If there was any lingering doubt that the fragmented streaming market is consolidating, it was just wiped away. Late last week, industry-leading Netflix (NFLX +1.49%) made the winning bid for Warner Bros. Discovery's (WBD 0.30%) streaming platforms and studio, beating out Paramount Skydance (PSKY 2.38%) and Comcast (CMCSA 0.98%) for the prized HBO and HBO Max brands.
Paramount isn't simply letting go, though. On Monday, it made what it argues is a better offer for the entirety of Warner, including Warner Bros. Discovery's cable television assets. The suitor says its deal could also be completed sooner, since it wouldn't need to wait for Warner's split-up (announced in June) before proceeding.
Antitrust concerns have already surfaced, with both bidders saying their plan presents the lower risk of becoming a competition-quelling monopoly. It's also possible that the Department of Justice won't like either plan well enough to allow it to proceed.
Whatever awaits, the recent drama confirms that Netflix is not only the big name to beat in the streaming business, but that it's setting the tone and pace for the entire industry. That bodes well for current and prospective shareholders.
The suitors' targeted prize
Netflix's offer values Warner Bros. Discovery's streaming business and studio at $72 billion, after absorbing nearly $11 billion in debt. That's for a studio currently turning about $12 billion in annual revenue into EBITDA in the ballpark of $2 billion, and a streaming business that turned a little over $10 billion in annual sales into $677 million worth of operating profit last fiscal year. It would also bring IP like Warner's Batman and Superman, Game of Thrones, and Looney Tunes to the table.
Notably, Netflix's offer didn't include Warner's television assets, like CNN, Animal Planet, TNT, or Discovery, which generated more than $20 billion in revenue last year, and just over $8 billion in EBITDA. That's not the case with Paramount Skydance's $108.4 billion offer, which is for the entirety of Warner Bros. Discovery as it stands today.
For perspective, Netflix is currently turning roughly $45 billion in yearly revenue into income on the order of $11 billion, versus an adjusted EBITDA of $9 billion on $39.3 billion in sales for Paramount last fiscal year.
NASDAQ: NFLX
Key Data Points
There's one stark difference between these two entertainment companies' results. Netflix's business continues to grow, while Paramount Skydance's is on the defensive. Of course, both companies could still do something impressive with Warner's intellectual property and brand names, even if we don't yet know exactly what that might be -- that is, if the DOJ's antitrust arm allows either deal to go through.
Given the rhetoric right now, Netflix's odds of ending up owning Warner's streaming assets and studio are arguably somewhere in the ballpark of 50/50. Paramount's are only slightly better, however. It already owns a streaming platform with nearly 80 million subscribers of its own (Paramount+), along with cable channels Comedy Central, CMT, and Nickelodeon, plus broadcast network CBS. Any argument that its deal wouldn't eliminate too much competition isn't exactly on solid ground, either.
To current and future Netflix shareholders, whether or not it's ever allowed to own any part of Warner Bros. Discovery just became secondary. The acquisition drama so far confirms a handful of bullish things about the company.
With or without Warner, Netflix wins
Don't misunderstand. Netflix would love to bring the Warner Bros. Discovery film and television studio into the fold, along with consumer-favorite franchises like DC's superhero lineup and Harry Potter, as well as most of Warner's 128 million streaming subscribers. Even if it ends up not happening, the story so far sends a handful of subtle bullish messages about Netflix's place within the streaming business.
1. Its current size makes it the name that others want to work with
We don't know how much Paramount privately offered for Warner Bros. Discovery, or the terms of those offers. But it's probable that Paramount Skydance's original offer made to Warner's board of directors looks pretty similar to the one it's now making directly to WBD shareholders.
Warner's board opted to sell to Netflix anyway, perhaps recognizing that Netflix is in a position to do the most with the assets it would be selling. That makes sense. It's also the world's biggest streaming platform, with more than 300 million paying customers as of the end of last year. It's easier to remain the biggest than it is to become the biggest.
It may end up meaning nothing this time around. It's a hint, however, that Netflix has a "first dibs" kind of authority when the next acquisition prospect surfaces.
2. It confirms that Netflix is regarded as the industry's leading powerhouse
Similarly, Paramount Skydance's somewhat reactionary response to Netflix's successful bid indicates panic that the already-biggest name in the business could get even bigger. Paramount probably doesn't really want Warner Bros. Discovery's deteriorating television business (which presents antitrust concerns of its own). It's just willing to take it in order to prevent Netflix from gaining any part of Warner.
3. If the deal gets done, Netflix could become a force on multiple fronts
Finally, given the possibility that the antitrust-minded pushback is more noise than substance and Netflix's offer for Warner Bros. will become a done deal, Netflix stands to bolster its growth as a result.
Image source: Getty Images.
Not everyone agrees. As Morningstar analyst Matthew Dolgin put it, "We think that any realistic amount Netflix would pay to acquire the Warner Bros. streaming and studio businesses would be value-destructive," citing significant overlap in its customer base. He's not wrong.
Combining two overlapping customer bases isn't all this pairing would bring to the table, though. Melding the two companies into one could allow Warner to also become a licensing and distribution arm for Netflix's in-house content that's mostly contained within its own distribution silo right now. And it's not exactly a secret that Netflix is increasingly eyeing reach beyond its customers' homes, including the silver screen.
Forget the numbers (for now) and just think philosophically
Bottom line? Yes, Netflix stock has been understandably dragged down by the prospect of the deal. It's seemingly a lot of money for a questionable amount of value.
Now look at the bigger picture. The streaming industry is consolidating itself anyway, largely out of necessity for most. Netflix is better served by proactively managing this shift and acquiring properties with staying power, rather than being reactionary to this change and then not being able to buy or build anything worth owning.
It also might be wise to simply trust the decision of the management team that created the industry it now leads.
