"Hollywood is Truly Freaked Out." Inside the Netflix/WBD Deal with Lucas Shaw

0:00Peter Kafka:When I scraped my car in that parking garage, I was worried that it could be a long process to take care of it. Like a landscaper's first day trimming a hedgeman. I have definitely already been here. Now, was it left, right, or right, left? Well, maybe I'll cut a path out and find my way back later. But it wasn't like that. I filed a claim in under two minutes on the GEICO app, and they handled it from there. It was taken care of almost as quickly as it happened. It feels good to get help quick. It feels good to GEICO. Support for this show comes from Odoo. Running a business is hard enough, so why make it harder with a dozen different apps that don't talk to each other?

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1:14Peter Kafka:From the Vox Media Podcast Network, this is Channels. Peter Kafka, that is me. I'm also the chief correspondent of Business Insider. And the reason I'm rushing through this is because we have a genuine emergency podcast today. As you know, Netflix just announced it as a deal to spend$83 billion, including debt, to buy a big chunk of Warner Brothers Discovery. The best person to discuss that with me is Lucas Shaw from Bloomberg, who's been covering this deal's ins and outs for weeks, months. Hello, Lucas. Hey, Peter. Thank you for all the work you do, and thanks for coming on. Let's go quick, because your time pressed.

1:51Peter Kafka:How did this deal get done? I think a lot of us assumed Larry and David Ellison would end up owning all of Warner Brothers Discovery. How did Netflix get this deal? They offered more money, I guess, or about the same money. Yeah, you know, it started with the Ellisons making not a hostile approach, but an unsolicited approach. They made three different offers, all of which were rejected by Warner Brothers Discovery. After those or at some point during that, I interviewed the Netflix co-CEO, Greg Peters. He's like, these deals are a terrible idea. Why would anyone do them? At the same time, not long after that, I had conversations with other people at Netflix who were like, we're actually more interested than Greg let on, which was the first sign to me that they were going to take a real look.

2:38Netflix started doing diligence on it, I think about a month ago. And then it's been this, you know, two, three horse race, depending on how you look at it, where you've got Comcast, Netflix and Paramount. but most people never really took the Comcast bid that seriously. And the odds of Netflix getting it seemed to increase by the week and then by the day. I think in part because it was evident that the messaging we were getting from the Warner Brothers board and from David Zaslav was that they didn't want to do the Paramount deal. I think there was a feeling that maybe the Paramount side was a little bit overconfident in their ability that they were the only ones who could get it approved through the regulatory.

3:19They were confident because the Paramount bid was all cash and Netflix is involved a little bit of stock. And they were the only ones willing to buy the whole company. But, you know, Netflix clearly put together a compelling offer.

3:30Peter Kafka:So you said that when I asked you, Netflix offered more money, and I'm still confused about this. The Paramount deal was supposed to be around$71 billion for the whole thing. It looks like Netflix is basically paying $73 billion for part of it. And it's really 83 once you include debt. Right. So what did Netflix just shock Paramount by spending way more than they thought they'd offer? The Paramount people that I spoke with were very surprised when we put out a story saying that Netflix was raising, I think it ended up being$59 billion in debt and their offer was going to be mostly cash. I think there was an assumption for a long time that Netflix would offer primarily stock because their stock's very valuable and it would mean that they don't have to, you know, raise a bunch of debt.

4:23That deal would have also, I think, as a result, been pretty dilutive for Netflix shareholders. So Netflix didn't want to do that. Yeah, I think all along Paramount and the Hollywood community in general thought that like Netflix was flirting, but wouldn't actually do it. As recently as Thursday, the day that this all went down, people were asking me on Twitter, LinkedIn, threads, like Netflix is really just trying to do this to drive up the price, right? And clearly they were more serious about it than anyone thought.

4:53Peter Kafka:Will this deal get done? Netflix and the Warner board have agreed to it. It needs regulatory approval in the U.S., I believe overseas. Donald Trump is in the White House. Donald Trump is friends with Larry Ellison and David Elson was reportedly at the White House this week saying you should you should stop this deal on antitrust grounds. What do you think is going to happen? Look, the honest answer, because I've been asked that a lot today, is I don't know, like asking me to predict what Donald Trump is going to do or anyone to predict what he's going to do is a fool's errand. That was a stupid question.

5:27No, it would it would make sense that there would be regulatory review of this deal. Do I think that the DOJ is going to sue to block it, as they did with AT &T, Time Warner in the first Trump administration. I'm having a hard time because, look, Netflix is run by a bunch of Democrats, right? Reed Hastings, its co-founder, longtime CEO, has become a very prominent and outspoken political donor. Ted Sarandos, the current co-CEO, is married to someone who did a big Obama deal, is married to someone who was an ambassador in the Obama administration. If you look at it like, you know, Netflix's leadership is probably among the most democratic of any company.

