What is the significance of the announced Paramount-Warner Bros. deal?
We’re at the endgame for the streaming media industry. Netflix has kept growing, growing, growing. Disney bought Fox in 2019 to get scale with its Disney Plus, Hulu, and ESPN services. And Amazon Prime Video is in the mix because it comes with an Amazon Prime subscription.
That left a bunch of smaller players—HBO Max, Peacock, Paramount+. Those companies needed to get together to get scale. They didn’t have global reach. And while they had done well on their own within the U.S., things didn’t look great compared to what Netflix has achieved within the U.S.—90 million subscribers and $18 a month recurring average revenue per user. So this was a battle to consolidate the last legacy businesses. This was Paramount Skydance’s chance to compete in the streaming business.
Netflix turned it into a bidding war. Why were they involved?
Netflix’s entry surprised us. It surprised the market. Netflix has already won the streaming wars. They built their business without owning any studio assets, so it was a really surprising move.
I think they saw a couple of things that interested them. Something like half the streaming on Netflix is legacy library content. Warners has a great library. The catalog of content from HBO, Warner Bros. television, and Warner Bros. film plays really well in streaming. So there was an appeal to owning that library versus paying to license it or losing access to the content if Paramount retained it exclusively for their own streaming services.
For Netflix, Warner Bros. would have been nice to have. Paramount needed it. Without this deal, I’m not sure how Paramount would scale enough to stay in the game.
And I think Netflix had a particular interest in HBO. Historically, U.S. entertainment companies really didn’t have the same scale of opportunity outside the U.S. “International” used to mean English-language markets. Netflix has totally turned that on its head with its strength in Asia-Pacific and European markets where English is not the first language. More than 50% of revenue comes from international. It’s pretty remarkable.
I think Netflix looked at HBO and said, “We could make HBO Max a second service and scale it globally.” HBO is a strong brand with great content and a loyal audience in the U.S. But internationally, HBO has really under-penetrated. Netflix proved a global model could work. And I think they saw a chance to apply that knowledge again with HBO.
Within the last year Warner Bros. was at a $20 billion valuation. The final deal was for $110 billion. What happened?
I have to give credit to [CEO and president] David Zaslav, which is something that people usually don’t do because, under his leadership, Warner Bros. Discovery was a really challenged equity. Since Discovery bought Warner Bros. from AT&T in 2022, the stock had gone from $30 to below $10 a share.
But Zaslav recognized that, like the “good bank/bad bank” dynamic we’ve seen in several financial crises where part of a bank is still viable if it can get rid of an underperforming part, Warner Bros. Discovery had a “good media/bad media” situation. HBO and Warner Bros. are the good; the cable networks are the bad.
Nobody wants assets that are in structural decline, so for a time, it didn’t seem like there would be a bidder beyond Paramount Skydance. Paramount has its own cable network businesses. When they look at Warner Bros. Discovery, in addition to scale in streaming, they see a chance to slow the erosion of cable network profitability through scale and synergies.
But then Zaslav proposed separating Warners’ streaming and studio businesses from the cable and network businesses. That attracted Netflix’s interest. The entry of Netflix was great for Warner Bros. Discovery shareholders. It took months to get a winner in the bidding war. Paramount moved very slowly. When they finally put out a $31-per-share offer that topped Netflix’s $27.75-per-share bid, Netflix pulled their offer in a nanosecond.
That led people to speculate that Netflix was bluffing all along. I don’t believe that. For Netflix, Warner Bros. would have been nice to have. Paramount needed it. Without this deal, I’m not sure how Paramount would scale enough to stay in the game.
Paramount will take on a lot of debt to do this deal. Are they in a position to succeed?
I’m somewhat skeptical. I think the debt is challenging. They say between the Paramount and Warner Bros. studios, they’re going to make 30 movies a year. We’ll see about that. They say there are going to be synergies and cost savings. We’ll see about that.
I’ve learned over my years of doing this that mergers in media typically don’t work. I can tell you from working at Time Warner, when those companies merged and then added AOL, meshing cultures is really hard. We’ve seen difficulties with Disney Fox, Warner Bros. Discovery, CBS Viacom.
The synergies tend to be human capital synergies. And the apparent cost savings, in the end, may actually hurt revenue because you lose people who were revenue generators. Debt-induced caution with spending on production may mean you end up missing out on big hits—there’s a randomness to film production. And slowing the erosion in linear cable isn’t actually a fix. So there are lots of questions here. Very often, the gift of winning is not much of a gift.
