Welcome back everyone. Today on the Jezebel Carlson
show, we have some massive news. This is ground shattering news.
We have Netflix, biggest streaming company in the world,
buying Warner Brothers and HBO. They're not buying Discovery.
And therein lies the detail. There's a lot of nuances in this
deal. And frankly, when I'm looking
online and I'm, I'm browsing across X, the amount of bad
takes on this I've seen are frankly just incredible.
There are so many people that have no clue about this deal.
They don't know what's going to happen.
They don't understand the intricacies of it.
They don't even understand what the deal is, what Netflix is
actually buying, what they're not buying.
They don't understand the strategic plan of Netflix, why
Netflix is motivated to do this. They don't understand what the
balance sheet will look like after it.
And so there's just a ton of bad information being spread online,
tons of bad takes, lots of people saying that this can't
happen or that can't happen, and I've had enough.
So I'm making this video just to clear things up.
We'll be sharing the actual data.
We'll be diving in and giving you a real insight into what
this deal actually is and why Netflix wants to do it.
So I also say this is someone that I've covered Netflix on
this channel for literally years.
You can go back throughout my history, I've been somebody
that's covering Netflix and I've been right on it.
I'll just point that out. Netflix is a company that I said
would be a massive winner in the future going back all the way to
2021 and they have been, Netflix has been an enormous winner.
It's a company that I have over $115,000 invested into, the
majority of that being gains. So this is one that I was buying
during the Lowe's. I even even when they were
losing subscribers, this is a company that I still stuck with.
Now, again, today, Netflix announced that they're buying
Warner Brothers Discovery, which includes the enterprise value of
$82 billion. So this is a massive
acquisition, and they say that they're buying Warner Brothers
Discovery, But there is a lot of nuance to this of what they're
actually buying and what they're actually not buying.
This is the first thing that a lot of people are getting wrong,
They say. Today, Netflix and Warner
Brothers Discovery announced that they have entered into a
definitive agreement under which Netflix will acquire Warner
Bros, including its film and television studio, HBO Max and
HBO. So notice what they're buying
there, They're buying Warner Bros.
So they're they're getting the the film studio.
The film studio is the one that has like tenant, right?
They're making Mad Max, The Matrix, like all those iconic
movies, tons of them are come through Warner Bros, right?
You see that you see that entrance whenever you go to a
movie. Warner Bros, one of the most
iconic film studios ever that has these massive film
franchises, so many different partners that work with them and
produce for them. Netflix is going to own that.
The other thing that they're buying is HBO Max and HBO.
So think about shows like House of Dragon, think about White
Lotus, think about The Wire, think about Sex and the City,
think about the, you know, the The Last of Us, all those type
of series like all these Friends, another one.
These are all owned by HBO Max and HBO.
It's also probably the most prestige film studio or at least
streaming studio in the world. Some of the most prestige, in
fact, I'd say the most prestige TV series ever made come from
HBO and HBO Max. That's what Netflix is buying.
What they're not buying is Discovery.
So even though it says here they've entered into a agreement
with Warner Brothers Discovery, they're not buying Discovery.
They're not buying the cable TV assets.
They're not buying all that old antiquated stuff where we
broadcast on cable television and they have kind of like the
daytime shows, right? Just kind of the slop that gets
broadcasted there. Netflix isn't getting any of
that. So this is a pureplay precision
deal just to buy the production studio of Warner Bros, all the
content that comes along with it and the specific prestige
content from HBO Max and HBO. Those services are highly
tailored, prestige boutique content.
And Netflix has carved out a deal where they're just getting
that, nothing else. Now, this is, it's a bit
different than most deals that happened like this.
For example, one of the the big deals that happened that was the
most similar to this one was Disney buying Fox.
Disney just recently, you know, a couple years ago, they bought
Fox and all the assets along with it for around $70 billion.
So roughly a little bit less than what Netflix is paying, but
around the same price. And that deal, Disney got all
the legacy assets, so they didn't just get like The
Simpsons, they got everything, all the cable assets as well.
So it makes it a more complex deal where they're getting a lot
of this antiquated legacy stuff along with it.
And that's different with Netflix here.
