One Battle After Another
Why Netflix Wants WBD So Badly and the Rising Value of Proven IP in an AI World
For the last week, my LinkedIn feed has been wall-to-wall screeds, rants, and analyses of the proposed Netflix-WarnerBros. Discovery (WBD) merger. Many of these: 1) argue that the deal marks the end of Hollywood, because Netflix is hellbent on destroying it; 2) predict that any deal will fail regardless of who prevails, because this is media and media mergers fail; or 3) try to handicap whether Paramount or Netflix will win.
I don’t agree with the first or second views, which are overly simplistic, and I won’t handicap the outcome because I have no insight. As of this writing, the deal values are arguably pretty close and the prediction market odds favor Paramount. According to press reports, Paramount has signaled that it can go higher, but Netflix certainly has the capacity to do the same.
To me, the more interesting question is: why does Netflix want it so badly?
Tl;dr:
This deal is very much out of character for Netflix, which has never taken on an acquisition anywhere near this size. It is incurring risk, pressuring its stock price, and absorbing significant management distraction. It raises the question: why?
Netflix doesn’t need the WBD Streaming and Studio assets to win the “Streaming Wars”—that battle is over.
Instead, it is preparing itself for the next battle: an almost unimaginably vast amount of “good enough” AI-enabled and created content, competing for finite attention and probably pressuring content prices.
In that world, proven, franchisable IP becomes more valuable than ever, for three reasons: IP as filter, IP as moat, and IP as platform.
IP as filter: when confronted with infinite choice, consumers will turn to recognizable, proven IP as a way to cut through the clutter.
IP as moat: evidence across animated films, video games, and music shows that it has become increasingly difficult to create new franchises.
IP as platform: traditional media can’t win the time game, but it can win the engagement game by thinking of its content not as a product, but as a continuous service across multiple formats and touchpoints.
Whether Netflix prevails or not, it is telling us something.
Netflix Has Shown Its Hand
Why Paramount wants WBD so badly seems relatively self-explanatory and, for that reason, not so interesting. Paramount is subscale. One of its “North Stars” is to scale its streaming business globally. For reasons I’ll explain below, this would be extraordinarily hard to do organically. Putting aside the difficulty of creating new hits, it just lost Taylor Sheridan, arguably the most important creative currently in the Paramount stable, to NBC Universal—underscoring the challenges of building critical mass in content from the ground up.
Regardless of who prevails, Netflix has tipped its hand.
So, back to Netflix. Netflix is not subscale, to put it mildly. It has over 300 million global subscribers and this year is on track for ~$14 billion in EBITDA and almost $9 billion in free cash flow.
It is important to emphasize that this deal would be a massive departure for Netflix. It has never bought anything anywhere near this size. It has also never incurred much debt. If the deal closes, by the end of next year, its debt leverage (net debt/trailing 12-month EBITDA) would climb to 3:1 from about 0.5:1 today. That is unquestionably manageable and will fall rapidly owing to its free cash flow generation and EBITDA growth, but still: it adds risk. And it has never had to integrate an acquisition of this scale and absorb the management distraction (both from the regulatory process, which is sure to be bruising, and then the integration).
Since speculation arose on October 31 that Netflix retained bankers to explore a WBD bid, its market cap has declined by almost $60 billion. To complete this deal, it proposes to take on $71 billion in debt and issue another ~$12 billion in equity. Relative to Netflix’s current market cap of a little over $400 billion, that is not a bet-the-company bet, but it’s still a big one and carries a big opportunity cost. Consider that, instead of increasing its shares outstanding by 3%, it could alternatively allocate that $71 billion of debt capacity toward purchasing its own stock, equivalent to 17% of the share base at current prices.
Netflix management is not incurring all this risk or opportunity cost lightly. Whether it prevails or not, it has tipped its hand. Netflix must really want WBD.
Why?
What WBD Studios and Streaming Brings to the Table
The proposed deal has Netflix acquiring the WBD Streaming and Studios businesses, not the cable networks (to be called Discovery Global and separated out prior to the transaction). So, here’s what Netflix would get:
One of the largest libraries in the world. As of 2022, Warner Bros. claimed that its library held 145,000 hours, including 12,500 feature films and 2,400 TV series (comprising 150,000 episodes). It would also get the HBO library, which is far smaller but has many high quality titles.
