"Neither Side Is Used to Losing." Lucas Shaw on What’s Next for Netflix and Paramount in the Battle for Warner Bros.

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1:04Peter Kafka:From the Vox Media Podcast Network, this is Channels with Peter Kafka. That's me. I'm also chief correspondent at Business Insider. And today, as promised, we are going deep on Warner Brothers Discovery slash Netflix slash Paramount. And as promised, we are doing it with Bloomberg's Lucas Shaw, who has been the dominant reporter on this story. This sounds like deja vu. There is a reason for that. Less than two weeks ago, when Netflix shocked us by landing the Warner Brothers deal, at least landing it temporarily, I had Lucas on for a quick emergency pod. As you know, the story is far from finished.

1:44Peter Kafka:Paramount and the Ellison family are still trying to buy Warner Brothers Discovery, so this one could go on for weeks or months. With that in mind, I had some practical questions for Lucas, like, what happens if Warner Brothers Discovery formally turns down Paramount again. But also some big picture ones like why exactly do Paramount and Netflix want to spend so much for essentially HBO and a movie slash TV studio? And what does this deal or potential deal tell us about the state of media in 2025 and beyond? It's good stuff, right? This is also a year end pod. So I talked to Lucas a bit about AI because as we're legally required to talk about AI.

2:25Peter Kafka:And we got some recommendations for your listening and viewing pleasure. This is a good one. Okay, here's me talking to Lucas Shaw. Lucas Shaw from Bloomberg. You're laughing because I'm bad at podcasting, but I'm glad to have you back on the show. We did an emergency pod when Netflix won. I'm putting scare quotes around the Warner Brothers deal. Yeah, that was two weeks ago. Two weeks ago, maybe that. Let's call it two weeks ago. The intent was for this previously scheduled conversation to be a look back at 2025 and a look ahead at 2026. We can do some of that. But honestly, the whole thing is Warner Brothers, Paramount, Netflix.

3:07Peter Kafka:It's the story of the year. I think it's the story of our careers. Really? It's the rise of streaming, right? Manifested. Got it. It's taking a huge step back. Yeah. Yeah. And displacing, you know, could potentially whatever. It's it's it's we oversell these stories all the time. People try to tell you why this thing is momentous, but it really is momentous, especially I think if Netflix does end up buying Warner Brothers. We are recording this on Monday. You guys will hear this on Wednesday. Things can change between now and then. But let's just start where the state of play is. Technically, right.

3:45Peter Kafka:Paramount just said, hey, we would like to buy Warner Brothers Discovery. consider our bid Warner Brothers Discovery and they have not yet responded. We expect them to respond any day now. Right. What do you think will happen? Warner Brothers Discovery will say thank you for this generous offer. We decline. We already declined this offer. The big question is whether they will say we don't want this offer and please stop trying go away. We are happy with our deal with Netflix or we declined, but if you want to offer us even more money, we're open to having a conversation. Because at the moment, they're not really supposed to be talking to other parties.

4:28There's kind of no shop provisions in their deals with Netflix, but they have the ability to open things back up where they can basically until the shareholders of Warner Brothers blasts a deal, someone else can come around and try to wow them. And I think it'd be pretty strange if they said go away. I think they'd be more than happy to use Paramount and Netflix to try to get another three to five dollars a share for their shareholders.

4:55Peter Kafka:So basically what we were describing more, we were describing as a done deal when we talked a couple of weeks ago, but saying, you know, Warner Brothers has picked Netflix as their buyer. You're suggesting that they haven't fully picked them yet. Like someone could still come in, would be. I think they picked them, but the board is never going to turn away an even better offer. And if Paramount, which has now made six offers to buy Warner Brothers Discovery, every single one of them rejected, if they make a seventh that is even higher, the board would have a fiduciary responsibility to engage with it.

5:29Peter Kafka:And I'm going to ask you to just do some prognostication, and it won't hold you responsible if you're wrong, because that's how the world works. do we expect paramount and then netflix to then get in a ongoing bidding war where each goes back to warner brothers says here's another dollar a share i think they both paramount has said that that this isn't the last and final which implies that or outright just says like we can we can go higher um my understanding is that netflix in studying the deal and doing its models has also created room to go higher. Whether they will is harder to guess. I would, I think they would, because they seem very committed to this.

