A few months ago, about 30 minutes after Ben Thompson and I finished recording a Sharp Tech segment about Spotify making video episodes of The Rewatchables podcast exclusive to YouTube, I realized I’d missed a fundamental irony looming over the news: Netflix, new home of The Rewatchables, is the same company that effectively killed the rewatchable movie.
That’s not a condemnation, but simply a fact. The emergence of Netflix and its business model accelerated the demise of Blockbuster and the DVD/VHS market, which fundamentally altered the risk tolerance of the movie business. Here, I’ll lean on an email from a Sharp Tech listener named Steven that came in earlier this year. Please forgive the long excerpt, but he nails it:
In the 80s and 90s, movies had significantly less dependency on their box office take because they would usually make a larger component of their overall revenue in the home video market as well as being shown on broadcast/cable TV. Blockbuster’s default revenue share of a movie rental was in the 40-50% range depending on the studio, which meant the post-box office revenue for a “single watch” was considerably higher than what studios see today from the streaming services. The revenue from a “true fan” was multiples higher.
The death of that market has produced two parallel problems that are killing creativity within the industry. First, the ARPU has dropped considerably, and while the internet has enabled a much broader global market, that isn’t an asset unless you’re telling stories that appeal to a global market – as an example, I’m not sure what the appeal of Hoosiers is outside the US. That cuts off a considerable number of stories from being made right there.
Second, you either make or break a movie in the box office exclusively today, and misses are catastrophic. As a result, you have to spend enormous money on marketing and then you throw in your famous recognizable actor/actress which command high salaries, and if you’re going to spend that much on marketing and Ryan Gosling, you might as well spend more on the rest of the movie. As a result, the cost of making movies has skyrocketed and risk tolerance is at an all time low.
In the past, a movie could flop in the box office, find an audience in rental, get a boost from TV showings on niche cable networks aligned to its core audience, get a boost from the Oscars, etc and make its money back over years with multiple swings of the bat at lower cost marketing campaigns. This was essential because – how do you market a movie like Shawshank Redemption perfectly when you have exactly one shot at it? We’re now in a world where targeted marketing should be able to find exactly the right million viewers for a movie, but the revenue mechanisms we have in place don’t function for midsized audiences. As a result, we get YouTube content and big budget films.
Matt Damon has made the same argument point in a 76-second interview clip that goes viral on X every few months. The specific type of movies that suffered in this boom-or-bust ecosystem are the bread and butter of The Rewatchables: mid-budget movies that are kinda idiosyncratic, with great actors and unique stories that will pull you back in if you happen across them on cable. For example, I loved recent Rewatchables episodes on 1992’s Sneakers (budget $35 million), 1996’s Tin Cup ($45 million), 1995’s Quiz Show ($31 million) and 2005’s Two for the Money ($35 million, and an inspired choice from the Rewatchables editorial team). I also had a great time re-watching 1995’s Crimson Tide on Sunday ($53 million), and that’s another movie that’s never made today (and no one ever settles the question of whether Lipizzaner stallions are from Spain or Portugal).
Not all of those movies are classics, but they’re fun and weird and interesting in a way that today’s movies usually aren’t. And as for true classics, you can go right down the list with some of the most iconic movies in history. Would Hoosiers be made today? A Few Good Men? The Firm? Jerry Macguire? Smart, ambitious, character-driven content for adults doesn’t really have a place at modern movie theaters anymore (but we do get eight Mission: Impossible movies).
This isn’t to say that sort of content stopped being made. Many of the mid-budget projects made for adults are now made as TV shows. Some of them are great, and many of them are just fine. I watch most of them. Re-watching those shows, though, and reliving the character arcs, twists and emotional payoffs of stories I remember fondly, requires committing 10 to 20 hours of my time. I’ll make that commitment for certain exceptional shows (The Wire, The Americans, Veep, Eastbound and Down, Industry, Le Bureau), but I can’t imagine finding the time to revisit a much bigger universe of pretty good or even very good shows that I genuinely enjoyed and will probably never see again (Game of Thrones, Mr. Robot, The Honourable Woman, Narcos, Billions, The Night Manager, Yellowstone, Orphan Black, Killing Eve, House of Cards, and dozens of others I’m forgetting).
The problem with this landscape for audiences is that the current environment renders even the best content disposable and less meaningful than it used to be. The industry that people love, or at least that I have always loved, was centered on shared experiences in theaters, and films that could be revisited for years to come, reviving all the memories, unintentional comedy, and unanswerable questions that have made The Rewatchables one of the most successful podcasts on the planet. That doesn’t really exist anymore. Even the fun genre movies that do get made (2023’s Air would be a decent Rewatchables candidate) are now competing in tiles, instead of re-running on channels, and are quickly overwhelmed by a river of new content that will itself be forgotten as soon as it’s watched.
