Netflix Walks, Paramount Wins, and the Ellisons Take Hollywood

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1:35Peter 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 this is a bonus emergency podcast for very obvious reasons. On Wednesday, everyone thought Netflix was going to buy or had a reasonable expectation that Netflix might buy Warner Brothers Discovery. on Thursday we learned they're not going to buy it which means Paramount's going to buy it here to explain all of this is CNBC's Alex Sherman welcome back Alex thanks Peter you pretty much just explained it there yeah podcast is over that's right thanks for doing it when when did when did your perception go from Paramount's made it made a bid now Netflix is going to counter that's what we all sort of thought was going to happen this week to Netflix is going to walk did Did you expect this?

2:26Peter Kafka:Did you have an inkling, I guess, is a more polite way of asking?

2:29Alex Sherman:I did not expect it to happen yesterday at all. I actually got a call about 25 minutes before the announcement. Well, I didn't get a call. I was reaching out to sources and I got one to call me back. And that was a plugged in person who told me it's over. Netflix is walking. And so you learned before I learned about 25 minutes before the news. Then I started frantically calling for a second source. Didn't quite get there in time for the announcement. I think, you know, just tweet it out. I should have just tweeted it out, but that's not the way we do things at CNBC. So, you know, I think I think Netflix at that point knew that I was onto the story and they were they were I think they were already going to publish their thing anyways.

3:10Alex Sherman:But look, the whole thing caught me off guard. I will say I don't think anybody was expecting this to happen, you know, the same day that Warner Brothers Discoveries board decided that the Paramount offer was was superior. That's the word that they use, a superior offer. To be clear, it's a table set.

3:30Peter Kafka:The idea was we sort of expected Warner Brothers to say, hey, we've got a bid here from Paramount Netflix. Now it's your turn to respond. Four days. They had said they basically had until Wednesday, end of day, next Wednesday to return. And Netflix had said, this is the offer we've made is we can go higher if we need to. So everyone, I think, expected them to go higher. Why do you think they didn't come back?

3:55Alex Sherman:Yeah. So, you know, look, I think there was a little bit of mixed messaging there. You also had Ted Sarandos saying just a day or two ago that they were going to be very disciplined on their bid. but the Paramount offer to your point, Peter, was only a dollar more than their previous offer. They went from$30 a share to$31 a share. So I think because the revised offer was not that much more, there was a decent chance that Netflix would be like, well, all right, well, we'll bump our bid a little bit and then we'll turn it back over to shareholders. You decide. The shareholder vote was only going to be in a few weeks from now, really.

4:32Alex Sherman:So we'll put out our offer. We'll put out your offer if you decide you want to go in Paramount's direction. Go for it. Don't vote our deal. And if you like our deal, then approve it. I did think it was an inkling that that was going to happen. I think in the end, Paramount probably decided we can definitely see where our own shareholder base thinks of this deal. The Netflix stock has tanked since all of this started happening. You go back to early December. It's down quite a bit. And in fact, shares shot up 10 % upon the news that Netflix was walking.

5:07Peter Kafka:Even this week, when it looked like Paramount's chances were improving, Netflix shares went up, which is a real signal saying, hey, hey, Ted Sarandos, we would like it if you didn't buy Warner Brothers Discovery. Right.

5:18Alex Sherman:So I'd have to think that that was part of it. I think it's also likely that when Netflix first announced the deal, perhaps they thought the regulatory process would be easier for them. It certainly appeared as though this was going to be a lengthy regulatory process, not to say Netflix wouldn't have been able to pull the right levers and make the concessions needed to get a deal done down the road. But it was not going to be smooth sailing. I think that part was quite clear, both in the United States and in Europe. And maybe that was another part of this where the Netflix leadership decided, you know what, if this is going to be that challenging for us, we just don't want to also have to get into a bidding war here.

6:02Alex Sherman:I'll say part three to answer your question is that because the bid was only a dollar more, I think Netflix also felt this could, in fact, get into a bidding war where if Netflix upped its bid, perhaps then Paramount would up its bid again. And then this would be a back and forth situation where Netflix was like, we don't even need to get into that. We're not comfortable with that. We'll just call it quits here. And then the last point I would say, and I know that there's like a section of social media out there that likes to poo poo this one. But I can tell you that I had private conversations with people that I trust around the Netflix universe or, in fact, that work at Netflix who told me initially that when Warner Brothers went up on the block, they were concerned only that it didn't go into the hands of somebody for cheap.