6:10And what, one of the things that's interesting about this dynamic is you have two companies that are not, or two entities that are not used to losing, right? The Allisons are used to getting their way. Netflix is used to getting their way. And one of the, one of them has to lose here. Um, the wrinkle for Netflix is that unlike the, unlike Paramount Skydance, which is a fully controlled company, Netflix isn't. It's a proper public company. And so if shareholders really don't like this deal, which it seems like some of them are lukewarm on it, the share price of Netflix has been inching down. If Netflix adds $3,$5 to its bid, you'd imagine shareholders would be even less satisfied with it.

6:48Peter Kafka:This is messaging that I hear, I assume you hear from people particularly in the Paramount sphere saying, look how much Netflix shares have gone down since last fall. Netflix really doesn't, Netflix shareholders really don't want this deal. They've lost$100,$140 billion in value. Not all of which is correct, related to this. So let's play this out. So if for whatever reason, if Warner Brothers says, you know what, all things being equal, we want to stick with Netflix. Sorry, Paramount. Yep. Do we, what, Paramount could sue? They could go again directly to shareholders? They could sue and say that this was an unfair process.

7:30That feels like a risky endeavor. You don't see a lot of those in M &A land. They could continue with going direct to shareholders at their current offer,$30 a share. They have been adamant that it is superior to the Netflix offer and they have had enough dialogue. dialogue they're meeting with and talking to a lot of shareholders to try to get a sense for how supportive they are um from the conversations that that um people on my team at bloomberg have had with shareholders it feels like you know they'd all obviously like to see the number go up i don't know that there is a clear preference for one versus the other so that is also risky this the safest move for for the ellisons if they really want warner brothers would be to come back with more money.

8:17Peter Kafka:And then we have the Trump wildcard, right? And we've gone back and forth for months and recently, the last few days, intensely about what role will Donald Trump have in this, right? He can't compel someone to buy Warner Brothers Discovery. He's, in theory, not supposed to have an active role in this at all. He said, I'm going to have an active role. Many of us assumed, ultimately, that Paramount would win the deal because the Ellisons, Larry Ellison, has a deep connection with Donald Trump. Semaphore had a story where they were quoting an unnamed treasury executive saying we're offended by this idea and this is backfired.

8:55Peter Kafka:How active do you think Donald Trump will be in this process, which could go on in theory for many months, right? He can order a review. There will be a review most likely anyway. So how much do you think Donald Trump is going to play? How big a role do you think he will play? In the negotiations over who who wins the current auction bidding war, whatever? Almost none, I think. I mean, I think his name will be invoked a lot and he will get asked about it all the time, which means that he will comment on various things and people will try to - Which he loves. Which he loves. And people will try to read into his comments and he likes being at the center of attention.

9:33I mean, he just made the death of Rob Reiner about himself and he likes making it appear as though he is the person who, you know, decides things. but I don't think that he exerts any real influence until someone has been selected. I think that the winner of this, you may factor odds of regulatory approval into the side that you pick, but the company that wins Warner Brothers is going to be the company that offers the best deal. And then Donald Trump will, he's currently having fun sort of making it seem like both sides are going to owe him something, right? He was very, he lauded Ted Sarandos, co-see of Netflix.

10:16He talked about how Netflix was a great company and then said, but this will need to be reviewed. And he's been very effusive in his praise for the Ellisons while also saying, but we have to look at market share. So he's setting himself up to either way, demanding something of the winner.

10:32Peter Kafka:He's thrown out this idea that CNN has to have new owners no matter how this deal goes down. If you took that at literal face value, it means that only the Paramount deal works. Those are the ones who want to buy Warner Brothers against Donald Trump. Who knows what he will say tomorrow? But, you know, we all reference the Time Warner AT &T deal, which the first Trump administration tried to stop with a pretty conventional antitrust challenge. There was a lot of speculation that this was done at Donald Trump's behest. Lots of folks in the DOJ say it was a legitimate thing for us to talk about. We're in a different era of Trumpdom where he just literally says to Pam Bondi, go ahead and pursue this.

11:13Peter Kafka:If she then did pursue a real antitrust challenge, does she have grounds to take one up? Both of these deals relative to the AT &T Time Warner would be kind of almost more traditional deals to have reviewed because you have competitors merging, creating greater consolidation and greater concentration of power within an industry. So I think while the you're right that it's almost impossible to predict what the administration will do and they don't seem to follow any of the traditional norms or rules for what they what they review, what they don't, what they care about. I think in a traditional administration, either deal would get reviewed and get a view is different than suits to block, which is what happened with AT &T and Time Warner.