For streaming services, meanwhile: If educated adults and families who pay $17.99/month for services like Netflix are enjoying new scripted content, but don’t have time to revisit any of it, those platforms need to make, license or acquire a lot more content to keep people watching. Which brings us to this week’s merger news.
Why Netflix Wants Warner Brothers
Netflix’s proposed acquisition of Warner Brothers Discovery is already fraught with peril, with inevitable regulatory challenges looming, and continued bids from Paramount that may force Netflix to continue a bidding war for months, an adventure that may not appeal to Netflix shareholders. Let’s assume, though, that the deal were to go through as announced last Friday: Netflix buys Warner Brothers for $72 billion and assumes $11.1 billion in debt while taking on $50 billion in new debt, all to to finance the purchase of a studio that has been sold four times in the past 25 years, in a succession of deals that ended in varying degrees of disaster. Given the history of media mergers at this scale, why would Netflix risk regulatory scrutiny and a whole new round of debt skepticism to go this direction anyway?
In short, acquiring Warner Brothers is both an offensive move that would dramatically enhance Netflix’s offering to customers, and a defensive move that would eliminate any new competition in the paid streaming space, possibly forever. To the former point, Warner Bros. provides exactly the sort of library that Netflix needs in order to keep audiences engaged, and no, it’s not a coincidence that almost all of this content dates to an era before Netflix upended the entertainment ecosystem. One baseline irony of the deal is that Netflix has been so successful at disrupting audience consumption habits that its own original programming efforts have almost universally failed to develop durable, franchise appeal in the modern era; so much so that the company is now paying a $72 billion premium to acquire content that was mostly made 25 years ago.
Regardless, Warner Bros. movies and television shows provide some of the most attractive IP available anywhere, eliminating Netflix’s need to license shows like Friends, ER, or The Big Bang Theory, while also opening a world of original franchises to push to global audiences and potentially leverage for new content (e.g., Batman, Superman, Game of Thrones, Harry Potter, The Matrix). HBO could be offered as a premium tier of Netflix, and its staggering collection of scripted TV hits could be marketed to a bigger audience than HBO Max ever had. Netflix already has 100 million more subscribers than its next-closest competitor, with a much lower churn rate than anyone in the space. This deal would transform the company from last year’s Thunder (68-14, champions) to this year’s Thunder (24-1, won by 49 points Wednesday night).
Part of that story, of course, would be killing off one of its chief competitors in HBO Max (currently the fourth-largest streaming service), while preventing Paramount or Comcast from leveraging HBO and Warner Brothers content to mount a real challenge in the future. This is the defensive appeal.
A deep reservoir of Warner Brothers scripted content affords Netflix not only the ability to tap a much richer vein of IP on its own platform, but also to potentially withhold that content from competing platforms, making it that much harder for any other service to make inroads into the future streaming market. As Ben Thompson observed of this possibility on Stratechery this week:
[I]t seems likely that Netflix will, over time, make Warner Bros. content, particularly its vast libraries, exclusive to Netflix, instead of selling it to other distributors. This will be economically destructive in the short term, but it very well may be outweighed by the aforementioned increase in value that Netflix can drive to established IP, giving Netflix more pricing power over time (which will increase regulatory scrutiny)
Pricing power is the endgame for both the offensive and defensive logic of this merger. A Netflix subscription was $7.99/month a decade ago, and it’s $17.99/month today. Better content and fewer credible alternatives for customers will make it much easier for Netflix to ratchet that number up every eighteen months for the foreseeable future.
Now, to the extent Hollywood is currently in the throes of an industry-wide panic over the possibility of a Netflix-Warner Bros. merger (complete with a great Variety cover this week), that, too, is a pricing power story, but the concern is not limited to customers.
Will Netflix Get Warner Brothers?
Senator Mike Lee chairs the Senate subcomittee on antitrust, and he said this week that the proposed deal raises “about seven different red flags.” For one, as the Entertainment Strategy Guy observed earlier this week, the merger would flunk any consumer welfare analysis undertaken by a court, because it’s likely to reduce the supply of scripted Hollywood content (bad for consumers), and lead to higher prices (ditto). The latter point was addressed in the previous section, while the former is simply a matter of common business sense. Netflix is buying a studio that makes TV and movies to pair with its original programming operations. If the deal closes, one platform can only serve so much content (Netflix has been investing in fewer original programs every year since 2022), and audiences will almost certainly get fewer total TV shows and movies than they did when two studios were making content for two different platforms. That will also mean fewer jobs in Hollywood, and reduced bargaining power for the writers, directors, actors and crew members still working.
