Netflix dropped by 2.7% on Wednesday following the news that this streaming service might be taking a closer look at acquiring Warner Bros. Discovery’s (WBD) studio and streaming assets. 

The reaction of the market indicates ambiguity, where investors are now considering how a change of this magnitude could influence Netflix’s strategy, regulatory risk, and overall growth potential in the long run.

As per the reports, the streaming giant has recruited a financial consultant and also got a glimpse of WBD’s internal financial information. This move is significant specifically in light of Ted Sarandos, the CEO’s recent statement that Netflix is “more builders than buyers” even though it continues to evaluate acquisition opportunities. 

The fresh attention on a possible deal with WBD tells us that Netflix is more willing than ever to diversify past its organic growth.

The Strategy Behind it

Morgan Stanley analyst, Benjamin Swinburne, not only analyzed the pros of this strategy but also the very big obstacles that such a deal would create. On paper, Warner Bros. Discovery has an uncontested creative and commercial power, it is a studio with a century-old legacy, globally appreciated franchises like DC Comics, Harry Potter, and The Lord of the Rings, plus HBO, which is a brand that for a long time has been regarded as the strongest among the most prestigious storytelling names.

The acquisition of this library by Netflix would bring immediate benefits in terms of content moat, which will boost the company’s position in the international markets where competition is aggressive, and perhaps it will also ease the company from the rising costs of original production. Netflix should be able to use Warner Bros.’ production infrastructure and strong IP to support its growth in both the streaming and theatrical ecosystems more quickly. 

Still, Swinburne pointed out that the integration of WBD’s businesses would put Netflix in a position to make some very profound strategic decisions. For instance, the current theatrical distribution model of Warner Bros. may be in direct contrast with Netflix’s preference of streaming releases.

 Netflix might have to bear short-term losses if it pulls out of third-party licensing, which is the most significant source of revenue for WBD. The HBO situation also presents a dilemma for Netflix, where the streaming giant could choose to either keep it as an independent service or turn it off completely, thus losing almost $2 billion in adjusted EBITDA and yet, at the same time combine premium content on one platform.

Regulatory Headwinds 

Regulatory approval may be a huge barrier even if Netflix can see clear long-term value. Netflix, as the largest streaming company globally, would be subjected to thorough scrutiny regarding media concentration, consumer choice, and competition. 

The regulators would most probably look at the impacts on the exhibitors, labor unions, and rival streaming services that rely on WBD content, among others.

Swinburne recognizes that any future acquisition would have to show the long-term value creation as outweighing the short-term financial pressures, and the potential $20-30 per share valuation would likely be financed with a mix of cash and debt. The central question is if this would give Netflix a strategy so powerful that it could justify the cost of the operational disruption and regulatory battles.

A High-Stakes Gamble

Netflix acquiring Warner Bros. Discovery has been depicted as a daring and possibly game-changing idea, but its realization is not so easy. A Netflix merger with WBD could change the company’s image from nothing but a pure streaming game changer to that of a vertically integrated entertainment behemoth. However, it could also jeopardize Netflix’s very business model which made it the leader.

Currently, the market still shows caution. Stock decline is an indicator of investor reluctance, but the scenario still shows a lot of interest. If Netflix decides to go after WBD, it would represent the company’s most assertive wager so far, where having exclusive IP rights is the secret to its next decade of global supremacy.


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