expansion may now have shrunk without an empire like WBD on the table, but at least it can walk away with a termination fee and a fairly clean bill of financial health.

Paramount’s gamble is an even more staggering one to consider, though the largesse of Larry Ellison will help assuage certain monetary concerns. In adding WBD to Paramount’s holdings, David Ellison is taking on a company that is almost 10 times its size (Paramount’s market cap is $12 billion, whereas it’s paying $111 billion for WBD). He’s also adding an unthinkable amount of debt to his ledgers, and relying on financing from sources such as Saudi Arabia’s Public Investment Fund, Abu Dhabi’s L’imad Holding Company, and the Qatar Investment Authority. And WBD’s failing linear TV networks, now under Paramount’s umbrella, have little hope of being long-term profit makers.

The results of Paramount’s purchase will likely be layoffs and cost-cutting that run into the billions of dollars, a further consolidation of an already squeezed movie-and-TV marketplace, and the addition of CNN to the CBS News network, which is currently being editorially transformed by Bari Weiss. Critics have begun to ponder what other changes could happen: Under Ellison, CBS got rid of Stephen Colbert’s Late Show—could HBO’s Last Week Tonight, hosted by the even more openly progressive John Oliver, be next? By bowing out, Netflix will not have to answer that kind of messy political question. The future of moviemaking and TV broadcasting remains murky, but the company has halted any potential philosophical transformation, leaving legacy media companies to clean up the mess.