The law at issue in a Netflix case is probably going to be Section 7 of the Clayton Act, which is a more liberal standard than the Sherman Antitrust Act and bars “acquisitions where the effect may be substantially to lessen competition, or to tend to create a monopoly.” Assuming the deal is challenged, the legal question will turn on how any court defines the market where competition is allegedly at risk. And to be sure, Netflix has a colorable argument that any market analysis should not be limited to premium streaming services (where Netflix dominates), but should include YouTube and liner television networks. As co-CEO Ted Sarandos argued to President Trump this fall, Netflix is “the fifth-or sixth-biggest distributor on TV,” compared to YouTube and a variety of cable conglomerates. Buying Warner Brothers “would make the company roughly the size of YouTube,” in Sarandos’ rendering, while analysts point out that Disney “represents more TV time spent (10%) than Netflix does today (8%), and is still larger even with HBO added (8% + 1.3%).”
As Netflix’s other CEO, Greg Peters, explained to investors this week:
We just want to really bring the facts to this conversation because if you look at Nielsen, this is Nielsen number of view hours on TV in the U.S. … We’re sixth in the current ranking right now. We’re behind YouTube. We’re behind Disney. We’re behind NBCUniversal. We’re behind Fox. We’re behind Paramount. And then if you say, ‘Okay, well, you’re going to go buy HBO and HBO Max, put that viewing on the list,’ this is what that would look like. We go from 8% of view hours today in the United States to 9%. We’re still behind YouTube at 13%. And potentially worth noting that we would be behind what would be if Paramount combined with WBD, them at 14%. We think there’s a really strong, fundamentals-based case for why regulators should approve this deal.
The narrative sleight of hand on display there is Netflix comparing itself to completely different businesses, with different cost structures and different distribution networks; namely, cable companies that broadcast on linear television (like Disney or NBC) or on free apps like YouTube. Netflix clearly doesn’t have interest in competing for viewing hours in the cable or broadcast space, otherwise it would be buying Warner Brothers Discovery cable channels, rather than telling David Zaslav to continue spinning them out. And YouTube, while definitely a competitive threat for attention on TV, is not a Netflix competitor for either content or consumer spending.
The risk of courts anchoring legal analysis to one expansive and theoretically defensible market definition is that it ignores the practical realities of market power and its impact on industries, which is ultimately what antitrust law was conceived to regulate. The continued emergence of YouTube may well be a Netflix concern, but a) Netflix isn’t expecting to pay for the $72 billion price tag here by moving from eight to nine percent market share, and b) Hollywood isn’t panicking because of where a post-merger Netflix would rank on a “TV time spent” graphic. Instead, Hollywood is internalizing the reality that if this merger is approved, it would reduce the number of viable buyers for premium content in TV, and reduce the number of films put in theaters, jeopardizing the financial health of a theater industry that’s already struggling to survive, in part because there aren’t enough movies to show.
It’s the other side of the pricing power concern. As Netflix dominance becomes further entrenched, it will have the power to pay talent less (because how many others are bidding for original programming?) and dictate terms to theaters, eventually reducing the amount of time any of its movies are shown in theaters (before airing free to its subscribers, exclusively on Netflix). “I think over time the windows will evolve to be much more consumer friendly,” Sarandos said this month, “to meet the audience where they are … all those things we’d like to do.”
If that policy eventually applies to Warner Brothers releases (this year’s hits: A Minecraft Movie, Superman, The Conjuring: Last Rites, One Battle After Another, Weapons, Sinners, and Final Destination: Bloodlines), it will absolutely accelerate the death of theaters. Then, as movie theaters die, the best path to monetization for feature-length content will come back to Netflix, the platform that will be able to promise an audience of 300 million people around the world, can create hits that generate valuable secondary revenue streams for studios, and will have the bargaining power to negotiate favorable terms to deliver that audience. This economy is already taking shape; it’s how Sony forfeited most of the upside in one of the biggest movies of the year, KPop Demon Hunters, in what was still arguably a good deal for the studio.
A Warner-Netflix merger would compound Netflix’s negotiating leverage with any Sony movies in the future (because it can always promote Warner and Netflix studio content instead). Meanwhile, the streaming landscape would look like an oligolopoly with Netflix clearly at the top, and Amazon and Disney far beneath them, with a hundred million fewer subscribers and distinct content priorities. The net effect of the reduction in competition will be fewer options for entertainment, and a transfer of profit upside from the talent that makes Hollywood programming to the company that distributes it and monetizes it at a scale that will be impossible for any of its competitors to match. It’s easy to see why that plan appeals to Netflix. It’s also important context for Senator Mike Lee warning, “There are potential monopoly-type issues, but also monopsony-type issues.”
The shift in market structure and profit incentives would result in higher prices for Netflix subscribers as well as less, and worse, movie and television content. But of course, as noted at the beginning, that shift has been underway for about 15 years.
