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Netflix prides itself on being good at hard things. There is some evidence to back up this self-belief. The company co-founded by Reed Hastings started off renting out DVDs by post, and managed to parlay that doomed business model into a $440bn streaming empire. It has raised subscription prices several times without losing customers. A planned purchase of Warner Bros Discovery will test whether this record of pulling off the improbable is a reliable, repeatable skill.
The deal announced on Friday puts an $83bn price tag on WBD’s studio and streaming businesses, including debt. The former make TV and film content, mostly destined to be screened in cinemas or sold to other broadcasters. That alone is new territory. Netflix produces a tonne of content, but it doesn’t really screen its films in theatres at present, other than for prestige reasons, and licenses its content only in a limited way.
What Netflix really covets is closer to its current competencies: WBD’s “intellectual property”, or in plain English, franchises like Harry Potter, Game of Thrones, Friends and The Sopranos. Think of the way Netflix turned the dusty Addams Family brand, which it licenses from current owner Amazon, into the hit show Wednesday. Seen one way, the company is paying five years’ worth of what it spends on content already.
Watchers of the M&A market know that big media deals have a dismal history. Look no further than the creation of WBD itself from Discovery and WarnerMedia, a Frankenstein’s monster stitched together with debt that has struggled to compete with deep-pocketed streaming rivals. If inexperience further raises the risk of big deals, Netflix is sunk. This is its first transaction of stature.
Still, the maths are not too demanding. To justify an $83bn acquisition price, based on the fact investors value Netflix itself at 9 times forecast sales according to LSEG, it would need to make just over $9bn of extra revenue a year. That’s not a big stretch. Even with no income from cinemas or licensing, it could amass enough to justify the deal by selling 45mn more subscriptions at the standard $18 a month — WBD already has 128mn streaming customers — or increasing what its 300mn-or-so current subscribers pay by roughly $2.50 per month.
The reality of a deal is far less simple than the numbers suggest. There is, for starters, a cast of thousands to consider. Regulators will want a say, and could impose all kinds of irksome conditions. Expect a furious debate over whether market share discussions should factor in YouTube, the only streaming platform with more share of users’ viewing time, according to Nielsen. Actors and writers too will have strong views. Any hope that the deal will sail through intact is probably fantasy.
Besides, what looks like a classic cinematic marriage ending could prove merely a cliffhanger. Paramount Skydance, which wanted to buy the whole of WBD, seems unlikely to go quietly. It could focus its efforts on lobbying to derail Netflix’s plans, or jump in with a higher, all-cash bid. That said, if Netflix in effect provokes its rival into massively overpaying and loading itself up with debt in the process, the streaming colossus may emerge looking even smarter than it does now. There is much to play for.
john.foley@ft.com
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