What does the deal mean for consumers?
I personally think that it would have been worse for consumers if Netflix had won. I’m a fan of seeing movies in theaters. If Netflix had acquired Warners, over time, we’d likely see fewer films in theater, the film industry would’ve been hit harder, and Paramount would have been very weak. That would effectively have left a duopoly between Netflix and Disney Plus.
Here, even if they face significant challenges, there’s a chance for Paramount and Warners to create a viable competitor to Netflix and Disney. [Paramount Skydance CEO] David Ellison says he will keep spending on content and production, which is good for consumers. He believes in movie theaters, which is also good. So I think it’s a better outcome than if Netflix had won.
Do you see any regulatory hurdles that would threaten the deal?
I think Paramount will do whatever they need to get this deal done. Internationally, it may take some time. State attorneys general may ask for some changes but as long as they don’t hurt the streaming and studio capabilities, that will get worked out. I don’t think there’s anything that could quash the deal.
And while I think Netflix ultimately backed away because the cost got too high, I suspect the board of directors at Warner Bros. wondered whether a merger with Netflix would get approval in a timely fashion. Donald Trump has made clear his support of the Ellisons and Paramount as winner.
In the first Trump administration, the Department of Justice drew out the process of the AT&T merger with Warner for so long that it ended up hurting the combination. The parties certainly recognize that the DOJ is more politicized now than before, so it’s not too surprising we ended up with the deal that has administration support and a greater certainty of quick closure.
CNN is owned by Warner Bros. Discovery. Is there a concern about the Ellison family, with its ties to the administration, taking over a news outlet that President Trump has criticized for so long?
Given what we’ve seen with the Ellisons at CBS News and 60 Minutes since Bari Weiss was brought in, I do worry that the truth will not be something that their news organizations chase. I worry that kowtowing to power will be the priority and that will produce a society that is less informed.
Maybe we will see capable executives at CNN who have enjoyed great freedom leave if they find they’re being told what to do. Maybe HBO executives will leave if they feel constrained. It’s not an accident that HBO has great content. Casey Bloys has done an amazing job. I’ll be watching to see if he sticks around. If great people leave and that shows up in what we see on screen, maybe it will damage the business.
But it’s not my working assumption that consumers react by disconnecting from politically influenced companies in large numbers. I’d like to say that kowtowing to politicians is bad for business, but I don’t know if that’s true. After Facebook’s Cambridge Analytica scandal in 2016, after the issues around child safety were raised, lots of people talked about deleting Facebook. But Meta keeps on rolling. Instagram keeps on rolling.
Everything we’ve talked about falls under the umbrella of media. But it doesn’t seem like these companies are exactly competing in the same market.
How you define the market is a real question. If we’re talking paid streaming, Netflix is the dominant number one. But the other major players have different strategies and different sources of revenue, so the overall success of those companies may not depend on the metrics that matter most to Netflix.
Amazon is a very big player, but they aren’t really competing for subscribers. The Amazon Prime Video platform exists to incentivize people to stay subscribed to Amazon Prime—to keep people shopping.
Disney is competing for streaming subscribers, but they also have studios that are an important part of their business. That’s the model Paramount and Warner Bros. will have.
And YouTube uses a content aggregation model. We recently did a note arguing that YouTube is the most valuable media company. It’s actually the largest revenue company in media—bigger than Disney. It has $62 billion in revenues—two-thirds from ads, one-third from subscriptions. People constantly overlook the importance of YouTube in the ecosystem. As a company that’s truly at the intersection of media and technology, YouTube is well-positioned for AI.
How is AI shaping the ecosystem?
Early in my career, I covered music. There was a lot of discussion in music companies about how much consumers had invested in stereos and massive speakers, how they would be reluctant to listen to music on their computers or their phones. We know how that turned out.
In terms of AI being part of creating content, I think, whatever the initial reaction, with time people will increasingly just focus on, “Is it good or not?” They will be less and less hung up on who made it and how it was made.
There’s reason to worry about AI’s impact on legacy media. But a generation of YouTube creators have already bypassed traditional media. They have viable models for monetizing their content. As AI tools get better it’s only going to accelerate their ability to tell stories.
It also accelerates platforms’ ability to target audiences, to identify what do you want versus what I want. Better tracking and targeting will help platforms monetize content. We already have all these platforms—YouTube, Meta, Spotify, Roblox—using a platform aggregation strategy. AI is going to enhance aggregators’ position. How long until we have another cycle of innovation and consolidation? How long will Netflix be the dominant source of premium content?
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