The Netflix management is not used to making a case out of defense. Throughout most of its history, the company has set the trends of the streaming business, and not followed them. That became different when the company announced that it was going to acquire some of the key assets of Warner bros in a deal valued at close to 83 billion dollars, a move that shocked investors and also left Netflix with its long held status of buying companies without embarking on huge acquisitions.
This announcement came after the recent earnings report of Netflix and right away created market anxiety. The streaming giant dropped nearly 4 percent early on in trading, and the decline stretched further, eliminating over 15 percent of its market worth since the initial announcement of an offer to acquire the assets of Warner Bros in early December. To a company which in many cases has been rewarded by markets on the basis of discipline and clarity the response portends profound doubt as to whether this acquisition fits the DNA of Netflix.
Netflix co-CEOs Ted Sarandos and Greg Peters were left to deal with issues they do not have to encounter much: has the company gone too far? The size of the Warner Bros acquisition is a drastic contrast to the Netflix mantra of building, not buying, a philosophy that enabled the company to expand its range of services beyond a DVD by mail operation into the most powerful streaming platform globally. This time around, however, Netflix is halting share buybacks and consuming tens of millions of dollars in deal-related expenses to go after a legacy Hollywood empire.
Sarandos packaged the move as a reaction to the extent to which the entertainment industry has evolved. The reason he highlighted is because technology companies have transformed the attitude of the audience, and that Netflix could not sit back and watch the competition change. YouTube, which is owned by Alphabet, was mentioned as one of the prominent examples of how the conventional concepts of television viewing have been shaken, and even the giants started to contemplate their strategies.
This, as per the co-CEOs, was not a deal that Netflix went to make. Peters clarified that the company was going into due diligence process without any form of anticipation that it would make a formal bid. This changed when the executives got a closer examination of the assets of Warner Bros. Peters said there are a few things that we saw when we got into the hood and they were just really exciting. The comment was reflective of the tone Netflix has taken since the announcement: tepid excitement and an understanding that this is a foreign land.
The core of the transaction is that Netflix is trying to remain on top of the competition arising. Paramount Skydance has also entered into the aggressive bidding scene with an offer of $82.7 billion in all cash to take over Warner Bros film and television studios, its massive content base and universally known franchise including game of thrones and Harry Potter. In that regard, the bid by Netflix is not merely expansion, but also avoiding members of the industry to accumulate assets that would change the competitive landscape in the industry.
The reemergence of theatrical cinema in terms of Netflix is one of the most vivid aspects of the argument of the company, which in the past considered theatrical cinema to be the secondary form of activity at best. Over the years, Netflix has been setting up as the future of entertainment, and it diminished the use of movie theaters in the on-demand streaming era. Peters admitted such change publicly. We have discussed in our Netflix history several times whether to build a theatrical business but we had other business to invest in and it never occurred to us to make it our priority. However, now having Warner Bros they have come up with a mature well-managed theatric business with awe-inspiring films, and we are over the moon about that inclusion, he said. The comment is a sharp contrast to the previous perceptions that theaters were going out of business.
The streaming aspect of the deal has a lot of symbolic importance other than in theaters. The flagship of the TV products of the company is HBO, which is highly considered as one of the strongest brands of high quality entertainment. Peters had few words to say of its value. And then there is the streaming side, HBO. It is an amazing brand. It claims prestige television is superior to practically anything. Customers know it. They love it. They do know what it means, he said. In the case of Netflix, which has taken years to establish its reputation as a high-quality originator, the acquisition of a brand with such cultural notoriety would support its dominance in the scripted television business.
The television studio of Warner Bros also contributes greatly into the reasoning of Netflix. Peters says that it is a healthy and well functioning business and it supplements the production infrastructure that Netflix already has in place. It is not merely to gain content, but to increase Netflix ability to produce content at scale which incorporates the traditional studio skills of Warner and the data-driven storytelling and distribution capabilities of Netflix.
Nonetheless, investors still do not believe. The fact that share buybacks have been suspended in order to finance the acquisition has cast doubt on capital discipline especially at a time when all markets are less tolerant of huge bets with unpredictable payoffs. Netflix claims that the acquisition is consumer-friendly and worker-friendly, phrasing that is supposed to comfort both consumers and the industry community that the merger would not be at the cost of creativity and affordability. However, the grandiosity of the deal is bound to stir fears regarding the problem of integration, cultural conflicts, and regulatory oversight.
Industry wise, the deal highlights the fact that the boundaries between old Hollywood and Silicon Valley are now so thin. Netflix as the disruptor has now taken up the assets that characterized the traditional studio system. Such development might be inevitable in a marketplace in which scale, intellectual property and global presence grow to be key determinants of success. Meanwhile, it casts doubt on the idea that Netflix will be able to maintain the nimbleness that served as its driving force as it assimilates as an organization as complicated as Warner Bros.
