Ryan Knudsen (2:04)

Should we just get back on the phone when this call is finished?

Joe Flint (2:07)

Yeah, that'd be great. Appreciate it. It's part of your drama.

Ryan Knudsen (2:10)

Exactly. This is gonna be what, a cliffhanger.

Ryan Knudsen (2:15)

Welcome to the Journal, our show about money, business and power. I'm Ryan Knudsen. It's Monday, December.

Ryan Knudsen (2:28)

Coming up on the show, the showdown over Warner Brothers.

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Ryan Knudsen (3:57)

The company that's being acquired, Warner Bros. Discovery, is itself the product of a giant merger. Just a few years ago in 2022, Discovery Networks, which owned a small streaming service and a bunch of cable channels combined with WarnerMedia, which owned the Warner Brothers movie studio, and HBO. When I got Joe back on the phone about an hour later, I asked him about the original vision for Warner Bros. Discovery.

Joe Flint (4:20)

And the idea was that they'd have this supercharged streamer of the best of hbo, the best of Discovery. You'd have CNN in there, and then you'd still own these movie and TV studios, and it would be the ultimate Hollywood giant.

Ryan Knudsen (4:34)

But instead of becoming the ultimate Hollywood giant, Warner Bros. Discovery stumbled. Joe says its CEO David Zaslav actually took on a lot of headaches. Its cable business was challenged by cord cutting, and building a streaming business was expensive. The company was saddled with heavy debt, and its stock price was in decline for much of its existence. So how did Warner Discovery become a takeover target?

Joe Flint (4:58)

Warner decided earlier this year to break itself into two separate companies. They were going to put the streaming and studios into one standalone company and then the cable networks, such as cnn, into another publicly traded company. The cable networks were is a drag on the Warner stock. So they thought that if they split the company apart, you'd have this one company that would have the movie studios and TV studios and hbo, max all these sexy properties, and then the other company would have what is still a good cash business, but seen as a melting ice cube in the cable network universe. So they did that. And there was always an anticipation that doing that when it was all done, there might be some interest from big players in buying those Hollywood entertainment assets.

Ryan Knudsen (5:51)

But before Zaslav could split the company up, Paramount decided to pounce. And earlier this year, it put in several unsolicited bids to buy Warner. And not just one part, but the whole thing. So introduce us to Paramount. Who's behind this company and why does Paramount suddenly decide to make an unsolicited bid for Warner?

Joe Flint (6:11)

Paramount was recently acquired by David Ellison and his Sky Dance Media Group. Now, Ellison, hit in the back of his mind, had the idea of getting Paramount and then going after Warner. So once he got Paramount, you know, he started to turn his eye immediately to Warner. So the idea of combining Paramount and Warner, and you've got this tremendous library and the Real potential to build a streaming service that could rival Netflix. That was what was appealing to Ellis.

Ryan Knudsen (6:43)

I feel like this is like nesting dolls. It's just like there's one merger inside of another merger inside of another merger that's now trying to, you know, go inside another giant merger.

Joe Flint (6:53)

Yes, a lot of consolidation, a lot of mergers. Paramount decided we don't want to wait a couple years and face a potential bidding war. So we're going to try to buy the whole company right now.

Ryan Knudsen (7:08)

Joe says Paramount thought that by moving early, it could have a clean shot at a takeover. So Paramount makes these unsolicited bids for Warner Brothers Discovery. How did David Zaslav at Warner Brothers respond to those bids?

Joe Flint (7:22)

Well, from my own reporting, I don't think they were necessarily thrilled by unsolicited, kind of aggressive bids that they also felt were lowball offers. But the challenge is once you've had a certain number of offers and they've become public, we're all writing about them as a company, you're kind of forced to at least address it and perhaps do what they did, which was open up a process to begin an auction.

Ryan Knudsen (7:49)

The auction, which was primarily over those sexy parts. Hbo, Max and the movie studios, drew bids from Comcast and Netflix.

Ryan Knudsen (7:59)

So what was the appeal for Netflix to own Warner Brothers?

Joe Flint (8:03)

So even though Netflix is kind of steered clear of big mergers, big deals, they always say we're a builder, a buyer, an asset like Warner Brothers that has a lot of classic IP superhero franchises, great old TV shows, a lot of content that Netflix already knows works on its platform because they've aired a lot of those shows and movies there. So they know this is good stuff.

