What to know about the $82.7-billion Netflix-Warner Bros. deal that will reshape Hollywood

Paramount is refusing to accept defeat in the Warner Bros. Discovery auction, launching a $78-billion hostile takeover of its rival on Monday after being spurned last week in the bidding.

The move comes four days after Warner’s board unanimously selected Netflix as the winner.

Oracle founder Larry Ellison was on the cusp of conquering Hollywood.

Just four months earlier, he had bankrolled his son David’s $8-billion acquisition of the storied Paramount Pictures.

Dear Ted Sarandos,

Congratulations on making the winning bid for Warner Bros. By directly contradicting your famous “build don’t buy” mantra, you have managed to throw the already beleaguered entertainment industry into an apoplectic meltdown, and just in time for the holidays!

Hollywood moguls once dismissed the outsize ambitions of Netflix’s executives.

“Is the Albanian army going to take over the world?” former Time Warner Chairman Jeff Bewkes asked a reporter 15 years ago. “I don’t think so.”

If Netflix can complete its $82.7-billion deal to acquire Warner Bros. Discovery, it will be a lot bigger but not necessarily a lot better for consumers — or for the streaming landscape the company developed.

Analysts predict that consumers, already chafing at rising subscription fees for streaming services, will be spending even more if the deal goes through.

The merger of these two companies would create such a powerful player that regulators are going to have to take a close look at how it could affect competition in the industry.

With such a hefty price tag, Warner Bros. Discovery’s board unanimously approved the transaction, but regulators as well as the companies’ rivals will not be as easily swayed.

The deal is subject to approval by Warner shareholders and government regulators in the U.S. and abroad. Netflix said it should be able to finalize the purchase in about a year to 18 months.

Anticipate hearings and court cases to scrutinize the deal, analysts say, because critics are already saying it will be too dominant in some sectors of the entertainment business.

“Despite whatever the company says, this is not a win for consumers,” Emarketer senior analyst Ross Benes said in a statement. “Netflix has already aggressively raised prices, increased ad load, and stopped people from sharing passwords. Absorbing a competitor with strong content will only lead to its service becoming more expensive and give consumers less choice. This is the pattern of large-scale industry consolidation and deregulated media.”

Netflix is betting billions of dollars that the deal will be done. It agreed to pay a $5.8-billion termination fee if the deal fails to clear the regulatory hurdles.

After a heated bidding war, Netflix on Friday morning announced it will acquire Warner Bros. in a $72-billion deal poised to overhaul the entertainment industry.

The high-profile deal, which totals $82.7 billion with Warner Bros.’ debt included, represents an unprecedented consolidation — giving Netflix control of iconic franchises such as “Harry Potter” and the DC Universe, plus classics from “Casablanca” to “Citizen Kane.” With its acquisition, Netflix beat out competitors Paramount and Comcast to vastly expand its content library and bring its subscriber base to above 420 million.

Not long before the blockbuster deal was announced Friday, Netflix seemed to be hinting it wasn’t that interested in acquiring Warner Bros. Discovery.

Netflix executives have long downplayed merger talk, including as recently as two months ago, when Netflix Co-Chief Executive Greg Peters said the company’s heritage was “being builders rather than buyers.”

Until this week, few even expected Netflix to win.

Paramount was widely seen as the likely buyer after it launched the bidding for all of Warner Bros. Discovery in September. After the Warner Bros. board rejected Paramount’s series of offers as too low, the company opened the auction to other prospective buyers in October.

The tide turned earlier this week when Netflix, Paramount and Comcast submitted their second-round proposals. Netflix’s offer was too high for the others to match.

Hollywood unions and trade groups are pushing back against the proposed $82.7-billion deal for streaming giant Netflix to acquire Warner Bros.’ film and television studios, HBO and HBO Max, citing concerns about greater industry consolidation, job losses and the potential hit to theatrical box office revenue.

Groups began voicing opposition even before the proposed tie-up was officially announced. Amid reports Thursday night that Netflix had secured exclusive rights to negotiate with Warner Bros., the Directors Guild of America said it had “significant concerns” about the development and intended to meet with Netflix for further discussion.

David Zaslav has fought his way to the top of the industry and grappled with challenges as the head of Warner Bros. Discovery, and we’ve covered his journey closely.

Here are some of the key stories with lessons about the leader:

David Zaslav: Hollywood reformer or wrecking ball?

Benched by the NBA, Warner Bros. Discovery boss David Zaslav faces tough questions

With Discovery merger, can David Zaslav restore Warner Bros. to its former glory?

