One party that has unexpectedly climbed at the top of the list for candidates to acquire Warner Bros. Discovery is Netflix. Despite a previous report stating Netflix was mainly interested in driving up the price for Paramount Skydance, the streaming giant has actually made significant moves to purchase the company. After securing the services of an investment bank, Netflix CEOs Ted Sarandos and Greg Peters were said to "really want" to acquire Warner Bros.
Now, a new report seems to indicate Netflix might be more committed in the sale than previously thought. According to Bloomberg, Netflix has informed Warner Bros. Discovery that, should a merger between the two occur, it will continue to release the studio's movies in theaters. Per the report, Netflix also plans to honor WBD's contractual agreements for theatrical releases.
This is a significant potential development. Netflix honoring WBD's previous deals is to be expected in case of a merger. They are, after all, contractual obligations. What's significant is the streamer's purported vow to keep releasing movies in theaters. A previous report from The Wrap stated that Netflix was slowly warming up to the idea of theatrical releases. As such, it's an evolution that's been coming for some time. However, acquiring Warner Bros. Discovery would fully thrust the streamer into the theatrical business much sooner than it seemed like it was going to happen.
Michael O'Leary, CEO of Cinema United (which is in charge of representing theater owners worldwide), expressed skepticism over Netflix's long-term focus on theatrical distribution: "Netflix's apparent agreement to abide by existing contractual obligations that they might inherit says nothing about a meaningful commitment to theatrical exhibition."
It's important to note that concerns for the future health of the theatrical industry extend to buyers other than Netflix. In a recent report, for example, a theater executive told The Wrap that Paramount merging with WBD was a "red alert" situation, given the potential diminished theatrical output from both companies.
Despite this interest, Netflix acquiring Warner Bros. still appears to be a challenging task. Benjamin Swinburne, an analyst for Morgan Stanley, cast doubt on the viability of a Netflix-WBD merger (via The Hollywood Reporter). Swinburne stated that, out of all the interested parties in the ongoing sale, Netflix, "may have the smallest synergy opportunity and perhaps the toughest regulatory path [to close the acquisition]"
Swinburne also proposed that a deal of this scale could lead to pressure on the financial performance of Netflix's newly acquired WBD properties, which might, in turn, result in Netflix needing to grow at a faster rate to justify the spend on such assets:
"Such a transition would take time, as TV distribution is built on run-of-series agreements and multi-year licensing deals and talent relationships would likely require some in-production films to still see theatrical distribution. Long-term, however, this kind of business model pivot would put downward pressure on the earnings power of the acquired businesses, which would need to be recouped through faster growth at core Netflix to justify the acquisition price, if a deal were to be announced."
Following Swinburne's analysis, on Wednesday, November 19, Netflix's stock fell to $109.57 per share—a 4% ($4.51) decrease.
Adding to the potential hurdles the streamer could face in a merger of this scale, California Representative Darrell Issa sent a letter to government officials, expressing potential anti-trust issues concerning a Netflix-Warner Bros. deal:
"As you are aware, Netflix is already the dominant streaming platform in the United States and permitting it to absorb a major competitor raises antitrust concerns that could result in a harm to consumers. With more than 300 million global subscribers and a vast content library, Netflix currently wields unequaled market power. Adding both HBO Max's subscribers and Warner Bros.' premier content rights would further enhance this position, reportedly pushing the combined entity above a 30 percent share of the streaming market: a threshold traditionally viewed as presumptively problematic under antitrust law."
Netflix's odds in acquiring Warner Bros. Discovery will likely become clearer after details on the first round of bids for the studio come in.