6:59Alex Sherman:That's what I was told directly. and so uh Netflix decided to take matters into their own hands with that and in fact they put in a bid and ensured it did not go for cheap and I think that Netflix leadership became enamored with Warner Brothers Discovery the more and more they looked into it and realized and thought about it was like how would this fit with us and certainly I don't want to say that they didn't want the asset or this was all just a ruse to drive the price up but because that's pretty

7:27Peter Kafka:extreme, right? And there's actually legal consequences. I don't think that's true at all, but I do think it's

7:33Alex Sherman:true that always in the back of Netflix's mind, they felt like well, worst case scenario here, if we walk away with a breakup fee and we force Paramount to pay up the nose for this, that is not a bad situation necessarily for us or at least it puts it's sort of the least bad situation if Warner Brothers Discovery is going to go to a competitor, right?

7:55Peter Kafka:We have to lose, but we basically wounded you by getting you to spend all this money. And the Netflix people for years, when Fox and Disney combined, other mergers are being floated. I would say, hey, how come you guys aren't bidding on this? And they would say, well, we don't want to buy companies. We want to spend money on talent. And they would also say, and by the way, we're very happy for Fox and Disney to spend two years integrating and going through regulatory clearances. We're very happy to see what was then called Time Warner get tied up in court for years when AT &T was buying it. We can just move ahead.

8:29Alex Sherman:But by the way, one of those companies that said that over and over again was Netflix to like every other. That's what I'm saying. No, Netflix. Netflix always said that.

8:37Peter Kafka:And then, of course, forgot that when they wanted to buy Warner Media. But back to why they walk. Right. So there's the price stuff. But we always knew that Paramount was going to spend more. Paramount said over and over, we're going to spend more. You would think if Netflix had already said we're going to spend twenty seven dollars and change per share that they could add another dollar. It is surprising to me that they are surprised by the blowback enough not to bid more. And similarly, on the regulatory stuff, I know that Ted Sarandos had made a lot of entreaties towards Trump, but he knew that Trump and Allison had a tighter bond.

9:16Peter Kafka:And it is surprising to me that they were surprised. And you never know. A lot of this is just the power of images and photos. But that those shots of Ted Sarandos leaving the White House yesterday afternoon looking kind of glum. There's actually if you can look on Getty, there's also amazing shots of him taking a selfie with some guy in front of the White House. And Ted Sarandos looks like he would rather be anywhere else than taking a selfie with that guy in the White House. suggests that they underestimated how much political pressure there would be. Do you think this is more of, if we had to make you choose, do you think this is more of a money thing or a we can't get this deal done thing?

9:55Alex Sherman:Yeah, I don't want to, the cop-out answer is both, I think. I do really think the answer is both.

10:01Peter Kafka:By the way, that's what I wrote, so I think that's a fair answer.

10:03Alex Sherman:I mean, clearly shareholders didn't like the money aspect of this, and tied into that was there was inherent risk that the deal wouldn't get done and they'd be tied up in this for a long time. So I think, you know, and look, I think the other part of it is, call it political or whatever, but I do feel like Netflix did not want to have this thing drag out for a long period of time and then be forced into a position again where in order to get the deal done, it had to make all of these concessions it didn't want to. And I think that the tea leaves suggested that's where we were headed.

10:41Peter Kafka:So, Paramount has already basically said this deal has been pre-approved by Pam Bondi and the DOJ. That's not officially true. In theory, the DOJ can review this, and they might, but, you know, Pam Bondi works for Donald Trump. If Donald Trump wants this deal to go through, Pam Bondi is not going to stop it by filing a suit. You've heard rumblings from the California state's attorney general saying, hey, we're going to try to stop this. We don't know what Europe's going to do. Again, we're just speculating. But is there any reason to think this deal gets stopped for regulatory reasons now?

11:16Alex Sherman:Probably less likely than Netflix, I would say. I think the California AG one is real. I mean, there's going to be a lot of job losses, I think, attached to this in Hollywood that probably were not going to happen in a Netflix deal.