Warner Bros. Discovery modifies David Zaslav’s employment contract — again

Warner Bros. Discovery is up for sale. Why CEO David Zaslav isn’t ready to give up the reins

The combination of two of the world’s most popular sources of content to keep us glued to our screens is set to grab an impressive slice of attention and advertising dollars.

Market intelligence firm Sensor Tower crunched the numbers and says the deal will deepen Netflix’s dominance.

“Though Netflix is already the market-leading streaming platform by global users, this deal further shores up its market share, expands the breadth and depth of its content library, bolsters subscriber engagement, provides greater exposure to valuable gaming assets and potentially drives deeper advertiser interest,” Sensor Tower said in a release.

A few examples of the numbers that may be added together if the deal goes through:

• Netflix leads the world in the number of monthly active streaming users with a 46% share. That could rise to 56% if HBO Max is added.
  
• HBO Max has recorded more than 25% in non-U.S. users recently. That would be a big bump for Netflix, which has had flat international growth.
  
• Netflix mobile app users spend 90 minutes a week on the app. HBO Max users spend around 60 minutes a week on its app.

It’s going to be tougher to compete with the combined companies, Sensor Tower said.

“This acquisition could help dampen the competitive threat posed by other streamers as the combined content library solidifies Netflix’s value proposition for consumers,” it said in the report.

Netflix is no joke.

It has been shaking up Hollywood for years, has emerged as the king of streaming, and is expanding into all types of entertainment.

Five years ago, competitors, including Walt Disney Co. and Warner Bros. Discovery, invested billions of dollars to chip away at its market share by launching splashy shows on their own streaming services. It lost some subscribers but earned them back and started growing again.

Netflix changed the way Hollywood works,overhauling how talent deals are structured, paying big fees upfront in lieu of offering traditional back-end participation. It changed the culture of TV by releasing full seasons of a series at a time and making shows from South Korea, France and Spain into global hits, despite U.S. audiences’ supposed aversion to subtitles. It accelerated viewers’ shift to streaming from cable and satellite. It revived oldies such as “Friends” and “Suits.”

Its smart maneuvering is what set it up to make the power move of putting together the biggest bid to take over Warner Bros. Discovery.

Warner Bros. Discovery has a substantial amount of U.S. real estate, owning 97 properties in several states with a combined total of 8 million square feet, according to real estate data provider CoStar.

Among them is Warner Bros.’ famous Burbank studio dating to the 1920s with soundstages, a back lot and production facilities. It also owns Warner Bros. Studios Leavesden, a 200-acre complex in the East of England where “Harry Potter” movies were filmed.

Additionally, Warner rents substantial space, including the former Warner Bros. Ranch in Burbank, a 32-acre movie lot that is being redeveloped with Warner as its sole tenant. Warner Bros. headquarters in a leased office designed by architect Frank Gehry that stands out along the 134 Freeway in Burbank.

Netflix owns a studio in Albuquerque and is building another on the site of a former Army base in New Jersey. It is also the biggest property tenant in the Hollywood neighborhood, renting more than 1 million square feet of office and studio space, entertainment property broker Carl Muhlstein said.

What will happen to all that real estate if the deal is completed?

“It’s still too early to tell,” Muhlstein said. “It will take several years for them to sort out the integration of both leased and owned properties.”

Rep. Laura Friedman (D-Glendale), who represents and comes from the industry, says the merger needs to help create jobs in an industry that has already been struggling with the shakeouts that come with consolidation.

“As the representative of nearly every major producer in Hollywood and a former film producer myself, my priorities are protecting jobs in greater Los Angeles and ensuring a robust and competitive industry that fosters creative expression and delivers to Americans excellent, affordable entertainment and quality news media,” she said in a statement.

“Repeated consolidation in this industry has already cost so many film and television jobs, and any merger should be evaluated on its impacts on competition and employment. Thousands of local jobs and the greater Los Angeles economy depend on it,” she said.

Writers are worried about the merger and want regulators to intervene.

In a joint statement, the Writers Guild of America West and Writers Guild of America East urged that the merger be blocked.

“The world’s largest streaming company swallowing one of its biggest competitors is what antitrust laws were designed to prevent,” they said in a statement. “The outcome would eliminate jobs, push down wages, worsen conditions for all entertainment workers, raise prices for consumers, and reduce the volume and diversity of content for all viewers.”

“This merger must be blocked,” the statement said.

The mega deal between Netflix and Warner Bros. could usher in a content arms race as competitors ratchet up production, said Lloyd Greif, president and CEO of Greif & Co., a Los Angeles-based investment bank active in the entertainment and media industry.

“Is the competition just gonna sit on their hands and not do anything? No,” he said. “I think Disney will have to increase its theatrical output. Paramount will have to increase its theatrical output. Sony will have to increase its theatrical output. Universal will have to increase its theatrical output.”

