Netflix WB Merger will be a disaster

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Already, filmmakers are coming out anonymously saying that the streaming giant, if the deal goes through, would “Hold a Noose Around the Theatrical Marketplace.” Just the fact that creative powerful storytellers are afraid of opposing this deal publicly should tell us something. The deal looks illegal and is likely to face a merger challenge, which I’m going to go into. It may ultimately even prompt a monopolization case against Netflix....

David Zaslav, is a reviled executive who has done a poor job for shareholders and filmmakers, but will nonetheless get paid $500 million if the deal closes. But Zaslav is just the help, the real power here is cable billionaire John Malone.

There were multiple bidders in the process. Comcast/NBC and Paramount were the others, they owned traditional studios. Netflix, however, is different. It doesn’t release its content into theaters, and most people think that the goal of Sarandos is to kill the entire movie theater business in favor of streaming.

One very obvious problem with this deal is that movie theaters right now are in a precarious position, and Netflix will likely push them over the edge. A theater needs a certain number of new releases to be profitable, and are very close to that line right now. Previous mergers have actually cut the number of theatrical releases.

Before Disney acquired 20th Century Fox in 2019, those two studios combined for an average of 24 wide release (1000+ theaters) films annually. Over the last three years, the merged studios have only released an average of 14 films annually – a 44% decline.

Netflix is the number one streamer, and would be buying the number three streamer. It would also be buying a large and important content library, which would presumably then be unavailable for potential rival streaming services. A Netflix-Warner merger is a recipe for monopolization, and would be a pretty straightforward challenge for an antitrust lawyer under the Clayton Act. Judges are always a crapshoot, but the story here is clear, and recent analogies work against this deal.

Yesterday, Biden antitrust chief Jonathan Kanter went on CNBC to discuss the situation, before the deal closed. He cast doubt on all the bidders, but pointed out that Netflx probably has the biggest legal risk among all the possible buyers. It would be a big streaming combination where prices to consumers are already going up, it would also mean that a big film and TV library currently being licensed by other streamers would be locked up by Netflix....

Kanter’s main point was that even attempting a deal is dangerous, since Warner Bros Discover would have to freeze its business for a year and half while it undergoes a review. If the merger fails, then its assets will have degraded in that time period. The risks of a deal are significant, and frankly, it is irresponsible of the Warner board to try to do this kind of sale....

If the deal is illegal, why would Netflix go ahead with it? Well, it’s probably bad legal advice. Sarandos hired antitrust lawyer Steve Sunshine of Skadden, and Sunshine is a bad lawyer. He is often over-optimistic in telling his clients to go ahead with deals.

Sunshine has advised on several high-profile mergers over the past decade that faced federal challenges. In multiple cases where he represented the acquiring company, the deals were blocked or later abandoned after intervention from the Department of Justice or the Federal Trade Commission. Those included Visa’s attempted purchase of Plaid, Adobe’s effort to buy Figma, and Sabre’s proposed acquisition of Farelogix....

So why this aggressive attempt to sell the corporation? A big reason is that Zazlav will be paid $500 million for closing the deal. But behind that payday is that the financiers who run Hollywood simply don’t believe the movie business can offer the kind of returns they see their monopolist peers in tech getting. And they lack any capacity for creativity or leadership.

That’s why antitrust laws exist, to prevent people like this from ruining important corporations. Ultimately, this story of consolidation in Hollywood has been longstanding, and it intersects with deregulation. The old Hollywood model was to make TV shows and movies, and to sell them through multiple channels; good content made good money. But starting 20 years ago, the price signals that used to communicate what consumers liked and didn’t like started breaking down, so making good content stopped translating into profits....


The right way to fix this situation is, as Jon Voigt proposed, to restore the prohibitions against vertical integration, a streaming version of the financial syndication rules. But financiers like Sarandos, Malone and Zazlav hate that idea, and think the answer is consolidation. They figure that consumers will then have no choice but to pay more for streaming, regardless of quality. Netflix in particular seems to have a model of importing foreign content, which will ultimately end the American film industry entirely.

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