6:10At the same time, it is a company that has studiously avoided regulatory problems for the most part over its career. They've been very adept at it. Ted Sarandos in particular is a pretty good politicker. He's very good at kind of charming people and making them think that he's their friend. In some cases, he is. I think that Netflix has made a concerted effort with this particular administration to try to make sure that they're on good terms. It's notable to me that Trump has yet to say anything, right? Yet to say. Yes. And we've asked for comment.

6:45Peter Kafka:He also doesn't complain about Netflix. If you think of the things that are in media that he complains about, they're about broadcast TV and cable news. Netflix does not seem to be. He's probably not streaming being stranger things. And I, yeah, it just feels like, you know, when, when, when Donald Trump is mad about something, he's not shy about immediately coming out and saying this is a bad idea. And so over the last few days, we've seen Paramount progressively ratchet up its frustration, sending these letters, leaking these letters, saying how bad this is, getting Daryl Issa and other politicians to say stuff.

7:19The fact that Trump is silent leads me to believe that he is on his surface, at least, not against it. And if he is not clearly against it, I don't know that the DOJ is going to try to block it. That could change. You can have Larry Ellison in his ear saying, Donald, what the hell, guy?

7:36Peter Kafka:And did the Ellisons have other options? Could they go hostile? Could they just go to the Warner Brothers shareholders and say, this is a better deal, take our deal, and or sue Warner Brothers, which they clearly were suggesting they might do with these letters this week? The Ellisons could do that. Well, I guess first off, there are other avenues people could do to fight this, right? They can try to fight it at the state level. They can try to fight it internationally. As far as Paramount and the Ellisons, they could sue and they could go hostile. If they choose to go hostile, they will have to offer considerably more than they are currently offering to convince the shareholders to do it.

8:15So if they were having a hard time getting the$30 a share already. Are they miraculously going to go to$35? I guess it comes down to how badly does David Ellison want it? I think some people feel like the Ellisons took it as a bit of a fait accompli that they were going to get it. And there might have been a little bit of arrogance in how they went about it. So are they going to come back and say, we misjudged this. We want this so badly. We've got, I like, I want this and we have to make a godfather cannot say no. We're paying you$35 a share for the whole thing and dare Netflix to go to$35. That would be the way for them to do it.

8:53Peter Kafka:Let's put the lens back on Netflix again. You already said there were, you know, one of the co-CEOs said we shouldn't do big media deals. And it seems like Ted Sarandos wanted to do a big media deal. What does it tell us about Netflix in 2025 that they've never done any major content acquisition, period, right? A few small, small assets. Roald Dahl catalog. Nothing close to this. This is totally out of line for them. Is this, this is such a great deal, we can't pass it up, why wouldn't we want to have HBO and a full-blown movie studio? Or is it, we bumped our head and as much as we tell you otherwise, we're actually having a harder time finding new subscribers and this is a good way to do it?

9:32Peter Kafka:Or can it be both? I think it's a little bit of both. I think that they have, they've been reasonably consistent in recent years that the type of big deal that they would do is if they could buy a library and a catalog and, and they don't want cable networks, right? They don't want legacy infrastructure. because of the way that warner brothers is has split the company and going about it they now said well we can get warner brothers and hbo and we don't have to take any of the networks that is appealing to us and yes maybe we're paying a big price but we think we can exploit that and bring more viewers to them you know suddenly we can offer friends and big bang theory on the basic netflix tier and upsell people for hbo whatever it's going to end up looking like there is definitely a part of me that feels like they have to be a little bit uncertain as to exactly what the next level of lever for growth is to do it right if they're if they're streaming service work we're firing on all cylinders if they were consistently churning out new franchises then why do you need to overpay for old franchises right i think netflix has has struggled to make something like Harry Potter, DC, that like is a cultural touchstone that lasts for years and years and years.

10:53And this is a shortcut to try to do that. It feels like a move that a more mature company makes that is trying to figure out what's next, not a move that a like a fast growing company makes.

11:05Peter Kafka:Question all the normal people have. What does this mean for my shows? What does it mean for my Netflix shows? What does it mean for my HBO shows? The answer for now is, first of well, the deal's not going to close for a year and a half. For two years, it means absolutely nothing. And then the answer on the call today was, we're going to run HBO and Netflix side by side, which is a good thing to say. It is very hard to believe that lasts indefinitely because why do you buy a company if you don't want to do something with it? But also, what is the point of running two streaming services? Surely there'll be some kind of integration at some point, right?

11:37Peter Kafka:Yeah. My educated guess on this from what they've said in conversations I've had is on the movie side, they will continue to put Warner Brothers movies in theaters, but they will compress the amount of time that they are exclusive to theaters unless, obviously, the theater owners have to agree. Right, and Ted Sarandon said on the call, by the way, this whole system sucks, and so over time, we're going to bring this back. We're going to go back to where Jason Tyler was a couple years ago. Yeah, those movies that are currently only in theaters for two months, three months, try two or three weeks.