“I do think there is a silver lining here and all this gloom and doom is a little overblown,” he added.

“I think it’s gonna start a production arms race. And that’s not a negative for the industry, that’s a positive,” he said. “It’s gonna be a fight for eyeballs.”

Producers are “rightly concerned” about the proposed Netflix and Warner Bros. deal, according to a statement from the Producers Guild of America trade group. The organization represents more than 8,400 producers.

“As we navigate dynamic times of economic and technological change, our industry, together with policymakers, must find a way forward that protects producers’ livelihoods and real theatrical distribution, and that fosters creativity, promotes opportunities for workers and artists, empowers consumers with choices, and upholds freedom of speech,” the group said in a statement. “This is the test that the Netflix deal must pass.”

Netflix Co-CEO Greg Peters says the Warner Bros. acquisition will work because both companies are in the entertainment business.

Past mergers have failed, he told investors on a call Friday, because the acquiring company didn’t understand what it was getting into.

“We understand these assets that we’re buying,” Peters said. “Things that are critical in Warner Brothers are key businesses that we operate in and we understand a lot of times, the acquiring company was a legacy, non-growth business that was looking for a lifeline. That doesn’t apply to us. We’ve got a healthy, growing business. “

“We got a clear thesis about how the critical parts of Warner Brothers accelerate our progress,” he added.

“If this deal makes it through regulatory approval, Netflix will cement itself as the Goliath of streaming services now with the combined weight of HBO Max and the content studios behind it all. This deal changes the calculus of the streaming wars, representing a seismic shift in the entertainment industry,” said Mike Proulx, VP and research director at Forrester.

Netflix Co-CEO Ted Sarandos told investors the acquisition will help the companies stay competitive.

“In a world where people have so many choices, more choices than ever how to spend their time, we can’t stand still,” he said on a call Friday morning. “We need to keep innovating and investing in stories that matter most to audiences, and that’s what this deal is all about. The combination of Netflix and Warner Brothers creates a better Netflix for the long term. It sets us up for success for decades to come.”

He said he expects regulators to approve the deal.

“This deal is pro-consumer, pro-innovation, pro-worker, pro-creator, pro-growth,” he said. “Our plans here are to work really closely with all the appropriate governments and regulators, but really confident that we’re going to get all the necessary approvals that we need.”

At least one politician is raising concerns about the Netflix deal to acquire Warner Bros.’ film and television studios.

Sen. Elizabeth Warren (D-Mass.) said in a statement Friday morning that the deal appeared to be an “anti-monopoly nightmare.”

“A Netflix-Warner Bros. would create one massive media giant with control of close to half of the streaming market — threatening to force Americans into higher subscription prices and fewer choices over what and how they watch, while putting American workers at risk,” she said in a statement.

Hours before the deal was announced, the Directors Guild of America said the potential tie-up between Netflix and Warner Bros. raised “significant concerns” for the group and its members and said it would meet with Netflix to express its concerns and “better understand” the company’s vision for the acquisition.

“We believe that a vibrant, competitive industry — one that fosters creativity and encourages genuine competition for talent — is essential to safeguarding the careers and creative rights of directors and their teams,” the group said in a statement late Thursday night.

Two days before Friday’s news that Netflix had won the bidding auction for Warner Bros., Paramount had accused Warner Bros. Discovery of unfairly favoring Netflix in the auction, claiming the company abandoned fair dealing with a predetermined outcome in mind.

In a scorching letter sent to Warner Bros. Discovery Chief Executive David Zaslav late Wednesday, Paramount’s lawyers accused Zaslav’s company of not playing fair.

Paramount’s acrimonious allegations exposed a deep rift between the two companies’ leaders after weeks of rising tensions.

“WBD appears to have abandoned the semblance and reality of a fair transaction process, thereby abdicating its duties to stockholders, and embarked on a myopic process with a predetermined outcome that favors a single bidder,” attorneys for Paramount wrote, referring to Netflix.

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The theater owner trade group Cinema United voiced opposition to the proposed Netflix-Warner Bros. deal early Friday morning, calling it an “unprecedented threat to the global exhibition business.”

The group urged regulators to take a close look at the transaction and understand its impact on moviegoers, the theater business, and the entertainment industry.

If the deal goes through, Cinema United said annual box office revenue in the U.S. and Canada could decrease by 25%, if the films that typically get a theatrical release by Warner Bros. are removed from theaters.

“The negative impact of this acquisition will impact theatres from the biggest circuits to one-screen independents in small towns in the United States and around the world,” Michael O’Leary, the group’s chief executive, said in the statement. “Netflix’s stated business model does not support theatrical exhibition. In fact, it is the opposite.”