So the first big point that I want to highlight is this is far
more tailored to what Netflix is wanting.
Netflix does not want legacy cable TV assets.
They don't want Discovery. They don't want or need any more
reality TV shows that are on the the daytime television.
They already have enough of that.
What Netflix wants is higher quality movies.
They're getting that with Warnermedia.
Netflix has had ambitions to make better movies.
They just can't make the studios themselves.
So they're acquiring Warner Brothers to make better movies,
to buy better franchises. Things that you can't replicate,
you can't create out of thin air.
They're buying it. The other thing is the HBO and
HBO Max. This is, again, when I look at
what Netflix is lacking overall in their library.
Netflix is a great technologist. They're a company where they can
create highly scalable technology, very easy to browse,
very easy to use. It works on every device, right?
They they're completely global. They're like in every country in
the world. They're so good with technology,
they're so good with user experience.
They're so good at scaling their costs across and advertising it,
making their stuff go viral. What they're not good at is
making consistently high quality content.
That's been the weakness of Netflix for a long period of
time. They can have some random hits,
but most of the big hits they have are also, and in a lot of
ways they're acquired. K Pop Demon Hunters was a hit
that Sony made the Netflix acquired, they blew it up.
You also have Wednesday, that was one that MGM Studios owned.
Netflix acquired the rights to it and blew it up.
Netflix is good at taking high quality content that doesn't
have great distribution, putting on their platform and making it
have explosive distribution. So when I look at what Netflix
really wants, what would be really accretive for the
company, what would be very valuable is a highly tailored
library of incredibly high quality content.
And that's exactly what HBO Max has.
Again, they have shows like The Sopranos.
You have the Penguin, right? You have the whole DC Universe.
You have Superman, you have Batman, you have White Lotus,
you have the The Game of Thrones is kind of done, but you have
the House of Dragon and the new series that they're coming out
with. You have The Last of Us.
It goes on and on. They have like 30 plus extremely
high quality series that keep people glued week by week.
But the problem with HBO, the problem with Warnermedia is
they're not as good at technology.
They're not as good at distribution.
That's why they have 100 million subscribers, not 330 million
like Netflix. So in terms of what they're
actually buying, I want to emphasize this again.
Netflix is getting exactly what they want out of this deal and
more importantly, they're not getting what they don't want.
They're not buying any of the legacy media assets.
They're not buying any of the kind of slow moving, declining
cable assets. They're just getting the content
that they compare with their distribution.
Now, the way that this works is they're going to be taking on an
enormous amount of debt. This is another point of
contention, another point that confuses a lot of people.
When we look at the amount of debt that Netflix is going to
take on between the the two companies after the acquisition,
it's going to be like $80 billion.
So they'll have a net debt of around seventy, $80 billion.
Netflix is paying for this in part, small part around $5 per
share in equity, but the majority in debt and Netflix
always does that because they consider that their equity is
worth a lot more than cash. So they like paying for things
with money rather than with equity.
So they're not diluting the shareholder that much on an
equity basis. They're paying for this, the
huge majority of it with cash. Now you may be saying, Joseph,
that's a lot of debt. Aren't you concerned with the
amount of debt they're taking on with this acquisition?
That's the next thing that I want to point out.
Netflix is a company that's in an extraordinarily strong
financial position. This is not a struggling company
doing a defensive acquisition. They're on the offense.
They're growing, they're acquiring.
They're a company that has global scale.
We look at their revenue growth and this is what it looks like.
This is not a struggling company.
They're growing faster than most big companies in the world.
They're growing right in line with the likes of Google.
So Netflix has top line revenue growth like crazy.
And while they've done that, they've always bumped up their
operating margins overtime. Every single year, their net
income growth looks like this overtime, just staggering that
income growth. Their free cash flow growth is
incredible. It's exponential.
By the end of this year, it will be above $9 billion.
So Netflix is already generating $9 billion.
Analysts estimates were that next year would be well above
$10 billion and so on and so forth.
Their operating margins go up, their revenue grows.
There are estimates that in five years, I believe Netflix could
have tripled their free cash flow.