12:03And I don't so I think there will be close scrutiny of either deal. You already have politicians on both sides of the aisle, at least in the case of the Netflix deal, saying that we'd want to scrutinize it. You have prominent industry organizations, you know, unions and filmmakers speaking out and saying we're worried about it. And so it's inevitable that there would be some examination. Whether they would sue to block it is much harder to predict. and the the cases against each deal are a little bit different right that the netflix the case against netflix is they're already the number one player in streaming if they add warner brothers discovery they become unbeatable as well as sort of these ambiguous concerns about the movie theater business which i don't think would generally matter in terms of antitrust with paramount there is like a little bit of where's the money coming from does syphius need to review it which they say it doesn't because there's Middle Eastern money and there's Middle Eastern money involved.

12:57Twenty four billion dollars comes from three different sovereign wealth funds in three different countries, Saudis, Qataris, Emiratis. And an organization called CFIUS tends to review kind of foreign ownership of U.S. businesses. The Ellison's have tried to structure this deal in a way they say will not require CFIUS review because none of those entities will have any governance rights. Whether that's actually true, we'll see. And on top of that, Paramount and Warner Brothers Discovery, if you combine their TV network assets, they control a lot of what's on linear television. Obviously a declining business, but still incredibly influential.

13:34And both, you know, obviously both sides are saying the other one requires more scrutiny than themselves.

13:39Peter Kafka:You're one of many people who says CFIUS review, which I think it's correct to say it. But I think it's a euphemism of saying, hey, it's kind of wild that$24 billion of Middle Eastern oil money. And again, it's not from companies in those countries. It's the country's sovereign wealth funds. It's from the countries. Direct extension of those countries. By the way, that$24 billion number is double what the Ellisons themselves plan on putting into this deal. Um, and you would think from the right, from the left, from people who are, who are just flat out against people from the Middle East and people who have real concerns about, you know, crown prince of Saudi Arabia had a, had a Washington Post journalist murdered in 2018.

14:24Peter Kafka:You would think there'd be more outcry about that. I have been surprised there hasn't been or really much coverage of it at all. Do you think there would be if they were the if they had been the winning bidder, though? Well, that's kind of one of the questions, because I've been asking a bunch of folks this realist to another question, which was I was a little shocked to see how strong the initial reaction against Netflix winning this was from Hollywood. And I kept thinking, they're both of concern if you're in the business of making movies and television shows and you make a living in Hollywood.

15:00Peter Kafka:But I would think you'd be equally concerned about the Ellisons and the Saudis in particular owning this entity. And so why do you think that group of people has not complained? Well, I think the entertainment business would have pushed back on either deal. If Paramount had won, which was the expectation for going into it, all of the noise that there's been about Netflix and movie theaters wouldn't really exist, right? Because Netflix wouldn't have won. or all the concerns about, oh my God, is Netflix going to own all of Hollywood? People would be focused on aspects of Paramount's deal. They would be lamenting the loss of a movie studio.

15:44They would be probably talking about foreign ownership. There'd be a lot more discussion of what are the Ellisons planning for CNN and what's going to happen with the news business. So I think the fact that Paramount didn't win, at least yet, is a big part of it. The other is just, even though Netflix has spent so much money on programming over the years, and Ted Sarandos has worked very hard to become kind of a leading figure in the industry, and they are still treated by many as something of an outsider in the very insular Hollywood community.

16:23Peter Kafka:An outsider who's wrecked the business is the other part of it. Right. Well, that and that's what I was going to say next is a lot of the changes over the last decade. People blame on Netflix. Now, Netflix has obviously been a primary instigator of that. But rather than just say, you know, all of our studios fucked up, this Internet threat came about and none of them responded very well. And so we ended up in a situation where now the most powerful player is Netflix. They they they would rather just say, damn, you, Netflix, you do things differently. We don't like you. And there are there are some things about the way Netflix has done business that you have have written about, podcasted about all of that that are kind of legitimate gripes.

17:04And then some of it is just kind of people upset.

17:06Peter Kafka:I thought you were going to say a big reason Hollywood can't complain about Middle Eastern money is they're all flying out to the desert looking for Middle Eastern money, including some very mainstream names, some liberal, well-known liberals are out there either doing deals or hoping to get deals made with Middle Eastern oil money. I think that's true at the top level. I don't think that's true at the worker level. Right. But also the Middle East feels like a somewhat nebulous threat to some of them, I think. It's not as tangible as like, I know what Netflix, if you're a writer or a producer, you are living day to day feeling how Netflix has affected your life.

