Speaking at the UBS Global TMT Conference shortly after Paramount’s all-cash rival offer, Netflix Co-CEOs Greg Peters and Ted Sarandos laid out the rationale for the game-changing deal to acquire Warner Bros.
Peters and Sarandos were interviewed by John Christopher Hodulik of UBS Investment Bank’s research division shortly after Paramount’s all-cash offer to shareholders to take control of the entirety of Warner Bros. Discovery. Netflix’s transaction is for Warner Bros. post the separation from the linear networks, which are being spun off into Discovery Global.
“We think it’s great for our shareholders, we think it’s great for consumers,” Sarandos said. “We think it’s a great way to create and protect jobs in the entertainment industry. We’re super confident we’re going to get it across the finish line.”
Peters acknowledged that the transaction was “unexpected” for the streamer, given its lack of major M&A activity in the past. “There are a bunch of titles that the Warner teams have that we think there’s more value to unlock in,” Peters said on one of the rationales for the deal. “We think we have exactly the platform to do that. We’ve got incredible reach. We’ve got a project experience that maximizes the value and content. Essentially, we are constantly in the business of evaluating various licensing opportunities for titles and then trying to figure out how to maximize the value of that asset on our platform.”
Peters also addressed the value of the HBO brand and its reputation for “prestige TV,” noting, “We want to double down on that concept. That gives us an additional lever” when it comes to packages for consumers.
Sarandos said, “We want HBO to double down on the things that people have loved for 50 years about HBO.”
Sarandos said that Netflix would retain Warner Bros.’s theatrical distribution business. “We didn’t buy this company to destroy that value,” he said. Similarly, the TV studio and its licensing engine would be maintained.
“These are the things that we’re going to keep going in this business. When we look at the whole deal, you see that their assets work better in our business model and our business model works better with these assets.”
The execs expressed confidence that the deal will pass regulatory hurdles. “At the end of the day, it’s pro-consumer—delivers more value to those folks. Pro-creator—we’re going to increase our content spend and deliver more. That means it drives jobs; it’s pro-worker in that regard. It’s pro-growth, pro-innovation,” Peters said.
Plus, he added, the deal would take the platform from 8% of viewing share in the U.S. to 9%, “So we’re still behind YouTube at 13%. A combined Paramount/WBD would command a 14% share, Peters noted. “We think that there’s a strong fundamentals-based case here for why regulators should approve this deal.”
On how a megamerger like this one would impact the “simplicity” of Netflix’s business model to date, Sarandos responded, “Simplicity was an early super power of ours. And today, it’s enabled us to do things that are much more complicated, but also chase bigger prices.”
The execs also addressed concerns about mass redundancies following a merger.
“We really do see it as a complementary situation,” Peters said.” If you think about the core business units that exist inside Warner’s that we would be acquiring, we don’t have those units right now. So we don’t have the redundancy issue. We’re not trying to consolidate. As Ted said, we anticipate executing and running those businesses as they are.”
“We’re not collapsing the studio, we are actually strengthening one of the most iconic studios in Hollywood by giving them a healthier business model to operate in and continue to release movies into the world, large, like they do right now,” Sarandos added.
The session also covered the traction Netflix has seen with its ad tier, and the platform’s approach to AI.
“We’re trying to think about all the different ways that creative AI tools can help creators tell better stories,” Sarandos said. “It will be great if it improves some of the efficiencies of the production cycle. But the idea that it has to be faster and cheaper is not good enough. It has to be better first. And then if it’s faster and cheaper, that’s great. But if it is just faster and cheaper without being better, it’s going to be bad for everybody. I don’t think it works as just as a cost-cutting tool. I think you’ll alienate audiences.”
Sarandos returned to the advantages of the Warner Bros. deal as the Q&A came to a close. “We think this deal with Warner Bros. is good for our shareholders. We think it’s good for consumers. We think it’s good for creators. We think it’s great for the entertainment industry as a whole because we’re creating and protecting jobs in production, and we’re going to continue to grow the business.”