So instead of being at 9 billion, they'd be at roughly
$30 billion in free cash flow. That's an incredibly healthy,
profitable company. If Netflix on their normal
trajectory in five years could be generating $30 billion in
free cash flow per year, they could pay off the $70 billion in
two years, all the debt for this acquisition in two years.
But that doesn't factor in the asset that they're buying and
the cash flow that that asset produces.
We also need to factor in what they're buying.
If we bring that up here, Warner Brothers Discovery is a company
that is also, again, they have a lot of debt, but look at the
trend over time. When we look at Warner Bros debt
over time, this is what they've been doing with their debt.
It peaked at $48 billion and now it's down below 30. 4 billion.
They've been paying off their debt steadily with their own
cash flows. This is without Netflix's help.
So it is true that this deal will result in a lot of debt,
but it will also result in increased cash flows for both
Netflix and Warner Brothers Discovery.
There's a lot of other things that that help out with the
financial situation. For example, in a company like
Netflix combines with a company like Warner Bros, They don't
need 2 legal counsels. They don't need 2HR departments,
they don't need 2 central management systems.
So you also can erase a lot of expenses with their general and
administrative. Netflix said that in this deal
they expect around $2.8 billion of expenses to be reduced.
So already just with the deal with the general and
administrative expenses to run the two companies where they
only really need one, they can erase almost $2.8 billion
annually just in expenses to run the company.
So we can look at this already and we know that this is a
massive acquisition, an 80 plus billion dollar enterprise
acquisition from one really big company, Netflix that has over
300 million subscribers to another pretty big company, you
know HBO and Warnermedia that has 100 million subscribers.
So it is a a very big acquisition.
Now that we understand what they're actually buying, what
they're paying, how it affects their balance sheet, I think
it's good to look at the realistic chance of this deal
making it through regulatory authority.
That's always the biggest question mark that investors
have. And right now the biggest take
across social media is there's no way this is getting past
regulators. They're going to shut this down.
After all, how could the biggest streaming company buy another
big streaming company? Well, that's not really the full
story. There is some concern in
particular with the nuances of different relationships.
For example, there's David Ellison, 40% owner of Oracle,
the CEO, and then you have a son or sorry, that's Larry Ellison.
Then you have a son, David Ellison, son of Larry Ellison,
who dad gave him a lot of money, which is it was fine, but he has
a lot of money. He used that money to buy
Skydance. Then with Skydance, he bought
Paramount Global. And then David Ellison was on a
a terror hair. He wanted to keep acquiring
different companies. He wanted to buy Warner Bros
Discovery, the whole thing, but he got outbid and he's not happy
about that. So David Ellison and his company
is complaining to the Trump administration saying, hey,
look, go after him. You know, you got to stop
Netflix from buying this asset, so they'll sell it to us.
And Trump is really good friends with David Ellison's dad, Larry
Ellison, who is a supporter of Trump.
He's a good friend to him. So you also have this political
dynamic in the background. Trump likes Paramount Global.
He likes Larry Ellison a lot more than he likes Netflix.
So Trump is probably more inclined to say, hey, the
Department of Justice or whoever, go after him, go after
Netflix, really have a multi year investigation into this
deal, make it hard to pass, right?
And that's kind of like doing a buddy a deal.
Now, even without that, even without the Trump dynamic, it's
still the regulator's job to look at this deal.
So anytime this type of a, this big of a transaction goes
through, they're going to be inclined to look at this deal
regardless. But there's just that added
dynamic that makes it even bigger for Netflix and even
bigger hurdle. But even though a lot of people
think this deal is unlikely to go through, I don't think so.
I think that this deal is going through.
I think it has a high likelihood of doing so.
First of all, Netflix put a break up fee of $5.8 billion,
meaning that if the deal doesn't go through, Netflix is paying
almost $6 billion. That shows that they are highly
confident that this deal is going to go through.
Netflix would not have done that if they didn't believe there is
a clear path to having this deal settle.
The other thing is that Warnermedia and Discovery they
put in place that they have to pay around $2 billion if they
back out of the deal. So if Paramount gives them a way
better offer and then they back out of the deal, they have to
pay an additional $2 billion to Netflix.
So both of them are pretty locked into making this thing
complete. And there's reason to believe
that this deal could go through. The reason is, is because when
we look at some of the data here, for example, we can look
at some of the the TV Nelson data.
