The latest on Netflix: Warner Bros. bid, earnings, and its deal with Matt Damon & Ben Affleck

Netflix, Warner Bros. Discovery, and the Future of Hollywood

Key Concepts:

• All-Cash Bid: A takeover offer made entirely in cash, as opposed to stock or a combination.
• Regulatory Approval: Government permission required for mergers and acquisitions to ensure fair competition.
• Spin-off: The creation of an independent company from a part of a larger corporation.
• ARPU (Average Revenue Per User): A metric used to measure the revenue generated per subscriber.
• Theatrical Window: The period of time a film is exclusively shown in cinemas before being released on other platforms.
• Artist Equity: A production model offering additional financial benefits to cast and crew based on viewership.
• AI (Artificial Intelligence): The simulation of human intelligence processes by computer systems.

I. The Bidding War for Warner Bros. Discovery (WBD)

The central topic revolves around the escalating battle for Warner Bros. Discovery between Netflix and Paramount Global, backed by Skydance Media. The Wall Street Journal reports Netflix is considering shifting to an all-cash offer for WBD’s studios and streaming assets. This move is largely seen as a strategic maneuver to accelerate the process, as Paramount believes it can secure regulatory approval faster. Rich Greenfield of Lightshed Partners notes that moving to an all-cash bid would allow for a shareholder vote as early as March, compared to a potential June vote with a stock-and-cash offer. He believes this is a pressure tactic on Paramount, forcing them to raise their bid if they want to remain competitive.

Greenfield emphasizes that Paramount needs the deal to prevent the planned spin-off of WBD’s assets, specifically Warner Bros. Discovery Global, which would allow WBD to auction off valuable properties like CNN, Food Network, and HGTV, cutting off Paramount’s access to crucial cash flow needed to finance the acquisition. He estimates Paramount would need to increase its bid by $4-6 per share to be truly competitive, a move requiring significant additional capital they currently don’t appear to have.

Despite the ongoing saga, Greenfield maintains his earlier prediction that the spin-off will occur and Netflix will ultimately win, though the deal won’t close this year due to regulatory hurdles. He acknowledges the possibility of Larry Ellison providing substantial financial backing to Paramount, but sees no current indication of this happening.

II. Netflix’s Theatrical Strategy Shift

A significant development discussed is Netflix CEO Ted Sarandos’s recent statement to the New York Times regarding theatrical releases. Sarandos indicated a commitment to maintaining a 45-day window between theatrical and streaming releases, stating, “We want to win [at the box office].” Greenfield interprets this as a pragmatic adjustment to the evolving business landscape, noting Netflix’s past reversals on issues like advertising. He cautions that while Sarandos may aim for strong weekend box office numbers, achieving overall box office dominance is a different matter.

Greenfield highlights Hollywood’s broader anxieties surrounding both potential mergers – Netflix/WBD and Paramount/Skydance – fearing consolidation and reduced competition. He points out Netflix’s past theatrical experiments, like releasing Stranger Things in cinemas, as evidence of their willingness to explore different distribution models. He expresses skepticism about the industry’s ability to consistently adhere to 45-day windows, given a 50% decline in cinema attendance since pre-pandemic levels, attributing this trend to changing consumer behavior rather than solely to Netflix.

III. Netflix Earnings and the Importance of Strength

The conversation shifts to Netflix’s upcoming earnings report. Greenfield believes investors will be closely scrutinizing whether Netflix is pursuing the WBD acquisition from a position of strength or weakness. Key indicators will include subscriber growth, engagement levels, and the performance of the advertising business.

He explains that a strong earnings report will shift the narrative, demonstrating that Netflix is thriving independently and viewing the WBD acquisition as an accelerant rather than a necessity. Conversely, a weak report will reinforce the perception that the bid is a defensive move driven by underlying challenges.

IV. New Hollywood Deal Models and the Impact of AI

The discussion then turns to innovative deal structures in Hollywood, specifically the agreement between Netflix and Ben Affleck and Matt Damon for their film The Rip. This deal incorporates a revenue-sharing model where the cast and crew receive additional financial benefits based on viewership thresholds. Greenfield views this as a flexible approach by Netflix, exploring alternative economic models. He notes that Netflix’s willingness to experiment extends to initiatives like the IMAX-only release of Narnia.

Finally, the conversation addresses the growing threat and opportunity presented by Artificial Intelligence (AI). Greenfield argues that AI has the potential to significantly reduce movie production costs and accelerate content creation, particularly in areas like post-production and visual effects. He acknowledges the guild issues that need to be resolved but believes AI will ultimately lead to a greater volume of content, benefiting companies like Netflix that need to constantly replenish their libraries to compete in the streaming wars. He cites the lengthy production timelines for animated films and the high costs of reshoots as areas where AI could have a substantial impact.

V. Notable Quotes

• Rich Greenfield: “I’m getting tired of talking about it, Julie.” (Expressing frustration with the prolonged bidding war)
• Rich Greenfield: “Unless Paramount meaningfully raises its bid, and I don’t think a couple of dollars does it, they have to meaningfully four, five, maybe even $6 raise the bid.” (Highlighting the scale of the bid increase needed for Paramount to be competitive)
• Ted Sarandos (as reported by the New York Times): “When this deal closes we’ll own a theatrical distribution engine that is phenomenal and produces billions of dollars of theatrical revenue…we want to win [at the box office].” (Signaling a shift in Netflix’s approach to theatrical releases)
• Rich Greenfield: “The thing that no one’s talking about, Julie, box office is down 50%. Sorry. Attendance, meaning butts in seats are down 50% from before the pandemic.” (Emphasizing the decline in cinema attendance)

Conclusion:

The situation surrounding WBD remains fluid, with Netflix poised to potentially escalate its bid. The outcome hinges on Paramount’s willingness and ability to raise its offer significantly. Beyond the acquisition battle, Netflix is demonstrating a willingness to adapt to the changing dynamics of the entertainment industry, embracing theatrical releases and exploring innovative deal structures. The looming presence of AI presents both challenges and opportunities, promising to reshape movie production and potentially level the playing field in the increasingly competitive streaming landscape. The key takeaway is that flexibility and a willingness to experiment will be crucial for success in the evolving world of Hollywood.