12:12As far as the streaming service goes, I think that they're going to take a bunch of the programming that's on HBO Max that's not HBO, like Warner Brothers shows, like Friends, like Big Bang Theory, and that will just be on Netflix, right? That makes Netflix even more appealing. It reduces cancellations. It maybe enables them to raise the price. And then there will be HBO as an add-on to it. now what i don't know for sure is will they just like fully integrate hbo and find a way to kind of like my guess would be a version of like amazon channels where you don't need a separate service it's available within netflix but you have to pay more because i think that netflix sees what amazon and youtube and others have done and making themselves sort of like the the new cable bundle and they're like, well, we're the number one service.

13:07Let's just make everything flow through us.

13:09Peter Kafka:And do you think we go fully back to where we were in pre-2015 where the only way to get HBO is to have a Netflix subscription and then pay extra? You mean take it off all the other places? Right. That's the old cable world, right? Which everyone hated and they finally got rid of it. Is there a possibility we go back to that world? I don't know. It's a good question. I haven't thought through that one. of if Netflix makes HBO a channel within Netflix and you can get it for$8 instead of the$15 elsewhere, do they take it off of the app store? Do they make it so you can't watch it as a standalone app on Roku?

13:45I don't know. I mean, I agree with you at the outset of this. I was like, Netflix really wants two streaming services. I assume that they would just get rid of it, but shutting it down is a steep text to pay to habit. So I think there's some middle ground that they can operate in.

14:00Peter Kafka:I went to this HBO programming event last month and Casey Boyce stood up. He had scripted remarks and said, essentially, I got the full quote somewhere. Netflix won. They are the basic cable utility. They are the utility. Everyone has them. They are basic cable. Then suggesting, you know, we're premium cable. And now it looks like he's closer to that world than he ever suggested. I know you're a time press. So one last question. I'm curious about that, though, like because that is sort of the analogy. but Netflix for all of the discussion about like Netflix is so powerful. They're like, they're a monopoly, blah, blah, blah, blah, blah.

14:36Netflix accounts for like eight and a half percent of television viewing in the U S right. It is not actually a dominant monopoly. The people spend more time watching YouTube. They spend more time watching the various Disney channels. They spend more time many months watching like NBC universal. I get that the NBC, some of those legacy things are going down, but do you really see like Netflix has wanted to be a cable substitute. And one of the ways to read this deal is like they hit a little bit of a ceiling in trying to be the cable substitute. Like, do you see them as a substitute?

15:05Peter Kafka:I think so. I think so. Both in terms of the numbers. Right. They are the dominant streaming service by aggregate subscribers. So, again, everyone sort of has them, whether they're watching them more or less. That analogy works. And they still put out high end, fair. Have every something for everyone. But they have all they really they really sort of do basic cable programming is their bread and butter. Right. Shows that are meant for very broad audiences, not HBO style stuff. And their other successful thing is literally taking old cable shows like Suits or something and making them huge, huge hits on Netflix.

15:40Peter Kafka:So I think the analogy holds up pretty well. do you think there's a world in which they would take they probably said against but like make the base netflix plan have ads that there would no longer be like hbo would be the ad free and all netflix would be with ads if that happens that tells you the business is really in trouble right then they're really just really trying to string out revenue i don't know why they wouldn't have have an ad free and with ad tier if they truly have i mean again if that tells you something either their ad plan is broken or some other part of their business is broken if they move to that but you know we've now seen them do the never say never thing multiple times the last few years they did ads they did sports they did a major acquisition all things they were never interested in doing until they are yeah uh last question lucas what does this mean for everyone who's not hbo and Netflix or when it comes to streaming?

16:42Peter Kafka:Are there more partnerings that have to happen? Does part does Paramount need another partner? Are there other partners? Is this a Comcast Paramount deal at some point? Someone asked me about that today. Hard to see a Comcast Paramount deal because the Roberts family, which controls Comcast, has been pretty clear that they're not sellers and the Ellisons are been pretty clear that they're not sellers. But I don't know, because if Netflix was way ahead as you say and they actually get to do this they leap so much further ahead than everyone um i don't know what that means for it would be an interesting test if because like the counter to netflix doing this right would be why spend 82 billion dollars 83 billion dollars on buying something just like spend that and make your own shows which is what netflix has done all along now right just like invest and that was their answer all along right um could ellison test that take the 70 billion dollars you were going to spend on paramount and just start signing up talent like raid the netflix cupboards um could be um you know what is bob eiger at disney i mean i realize he's allegedly on his way out but what are the people at disney um think about this like they're trying so hard to catch up with Netflix and Netflix just is this big deal.

18:02I think the truth is, is that most people in Hollywood today are just truly freaked out because they didn't think this was going to happen.

18:07Peter Kafka:That's where we're going to leave it. We're all truly freaked out. Thanks, Lucas. Good luck. Oh, and we're going to see you in a few weeks if you enjoyed this conversation, which everyone did. So we'll see you soon. Thank you. Take care.

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