When you divide up a market, you look at the streaming companies
and what they would be if they combined.
This is the best gauge for that. The Nelson total TV viewing
time. When we look at Netflix, it
makes up 7.5% of the streaming market.
So this is just counting the streaming market.
When you factor in all of television and cable TV and
sports, they're even smaller, but Netflix just in streaming
7.5%. Now there is a caveat here.
They're including YouTube in this.
Regulators may say YouTube's not streaming.
That's a very difficult argument to make.
It's YouTube is a direct competitor to Netflix.
But even, you know, whether or not you include YouTube, Netflix
is still a very small portion of the total streaming market.
When you look at Warner Bros Discovery way down there,
they're 1.5%. So when you combine those
together, you know you get 9%. That is not a monopolistic
market share. Even with Netflix buying Warner
Brothers Discovery and combining their streaming together,
they're still smaller than YouTube.
So if they're a monopoly, so is YouTube.
In streaming. Even if you took YouTube out of
this and you just had the market share, they're still not above
30%. That's taking YouTube out of the
picture. So no matter which way you look
at this, Netflix does not have a monopolistic grasp on the
streaming market. It's highly fragmented and
Warner Brothers Discovery small enough that regulators will have
a difficult time arguing that this makes them some big bad
monopoly. It's just going to be very
difficult by the numbers. The other aspect of this, what
Netflix is actually doing here, is they're not just buying HBO
Max in the streaming market. They're also buying a production
studio, which is the Warner Bros production, and that is
vertical. That is not a horizontal market
share increase. That is expanding vertically.
Netflix does not have some big movie studio.
That's not a huge business for Netflix.
The companies that have that are Comcast.
Comcast has Universal, so Universal buying this would
actually be more difficult than Netflix.
Also, Paramount has a massive movie business, so Paramount
buys Warner Bros. That's going to be another thing
where they're looked at more critically than Netflix.
So Netflix is not a monopoly. If you combine the streaming
time in any reasonable way, they're not monopolistic.
It's not anti competitive and when you look at what they're
doing with buying the movie studios, that is a vertical
move, not a horizontal which is in a different market.
Having movies go to the movie theater, having a big roduction
movie studio is different than having streaming watch time.
So in either case, I think that Netflix has a very strong
argument that by doing this move, they're not becoming
monopolistic, they're not anti competitive.
I think they can make that argument and pass it through
regulation. Now, a few other things that
I'll mention is that Netflix is also doing a few minor changes
to their business model. They've done this routinely over
time and it's one of the things that Netflix is best at is
adapting and changing, changing their game plan over time, but
still keeping to the plan, which is growing a massive
entertainment business. It's highly profitable with ever
growing margins. The things that they're changing
now is Netflix has said even if they buy Warner Bros, they will
guarantee a theatrical release window.
So they're gonna guarantee that if you make your movie for
Warner Brothers Discovery, you'll have your movie in the
theater. That's one thing that's very
important to the film makers. Like they, they love cinema,
they love the movie theaters. They don't love it going
straight to streaming things. Going to straight to streaming
is like viewed as lesser than, right?
It's not really cinema. It's not the same thing.
So that's a big thing that Netflix is saying that they'll
do. They'll make it so that when you
you film and you produce for Warnermedia, it's going to go to
theater and then it will be to a bigger audience and streaming.
So the film producers should get the best of both worlds.
But many of them are still going to be concerned about this.
They don't like Netflix. Many people complain online
because Netflix is highly disruptive.
The other thing that Netflix said they're going to do is the
HBO brand is so good, it's so prestige.
The Netflix is not going to just consume HBO, put on the platform
and have the Netflix brand encompass HBO.
They believe that would be destructive to the brand value
of HBO. Instead, they're going to keep
HBO as a separate streaming service with all that with all
that prestige boutique content. Then Netflix can also take
selective shows off of HBO, show them to their Netflix audience
and get hundreds of 1,000,000 more people exposed to the HBO
service. They can also bundle the
services together. So you can sign up for Netflix
and for like 3 bucks more you could buy HBO for example.
And that's a thing that HBO needs because Netflix has 300 +
1,000,000 subscribers. HBO is at like 100 million.