The Flattening of Everything
There’s been a groundswell of opposition to big tech over the past 10 years, yet as that sort of backlash has become ubiquitous and borderline cliche, Netflix has more or less avoided scrutiny. Even as its debt-fueled rise permanently upended one of the most successful industries in American history and trained a generation to “binge watch” a bunch of sleek-looking and forgettable TV, it’s been rare to see mainstream discussions wondering about the net impact of technological shifts and consumption habits that one company spearheaded.
Whether the Warner Bros. deal is approved or not, I suspect the era of Netflix as Big Tech Switzerland is now over. It’s not that what the company is attempting is morally wrong, but the power grab is too transparent, and the potential impact too clear for the world to see. That, more than any market definition haggling, is why I expect Netflix to lose if this merger is challenged in court. Antitrust is inherently political, and the politics of this move are unpopular on a bipartisan basis.
Of course, even if Netflix loses today, the structural dynamics of the modern environment still favor its business tomorrow, and those same dynamics remain bearish for the rest of Hollywood. And on that point, the Netflix story is a perfect distillation of the big tech’s impact on practically every corner of modern life. The company began by offering enormous consumer surpluses while legacy incumbents were flat-footed in their response (first with Blockbuster, and later when it took Hollywood six years after the 2013 premiere of “House of Cards” to launch competing products). It thrives today because of unmatched engineering, superior leverage over its costs, and consumer inertia in a market where everyone else got started 10 years too late.
Consider the social concerns animating tech resentment and Netflix checks those boxes, as well. Depressed that social media companies like Meta are serving mindless content that’s both monopolizing attention and isolating everyone? Streaming TV is not necessarily better, and certainly more literal in its isolation. Worried about the incentive structure of an economy in which aggregators like Amazon, Google, and Meta are leveraging their distribution networks to extract the profit margins from the businesses that actually make the things people buy? Well, that’s not far off from where the entertainment business may land. Curious about the impact on innovation, quality and consumer welfare if big tech companies can impair the ability of new companies to achieve scale and profitably compete with them? That, too, sounds familiar after the past 3,000 words.
There was a long and entertaining New Yorker profile this week that ended with Konrad Kay riffing on the dangers of conflating financial health with social health. Kay is an ex-banker, one of the co-writers on HBO’s cult classic Industry, potentially a future Netflix employee, and he said:
“My screen time is eight hours a day, and anytime I feel anything—anxiety, feelings of self-worthlessness, does my girlfriend love me, why am I not a dad, I’m going to die, all the things I think when I have five minutes on my own—this thing denies you all that, in a way that is so pleasurable,” he said. “I’m, like, ‘Wow, this fucking jacket! It’s going to make me feel fucking amazing.’ The jacket comes, and I look good for a day, and then I start to feel that feeling again. The danger of this thing is it flattens the experience of the world. So I can go on Instagram and see some woman I’m not dating, and then I can go on Twitter and see some kid being beheaded in Gaza, and then I can look at the jacket—spending the exact same amount of time on each of them. … And you wonder why people are fucking miserable!”
The frustrations he describes there are hard to capture with data and hard for most to even articulate, but that doesn’t make them any less valid and widely held. Again, this is not a condemnation, but closer to a fact: Technological change and unregulated big tech growth has created a world that is more convenient for everyone, great for shareholders, but less financially rewarding for producers, and less spiritually fulfilling for consumers.
A collective reckoning with those realities may not be ideal for Netflix as it seeks to close its Warner Brothers deal, but it’s becoming unavoidable for everyone else.
What I’m Reading This Week
This will be quicker because today’s column ran long, but here are some recommended reads this week.
- How Everyone Got Lost in Netflix’s Endless Library. From last year, this was a great New York Times Magazine feature on modern Netflix, specifically, and tech, generally.
- Why I LOVE Netflix Buying Warner Bros. Part one from the always-excellent Entertainment Strategy Guy.
- Why I HATE Anyone Buying Warner Bros. And an important part two.
- Why Does A.I. Write Like … That? I learned more than I expected here.
- At State Dept., a Typeface Falls Victim in the War Against Woke. Fully team Rubio on this one.
- The Mischievous Ex-Bankers Behind “Industry”. The aforementioned New Yorker profile… This was a delightful read about two writers operating on a different frequency from everyone else in entertainment, and capturing the vibes of the current era better than anyone.
Finally, this is not reading, but this chart on the EU’s regulatory revenue is incredible. And, in brighter EU news, I had a great 15 minutes watching this 60 Minutes segment on Swiss watches.
Thanks for reading, and have a great weekend.
Sharp Text is extension of the Stratechery Plus podcasts Sharp Tech, Greatest of All Talk, and Sharp China. We’ll publish once a week, on Fridays. To subscribe and receive weekly posts via email, click here.