Ryan Knudsen (8:27)

The deal stunned Hollywood because many assumed that Paramount had the upper hand. But Netflix's bid won out. Its $72 billion offer was just for part of the company, only HBO, Max and the movie studios. And it doesn't include the cable channels like cnn. Netflix has said it would continue Warner Bros. Operations, including selling shows to other networks, as Warner has done in the past. It also plans to continue releasing Warner films in theaters.

Ryan Knudsen (8:56)

Paramount, meanwhile, isn't giving up. It wrote a letter to Zaslav last week saying the company had, quote, embarked on a myopic process with a predetermined outcome that favors a single bidder. Warner wrote in response on Thursday that it fully and robustly complies with its fiduciary obligations and will continue to do so. Earlier today, Paramount announced that hostile takeover bid, which was for $77.9 billion, not including debt for the whole company. How big of a fight does Warner Brothers and Netflix have on its hands?

Joe Flint (9:30)

Yeah, we're in Squid game territory right now. They're taking it to shareholders and so now this will uglier between Netflix and Warner and Paramount. You know, we'll, we'll see how it all plays out.

Ryan Knudsen (9:47)

After the break. We hear about what Joe heard on that phone call.

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David Ellison (11:30)

Hello everyone. Thank you all for joining us today, especially on such short notice.

Ryan Knudsen (11:36)

Okay, so let's go back to this phone call that just happened earlier this morning that you had to step out for. What did Paramount say this was?

Joe Flint (11:44)

Them making their case to the analysts why they were doing this.

David Ellison (11:48)

By bringing together the complementary strengths of Paramount and Warner Brothers discovery, we can unlock greater scale, reach and creative.

Joe Flint (11:55)

So basically, they were saying that they firmly believe that their offer is better than Netflix's offer and that this process to bid on these assets has not been fair, that it was inherently biased in favor of Netflix versus Paramount.

David Ellison (12:09)

On Thursday, we submitted our fully financed superior offer, an offer that directly addressed every concern with our previous bid that they laid out. Yet we did not receive a single callback that brings us here today.

Joe Flint (12:23)

So they're taking their case to the Warner shareholders here and that they believe their deal has a better chance of passing from a regulatory standpoint. Basically, that was. I mean, if they were already hostile, they've now turned it up to super hostile, where they've gone to 11.

David Ellison (12:41)

We're here to fight for value for our shareholders and for WBD shareholders.

Ryan Knudsen (12:48)

Why not just give it up and say, okay, we're going to let this one go for Paramount. Why fight so hard?

Joe Flint (12:54)

So Paramount stock took a hit last Friday when it emerged that Netflix had been Warner's chosen partner. I think because the street and everyone else felt that Paramount really needs Warner to scale up and be a competitor. Otherwise you're still the same old Paramount. So they really feel like they need these assets. They, they will tell you that they feel like they will be a better steward for these assets than Netflix. But that's really what's driving this. The old he who has the most toys wins.

Ryan Knudsen (13:23)

On Monday, Netflix co CEO Ted Sarando said that Paramount's tender offer was, quote, entirely expected. And he said that Netflix is, quote, super confident its deal will get done today. Paramount accused Warner of never meaningfully engaging with its offers over the past 12 weeks.

Ryan Knudsen (13:41)

So if this deal with Netflix and Warner Brothers goes through, this company will be huge. It'll have two streaming services, Netflix and HBO Max. It'll have a giant movie studio, plus, you know, the movies that Netflix makes, tons of valuable ip, from Superman to Harry Potter to Stranger Things. Can you talk about the antitrust concerns? Because the government will have to review this deal in order for it to go through.

Joe Flint (14:06)

Yeah, there's a few major antitrust concerns.

Joe Flint (14:12)

The biggest thing that this will turn on for Netflix is how are we defining the streaming marketplace? Netflix, when they put out their earnings letter every quarter, when Netflix does an earnings letter, they used to like to say that they don't just view their competitors as Disney plus. Fortnite is a competitor, Sleep is a competitor.

Ryan Knudsen (14:31)

Yeah, I remember that moment.