The, the extra 200 million people that are watching Netflix
that aren't watching HBO, well, those are 200 million people
that could be cross sold this service.
So Netflix view this, they view this as highly accretive,
something where they can introduce enormous amounts of
people to this new service if they get it, so that more people
are exposed to HBO's content, more people have access to it.
They they use their technological savvy to scale
their content, which they've done before.
This could be extremely accretive to the company and it
solves one of the biggest problems for Netflix.
I have some familiarity here. I run a subscription company.
I run Qualtrim. It's very successful.
We have 12,000 subscribers. It's revenuing 7 figures now.
And so I have a little bit of experience here.
And two of the biggest things that you're worried about when
you're running a subscription company of any kind is customer
acquisition, bringing new people in, enticing them, making it so
that your product looks attractive enough for people to
sign up for. And then the second thing is
retention, meaning just keeping your customer after you've
gained them. Those two things are the hardest
part of any any streaming service, any subscription
service, any SAS company, any membership company of any kind,
acquiring users and retaining users.
What Netflix believes they're doing here is they're making it
so that their content library, their offering is so unmatched,
so indisputably good that they will be able to acquire any
customer in the world that wants high quality entertainment.
Anyone that values any type of long form, high quality
storytelling, they're going to sign up for this offering.
And then not only that, they're going to stay.
Again, the biggest problem, one of the biggest ones is not just
customer acquisition, but it's keeping the customer.
When you have churn, which is people that leave the
subscription every single month, that is very costly.
In fact, in most cases, you don't actually have to even
raise prices. You just have to keep your
average customer there for longer.
Netflix solves that second problem.
How could you cancel a Netflix subscription when they have the
whole wheel of content of Netflix, all the shows that they
create, all the documentaries, all the spin offs, all the
comedies, you know, all the stuff that they do.
Plus you throw in the value of HBO as well, plus Warner
Brothers Studios. I mean, it's an offering that is
unparalleled. You would have to stick with
Netflix. You'd be very unlikely to cancel
it. They do have many competitors.
You have YouTube, you have Amazon Prime Video, you have
Apple TV. But even those guys could not
compete with Netflix. I mean, they they really would
have a very difficult time offering the breadth of their
content. And all that means for Netflix
is that people sign up, people stick around.
That's what they want. If they do that, which I think
this would accomplish, this would work out to Netflix's
benefit. There are number of streaming
subscribers would go from 300 + 1,000,000 to 500 million to 700
million. We're talking about a company
here that could have a billion subscribers at one point, all of
them paid subscribers or on ad tears that are also paid across
different types of formats. But you could have a a streaming
service that could literally double from 300 million to 600
million. Now, there's a lot of other
things that I could go into. For example, one of the biggest
expenses that Netflix pays for is licensing content from Warner
Bros. So they license show like shows
like Dune, they license shows, you know, boutique series from
HBO. They wouldn't have those
licensing expenses anymore. They could be able to just share
that content across libraries. So that actually reduces their
content spin because so much of Netflix's content is licensed.
One of the biggest companies that they license content from,
they would own. So even though it looks like
it's really expensive, there's a lot of ways this is less
expensive than it looks. The reduction in general
administrative, the reduction in advertising, the reduction in
customer acquisition, the longer retention, the reduction in
price of licensing content. There's so many different tools
that Netflix could work with here.
So I believe that what Ted Sarandos and Greg Peters are
doing, the Co CE OS of this company is they're buying
exactly what they want, which is high quality content.
They believe they can get this through the finish line.
They believe that regulators do not have a strong argument to
shut this down and it positions Netflix to dominate the future.
So this is a massive deal expected to be a creative to
Netflix on a GAAP basis one year after its close, meaning there's
going to be one year ahead, probably 2026 where things look
a little rocky. The deal should close mid to
late 2026. After it does, there's a year
where they're paying down debts, they're they're cutting costs.
And then the very next year, this is profitable for the
company on a going forward basis.
And then they have that massive library to raise margins, make
it more profitable, bring in more subscribers and become the
biggest entertainment company in the world.
So that's what it looks like so far.
Hope you enjoyed this little summary.
See you next time.