17:50Right. If you're a grip, you know, there's less work being done in town. Right. And you even if whether that's Netflix's fault or not, there is a part of you that is blaming them. If you have to worry about like Saudi Arabian influence on CNN or the death murder of Jamal Khashoggi, it doesn't feel like an immediate proximate threat. Most people are self-interested. So they're they're thinking about, you know, it's the same reason in any presidential election. It's like, can I afford my life week to week? If I feel good about my life, I'm, you know, I vote one way. And if I don't, I vote another.

18:21Peter Kafka:One more thing on the oil money. Warner Brothers Discovery has not said anything on the record about this. They have not produced, and they will any day now, a filing that says, here's how we came about deciding to pick Netflix as the buyer, sort of Paramount or Comcast. But Paramount in their filing has suggested, basically, you read between the lines, it It looks like Warner Brothers was at least concerned to some degree about the sources of financing is that it was. But it's unclear to me. Is it do you think that is because they're saying, well, we're uncomfortable with Middle East money or just that every time you come to us, the deal was a little different or we have some other concern?

19:02Peter Kafka:All of the above. from the conversations I've had with people involved in the deal. There was concern that the paperwork and the way the money worked seemed to change with each offer. There was concern about Middle Eastern money, if not ethically, that it would invite greater regulatory scrutiny that they didn't want. And then, I guess the more conspiratorial argument would be that it was also a really good pretext for accepting the Netflix deal that they wanted more in the first place. We'll be right back, but first a word from a sponsor.

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21:49Peter Kafka:and we're back what prompts one of these two titans to to tap out it's how when when do they say all right we we cannot it's the done i mean it's too much money too much hassle i assume i mean they're they're they're they've been in it for months now so it can't just be we change our mind right it's got to be we have officially reached a a price that we don't want to pay and how like if you think back to what happened where you know disney agreed to buy most of the entertainment assets from fox and then comcast comes in and says hey wait a minute we're gonna come up over your offer so that the board has to really think about it which then forced disney to pay even more yep we're in a very similar situation here i mean a little bit different in that there there hadn't been sort of this uh and you can correct me if i'm wrong i remember there being sort of like a you know a public auction between multiple parties with that one nothing close to it disney and fox just said we have a deal and everyone holy crap and then comcast came in but in this it is similar in that warner brothers has agreed to a deal with netflix paramount is has come back is is not going away and it may get to a price where either side finally says too rich for my blood i don't want to do it um we haven't actually added to the offers yet So we're not there yet.

23:11And it doesn't feel from the behaviors. Both Paramount and Netflix have really dug their heels in there. You know, Netflix issued it issued something this week that was essentially like a Q &A answering questions, which was presented as for our employees, but was clearly as much as anything for the public. um they're real you know each side is very focused on combating the narratives that they think hurt their cases um but a lot of that is about kind of public perception um and this i still say that this deal comes down to dollars and cents who needs this deal more oh paramount because uh because it's a smaller it is a fundamentally weaker company right david ellison bought Paramount or merged it with his company Skydance because that was his way of sort of getting in the big leagues.

24:02But he bought the smallest and weakest of the big Hollywood companies, right? It's the kind of last place or second to last place movie studio. It's kind of a third tier streaming service. It still makes pretty much all of its money from these cable networks that are slowly dying or rapidly dying. And so if you were trying to position that company for the future. Look, he can take all the money that they're going to spend on this deal and just invest it in Paramount. That is the argument against these deals is like rather than dealing with two years of pain in the ass process, like just buy a bunch of stuff, right?

24:39Go out and buy some IP, spend a bunch of shows. This is what Netflix would do when they didn't bid on deals. So Netflix is obviously in a much stronger position in terms of its stock price, in terms of how much money, in terms of where streaming service is. However, I would say that the fact that Netflix is seriously going after this deal signals to longtime Netflix watchers that maybe the company is not on as secure footing as the public would be led to believe.

25:06Peter Kafka:Yeah, that's what you and I were talking about a couple of weeks ago is a strength or weakness. It can be some of both. Right. I mean, I guess you can make the argument if you're on the Netflix side, like, look, we haven't done any of these deals before, but we never had the chance to buy HBO. This is a one of a kind asset. We don't have to deal with the cable networks anymore. And you know, the odds of anything like this coming up again are very slim because if David Ellison buys it, he's not getting rid of it. Universal is not going anywhere. Disney's not going anywhere. What else is there for us to buy?