Joe Flint (14:32)

Yeah, Sleep is a competitor. So they view anything as a competitor. They would argue the streaming market includes TikTok, includes Facebook with all their videos, now Instagram. You can't just look at Netflix versus Disney plus versus Paramount plus. In fact, in that world, they argue that they actually, as a company have a smaller market share of TV viewing than Paramount. But what Paramount is going to argue and what the Justice Department will have to decide is whether that is just too broad a way to look at this marketplace, that it needs to be looked in a more narrow fashion of subscription video service providers. Paramount kind of dismisses the idea that TikTok or Instagram can be seen as competitors in the streaming world. David Ellison said, look, that's like Coke tries to buy Pepsi and the deal gets approved because Budweiser is seen as an alternative to Coca Cola. It's not. And he said, you know, the next maker of Game of Thrones isn't going to go to Instagram or TikTok to make their show. They're going to go to a Hollywood powerhouse. So that's going to be really what the thrust of the argument will be. There will be other issues too, about the consolidation of movie studios and what that could mean for the theatrical business, what it means for creative talent. But those are issues both companies are going to have to answer. So it really comes down to defining what the the streaming marketplace is.

Ryan Knudsen (16:07)

Netflix co CEO Ted Sarando said Friday that the company is highly confident the deal will win approval because it's, quote, pro consumer and pro innovation. If the Netflix deal goes through, would it mean that Netflix has pretty much taken over Hollywood?

Joe Flint (16:22)

I think it's both those things. I think some would argue in many ways, Netflix is already taken over Hollywood, or at least radically changed the landscape out here. But Hollywood is always, even now, all these years later, a little distrustful of Netflix. They're still seen as a disruptor. So Netflix in many ways already is the big force out here. And that's why so many people are a little bit scared about them even getting bigger with Warner. And that leads to the next question about the future of Hollywood and which way Hollywood will go.

Ryan Knudsen (16:59)

President Donald Trump was asked about the Netflix deal at an event on Sunday, and he expressed some skepticism.

Donald Trump (17:05)

They have a very big market share, and when they have Warner Brothers, you know, that share goes up a lot. So I don't know that's going to be for some economists to tell and also, and I'll be involved in that decision too.

Ryan Knudsen (17:17)

But essentially at this moment, Warner is sitting there looking between two suitors and has to decide which ones it thinks is the most attractive.

Joe Flint (17:26)

Pretty much, yes. Warner has 10 business days to respond to Paramount's offer. So we have to see how all that plays out. And that's kind of what we're waiting for next. And also, just in theory, Netflix could try to come back with a bigger offer if, if Warner were to suddenly change its mind. Conversely, if Netflix feels they're getting into a bidding war that they don't want to be in, or this is just too much of a public battle that's not necessarily their style. Maybe, maybe they would walk, I don't know. But that's, you know, those are the questions we'll all be waiting to see answered, hopefully in the next few weeks.

Ryan Knudsen (18:16)

And what would it mean for us binge TV watchers, for everyone on their couches?

Joe Flint (18:22)

Well, eventually, I mean, if Netflix is successful, they will have an even bigger library of TV shows and movies. And with Paramount, same sort of thing in terms of building up a library and a stronger streaming product, I guess.

Ryan Knudsen (18:39)

Either way, though, it seems very possible that there's going to be less competition with this type of consolidation.

Joe Flint (18:45)

Any one of these deals takes one buyer out of the marketplace. Really? Even if they say, well, we're running it separately and everything, no, it's all part of the same company. So that's always a concern. Just to have fewer places to shop your products to. It gives someone more control to set pricing. I mean, one of the reasons Netflix is sort of viewed still warily by Hollywood is when they came in and started making original programming, of course they threw money at everyone, tons of money. Then once they got all the talent, of course, then they started the belt tightening. Suddenly it's like, yeah, no, we're, we're not making it rain anymore. So that's always a challenge for the creators, writers, producers, actors. Just fewer people to play off one another.

Ryan Knudsen (19:31)

All right, Joe, I know you've got a busy day, so I really appreciate your time.

Joe Flint (19:33)

Sure.

Ryan Knudsen (19:49)

That's all for today. Monday, December 8th. The Journal is a co production of Spotify and the Wall Street Journal. Additional reporting in this episode by Lauren Thomas.

Ryan Knudsen (20:02)

Thanks. Thanks for listening. See you tomorrow.

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