Hollywood’s old guard was long dismissive of the idea that Netflix could one day upend the establishment entertainment industry. “It’s a little bit like, ‘Is the Albanian army going to take over the world? I don’t think so’,” Jeff Bewkes, the former chief executive of Warner Bros’ parent company, said in 2010.
But on Friday Netflix — launched in the 1990s as a mail-order DVD movie rental service — agreed an $83bn deal to buy Warner Bros, the modern descendant of Bewkes’ company and home to the legendary film studio. The move closes an improbable arc befitting Hollywood treatment and cements the tech industry’s grip on entertainment.
Once again, incumbents across the old entertainment world underestimated the streaming pioneer that has upended their industry over the past two decades. As recently as Monday morning, Polymarket put the chances of Netflix winning Warner Bros at less than 5 per cent.
The deal marks the zenith of Netflix’s evolution into a Hollywood kingmaker with $450bn market value. The executives pulled it off by quickly and quietly assembling a strong bid even as they publicly played down their interest.
Netflix’s co-chief executive Ted Sarandos on Friday acknowledged many people would be surprised about its audacious bid for Warner Bros, but said this was a “rare opportunity” that could not be ignored.
If the deal is approved, Netflix will control some of the crown jewels of the entertainment business: the Warner Bros studio — including the Harry Potter, Batman and DC Comics franchises — HBO, still the envy of the television industry, with hits including Game of Thrones, The White Lotus and The Sopranos, and Warner’s own top-tier streaming service, HBO Max.
The auction has also been a stunning triumph for WBD chief executive David Zaslav, who a few weeks ago appeared set to be dethroned by the ambitious 42-year-old David Ellison. But Zaslav managed to stir up a competitive bidding process, boosting his company’s languishing share price and ending up with a buyer willing to let him remain the head of the WBD studios.
With the ink barely dried after Ellison closed an $8bn takeover of Paramount this summer, he set his sights on Warner and began making bids for it in September.
Zaslav bristled at the approaches, having already announced a plan to split WBD that would allow him to continue running the studio, streaming group and HBO — the more glamorous, faster-growing parts of the business — and spinning off legacy TV channels weighing on the share price.
But Warner’s board realised it had to move quickly or risk losing control of events, said people briefed about the matter. WBD formally kicked off an auction in October as Zaslav sought out other buyers. “It became obvious [Paramount] weren’t going to go away,” said a person involved in the sale process.
Internally at Warner, the sale process operated under the code name Project Sterling, with the bidders assigned aliases: Noble for Netflix, Wonder for Warner, Prince for Paramount and Charm for Comcast.
With a voracious appetite for the assets, flush with capital with the backing of his father Larry Ellison, one of the world’s richest people, and having gathered further investment backing from Apollo and Saudi Arabia, it appeared WBD was Ellison’s to lose. US President Donald Trump appeared to be publicly advocating for Warner to end up in the hands of Paramount, telling reporters the Ellisons are “friends of mine”.
Netflix, meanwhile, seemed to play down its interest. Co-chief executive Greg Peters told a Bloomberg conference in October that “we come from a deep heritage of being builders rather than buyers”. “Big media mergers . . . don’t have an amazing track record,” he added.
To keep momentum for the auction, Warner imposed an extraordinarily compressed timetable, giving bidders days to revise terms that would typically take weeks. “This was so big, it impacted so many people, we had to get on with it and not dilly dally,” said a person close to Warner Bros’ chief executive.
During six weeks, board directors were pulled into near-daily emergency meetings, all-night drafting sessions and a Thanksgiving-weekend of tough negotiations.
The auction came to a head this week, with final offers due on Monday morning. Netflix, Paramount and Comcast each submitted sharply different proposals. By Thursday night, after hours of debate, the board went into executive session and emerged with a unanimous verdict: accept Netflix’s offer.
Netflix had not been the obvious frontrunner. The company had never attempted a deal of this magnitude. But inside the boardroom, one factor outweighed price: Netflix had presented a fully-formed offer.
“Netflix was ready to execute this deal in every material way,” said a person involved in the sale negotiations. Its team spent 10 consecutive days addressing every request, tightening covenants and agreeing a $5.8bn break fee, among the largest on record.
The board wanted a proposal it could sign immediately. Netflix was the only bidder whose paperwork was fully executable that night. “Minutes after the vote, the contracts were signed,” said one person involved.
Netflix’s offer met all of the Warner board’s demands and it was willing to adopt requested changes to get the deal done. Paramount and Comcast, by contrast, were still seeking to negotiate certain terms, said people familiar with the matter.
Even Netflix insiders say that until recently they saw themselves as distant outsiders to the deal. “We always thought the chances of it going our way were slim as Paramount were in so early and so hard, even though we thought our case and strategy was better,” said one executive.
Zaslav could retain operational control of Warner even after Netflix takes over, although a formal agreement has not been signed, a person familiar with the matter said. This is a luxury he would not have been afforded under the Paramount deal, where he would have shared the chief executive role with Ellison.
Netflix said it expected the deal to close in 12 to 18 months. But people close to US regulators said the process could last longer as the transaction is expected to face serious antitrust hurdles. The combination of two of the largest streamers in the US was likely to be seen as anti-competitive, said a person close to Trump’s regulatory officials.
Netflix executives say they are confident of overcoming any antitrust concerns, pointing to the large and diverse entertainment market where audiences are shifting to digital platforms such as YouTube.
If the deal goes through it would make Netflix the “goliath of streaming services”, said Forrester analyst Mike Proulx, calling the deal “a seismic shift in the entertainment industry”.
Yet Netflix shares dropped 4 per cent at market open on Friday, indicating investors were sceptical about the purchase.
Hollywood’s creative class is similarly likely to be discontent with the outcome — with concerns about Netflix’s commitment to the cinema and decades of anxiety about the tech company that disrupted their business spilling into public view. The revered director James Cameron this week said selling Warner to Netflix would be a “catastrophic loss” for Hollywood.
On Friday, Cinema United, which represents more than 30,000 movie screens in the US, said it would oppose the deal, arguing it would risk removing “25 per cent of the annual domestic box office if films that are traditionally given a robust theatrical release by Warner Bros disappear from theatres”. Netflix has promised to meet Warner’s theatrical commitments.
Investors are waiting for Ellison’s next move. Paramount this week sent a letter to the WBD board questioning whether there has been “a tilted and unfair process” favouring Netflix.
Sarandos used Friday’s investor call to reflect on Netflix’s unlikely history and justify the big swing.
“Remember, we started off as a DVD-by-mail company, then we moved to streaming, to producing original content, live programming, from a US-centric business to a global business,” said Sarandos, who keeps a replica of Rosebud, the childhood sled at the heart of the Warner Bros’ film Citizen Kane, in his home.
“In a world where people have so many choices, more choices than ever how to spend their time. We can’t stand still.”
Additional reporting by Oliver Barnes
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