Some of the best-known franchises, including DC (Superman, Batman, Wonder Woman and, depending on how you count them, hundreds or thousands of additional characters), The Wizarding World of Harry Potter, Lord of the Rings, Game of Thrones, Looney Tunes, Hanna-Barbera, and many long-running TV series, like Friends, Big Bang Theory, Game of Thrones, Sex and the City, ER, The Sopranos, and West Wing.
The Warner Bros. lot and studio operations, including a 110-acre lot and dozens of soundstages in Burbank and a 200-acre studio in Leavesden (UK).
The largest producer of film and TV for third parties in the world, including theatrical distribution.
The HBO linear networks and HBO Max streaming services, which have 58 million domestic and 70 million international subscribers. The Streaming Segment (which includes the linear networks) is on track for between $10-11 billion of revenue and about $1.3 billion of EBITDA this year. Note that HBO’s rights are encumbered in some large international markets, like parts of Western Europe, Canada, and Australia, where it distributes through third parties.
The Last Battle: The Endgame of the Streaming Wars
Let’s first dispense with the obvious. In the so-called “Streaming Wars,” Netflix acquiring WBD is the endgame. It is the killshot, knockout punch, checkmate, you pick.
The Deal Will Make a Dominant Netflix Even More So
Netflix’s dominance over its traditional media peers is hard to overstate. The best way to illustrate it is probably Figure 1, which shows EBITDA for Netflix and the media conglomerates’ streaming businesses. As mentioned, Netflix is on track to generate almost $14 billion in EBITDA this year, multiples of the rest of the industry combined.
Figure 1. Netflix Generates Far More Operating Profit than Everyone Else, Combined
Note: Disney is on September FY, so 2025 is actual, not estimated. “Profits” are EBITDA, except Disney, which is operating income. Source: Company reports, The Mediator estimates.
In streaming, the trick is having enough compelling content that it both supports pricing power and minimizes churn. By inference, Netflix clearly already has a critical mass of good content without the WBD assets. Figure 2 compares average monthly revenue per subscriber in the U.S. (or U.S. and Canada, depending on how it is reported) for the largest streamers in 4Q24, the last quarter that Netflix provided subscribers. And Figure 3 shows churn the last time Antenna broke it out publicly. It has surely changed since the end of 2023 (in particular, Disney churn has fallen, since it now bundles Disney+, Hulu, and ESPN+), but you get the idea. Netflix stands out.
Figure 2. Netflix Has the Highest ARPU…
Note: (1) Paramount+ is global ARPU. Source: Company reports.
Figure 3. …And the Lowest Churn
Source: Antenna.
From this position of strength, WBD would obviously make it even stronger. Netflix has not been specific about how it might incorporate Warner Bros. and HBO content or HBO Max with the core Netflix service. It said it intends to keep HBO and HBO Max as separate services, which it surely will for a while, due to contractual and technical constraints and perhaps its efforts to appease regulators. But there is no question that it would bolster its core service with Warners (and possibly HBO) library content; mine both libraries for new development; and, to the extent HBO Max remains separate, devise attractive bundles of Netflix and HBO Max that would likely further reduce churn.
On top of that, the deal would make Netflix an even more dominant buyer of programming. Netflix is also already one of the largest buyers of content globally and, as shown in Figure 4, I estimate that in 2024 it spent more cash on non-sports programming than any other company (albeit by a nose). It’s a bridge too far to say that after this deal Netflix would be able to get any project it wants. Creatives choose studios and streamers for any number of reasons, including relationships, focus, and marketing commitment. But for any creative motivated primarily by money and distribution, this acquisition would obviously make Netflix an even better bidder.
Figure 4. Netflix Spent More on Non-Sports Content than Anyone in 2024
Note: Disney and Fox on September and June fiscal years, respectively. Source: Company reports, The Mediator estimates.
It Relegates Competitors to Subscale
Taking WBD off the table is also defensive because it prevents anyone else from getting it. This deal also would change the relative scale needed to compete. It is conceivable that, should it go through, eventually some combination of Disney, NBC Universal, and Paramount will also be compelled to join forces. In that scenario, if either or both of Peacock or Paramount+ fail to find a dance partner, they would likely be permanently relegated to being subscale.
Is Netflix willing to incur all this risk to win a war it has already won? Probably not.
This is all well and good. But let’s pause for a second. Is Netflix incurring all this risk to finish off its far weaker competitors? Is it really concerned about the competitive threat of a combined Paramount-WBD?
Probably not. This deal is about the next battle, not the last one.