11:29Peter Kafka:Have we ever seen an attorney general suit stop a merger? Right.

11:32Alex Sherman:I mean, I'm trying to think now. That's a good question. I don't think it's unprecedented, but I cannot think of a deal off the top of my head. Rare if ever. It's rare. You can't think of it. It's rare. Okay. Yes.

11:46Peter Kafka:And Europe might try to stop it. Europe has stopped other deals in the past, although it seems like Europe's less interested in stopping deals Donald Trump likes right now.

11:57Alex Sherman:Yeah. Also, I think Europe is particularly attuned to big tech not getting all that much larger. Netflix, I think, fell into that bucket much more so than Paramount, which is really not big tech at all. It's legacy media. So I would imagine the regulatory path is probably smoother from that end in Europe than it would have been for Netflix.

12:22Peter Kafka:OK, let's let's walk through what happens to each of these three players now. um warner brothers discovery we assume is going to get bought by paramount so the big assets there there's the tv movie studio there's hbo and there's this collection of tv networks the one everyone in my world your world cares the most about is cnn david elson hasn't said what he's going to do with any of these assets more or less except i guess make more movies that's been his pitch to to to hollywood but we don't know what that means for leadership at any of these companies who's going to run them. Do you have any sense of what happens to any of these?

12:57Alex Sherman:No, I mean, I'll front run my own story here that I'm currently working on real time for CNBC. There is a lot more anxiety, depression among Warner Brothers Discovery employees with this going to Paramount than what I picked up on in terms of had this gone to Netflix.

13:23Peter Kafka:A lot of them had said, if we have to get bought, we'd prefer to get bought by Netflix.

13:27Alex Sherman:Correct. And so why is that? Well, Netflix is not really in the business that Warner Brothers Discovery is in for most of their businesses. I mean, they're not really in the theatrical business. They're not really even in the prestige TV business. So a lot of those leaders would have been left alone de facto because there aren't existing leaders at Netflix that do those jobs. That is not the case at Paramount. and that goes across the board. They have a movie studio. They have a streaming business. They have a news business. They have a sports business. They have a streaming business. There's just so much overlap here that this is why Paramount has put out the$6 billion synergy number or whatever the latest version of that is because there's going to be a lot of job cuts that are involved here.

14:13Alex Sherman:And so part of the whole premise of this deal is that there's so much overlap that we need to suss out who's going to run all of these divisions. And then whoever doesn't run these divisions will lose their job.

14:25Peter Kafka:Yes, along with thousands of other employees.

14:28Alex Sherman:Along with thousands of other employees, yes. So there'll be a lot of cuts at the leadership level and there will be a lot of cuts at the rank and file level for lack of a better term. So that leads to kind of a depressing scenario from the Warner Brothers Discovery standpoint. So I don't think anybody has a good sense yet of who's going to run these divisions. It's just so early on at this stage. But as my story will say, that's kind of assuming this deal does in fact get done. That's the next chapter here. The next chapter is to figure out, OK, we've got all of these people now. How are we going to restructure this thing so that we put the right people in charge?

15:07Alex Sherman:How fair is that process going to be from a meritocracy standpoint versus, you know, well, we're paramount. We're coming in. And so we're making the calls here. And, you know, it'll just be it'll be old school Paramount buying Warner Brothers Discovery. And we're going to take over from a cultural standpoint and a relationship standpoint. Like, we'll see. But that's why there's so much anxiety on the WBD employee side.

15:31Peter Kafka:As an aside, the idea of combining in particular CNN with CBS has been around for years and years under many different ownerships. I don't know why it's always CBS, but this is not the first time people have contemplated that. And I think there's an alternate reality where you go, it makes perfect sense to take a big news gathering operation that's on broadcast TV and one's on cable. And yes, there'd be some cuts, but you could make something really, really strong if you combine those two assets in theory.

16:01Alex Sherman:Yeah. Just a quick note about why it's CBS. Well, it's not going to be NBC because they already have MSNBC and it's not going to be Fox because they already have Fox News. So really, it was just ABC or CBS in terms of network news that didn't have an associated cable news network. And I think the thinking always was it's more likely to be CBS than than Disney. So that's why I think it's been CBS.