Netflix has a big unanswered question. That may kill its Warner Bros. deal

By David Goldman, CNN

(CNN) — Netflix’s shocking $72 billion bid to buy Warner Bros. and HBO is the rare corporate mega-merger that can shift the tectonic plates of an entire industry and permanently change the way all of its participants do business.

In other words: It’s the kind of deal that could force antitrust regulators to put away their rubber stamps and take out their magnifying glasses.

Hollywood is at a precarious moment, upset by rapidly changing consumer behavior fueled by significant growth of tech rivals, including YouTube, TikTok and, well, Netflix. That has created massive uncertainty for legacy movie and television businesses. Hollywood acknowledges that its industry is in crisis and needs to adapt – perhaps through consolidation.

Netflix believes a combination with Warner Bros. and HBO could create more opportunity in Hollywood, turning Warner’s robust intellectual property into shows and movies that Warner Bros. Discovery couldn’t have produced on its own. And it could widen HBO’s somewhat more niche audience, giving it broader appeal and more funds to produce high-end content.

But those potential benefits may not be enough to satisfy antitrust regulators, who will be scrutinizing the merger of two of world’s three largest streamers with this year’s best-performing movie and television studio. Governments around the world will be investigating whether the deal could reduce competition and possibly harm consumers.

That’s why Netflix will have to answer a crucial question: Why does it want to buy Warner Bros and HBO? That answer could determine both companies’ fates.

Antitrust concerns

The deal would see Warner Bros. acquired by one of its biggest customers: In addition to its massive movie studio, Warner Bros. makes television shows for various networks and streamers – including Netflix.

Meanwhile, the deal would consolidate No. 1 streamer Netflix with No. 3 HBO Max (Amazon Prime Video holds the No. 2 spot), just as companies are raising subscriber prices in response to slower growth.

The new company’s market share would surpass the 30% benchmark that regulators set to determine whether to block a merger in the US Department of Justice’s most recent antitrust guidelines, issued in 2023.

“It looks challengeable,” said Herbert Hovenkamp, an antitrust law professor at the University of Pennsylvania. “This is a fairly concentrated market where you get concerned about higher prices.”

Hovenkamp noted that the DOJ’s previous antitrust guidelines, written in 2010, likely wouldn’t have supported a legal challenge – so a case could test whether the Trump administration will adhere to Biden-era antitrust rules. The Justice Department did not respond to a request for comment.

Republicans, traditionally a pro-business party, control Washington at the moment. You might expect that means this deal would sail through. But today’s GOP includes populists Missouri Sen. Josh Hawley and Utah Sen. Mike Lee, who already put out a statement that the proposed merger should “send alarm to antitrust enforcers around the world.”

And Vice President JD Vance, who has lavished praise on former President Joe Biden’s former top antitrust cop Lena Khan, may also prove a crucial voice in the negotiations that follow.

Both Netflix and Warner Bros. Discovery have massive international businesses as well, and global regulators – particularly in Europe – could raise objections. That’s the argument that Paramount, which had appeared until the last couple days to be the frontrunner to buy Warner Bros. Discovery, has been making: Regulators are unlikely to allow Netflix to get substantially bigger.

What Netflix will do with Warners

Netflix has its work cut out for it. It’s already begun laying out its case: The company has been talking up its world-class algorithm and deep understanding of what viewers want to watch. That’s on purpose: If antitrust enforcers believe the deal is about efficiency, regulators could let it skate through, because it could improve the consumer’s experience and encourage more competition. 

If regulators believe Netflix is about growth and dominance, perhaps not.

“Antitrust enforcers will want to understand why Netflix is doing this deal at all, and they’ll need to understand the motivations as well as the executives involved,” said Doha Mekki, former acting assistant attorney general for the Department of Justice’s antitrust division, who served under Presidents Obama, Trump and Biden.

“The companies will make the best arguments they can about scale, efficiency, and availability after the merger. But at the end of the day, federal and state antitrust officials have to answer some important questions,” she added.

For example, regulators will examine whether the deal would increase Netflix’s power over creators, distribution and consumers – and whether the merger review itself puts decisions and innovation on hold at Warner Bros. and HBO, Mekki said.

Of all Warner’s potential suitors, “In some ways, (Netflix) may be the hardest of the lot to justify on antitrust grounds — especially if the deal entrenches Netflix’s market power,” she added.

Workers may be key

Hollywood’s shift to streaming has turned its business model on its side – shortening films’ exclusivity periods in theaters to around 45 days from two months, reducing the number of writers on shows and the number of episodes in a season. That has drastically reduced the number of jobs for theater workers, actors, writers, directors and crew members.

Hollywood’s unions fear Netflix’s purchase of Warner Bros. and HBO will exacerbate those trends. That’s why they came out vociferously against this deal Friday.

Netflix offered assurances to the contrary, saying the businesses were complementary and would create even more opportunities for creators. It said, for example, it would commit to putting Warner Bros. movies in theaters.

But worker advocates fear Netflix could eventually bend Warner Bros. and HBO to its streaming-first model, potentially further reducing competition and eliminating thousands of jobs.

“The world’s largest streaming company swallowing one of its biggest competitors is what antitrust laws were designed to prevent,” the Writers Guild of America, the union representing Hollywood writers, said Friday. “The outcome would eliminate jobs, push down wages, worsen conditions for all entertainment workers, raise prices for consumers, and reduce the volume and diversity of content for all viewers.”

Although antitrust enforcers typically focus on consumer harm, there’s precedent for scrutinizing what a merger could do to workers, as well. That’s how the Justice Department successfully challenged Penguin Random House’s $2 billion bid for rival publisher Simon & Schuster.

Rather than focus on the consumer impact — whether fewer books would be sold — the case was built on whether having fewer potential book publishers would mean lower advances for writers. Author Stephen King was the first witness at trial.

The Trump administration and many state attorneys general have signaled they could still consider how deals affect workers and producers in antitrust reviews, Mekki noted.

The Trump factor

Other factors could loom large over antitrust regulators’ potential approval or rejection of the deal. One key question on insiders’ minds: Will politics come into it?

“I’m horrified by the thought that enforcement policy could be driven by the whim of the president, but the fact is he very well could do that,” said Hovenkamp.”

Paramount CEO David Ellison made several overtures to President Donald Trump to win regulatory approval when his Skydance production company sought to buy the movie studio. That’s why Hollywood widely expected Paramount to be in the catbird seat for its proposed purchase of all of Warner Bros. Discovery – in contrast, Netflix plans to buy just Warner Bros. and HBO after the existing company spins off its cable assets, including CNN.

On Friday, CNBC quoted an anonymous senior administration official saying the Trump administration is viewing the deal with “heavy skepticism.” It also reported that Paramount may try to take its offer – valued very slightly lower than Netflix’s – to Warner Bros. Discovery shareholders. The potential argument: It faces fewer regulatory hurdles than Netflix’s bid.

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