Warner Bros. started with distribution. Just after the turn of the century, Harry, Albert, Sam, and Jack Warner bought a second-hand projector and started showing short films in Ohio and Pennsylvania mining towns; in 1907 they bought their first permanent theater in New Castle, Pennsylvania. Around the same time the brothers also began distributing films to other theaters, and in 1908 began producing their own movies in California. In 1923 the brothers formally incorporated as Warner Bros. Pictures, Inc., becoming one of the five major Hollywood Studios.

What the brothers realized early on was that distribution just wasn’t a very good business: you had to maintain the theater and find films to show, and your profit was capped by your capacity, which you had to work diligently to fill out; after all, every empty seat in a showing was potential revenue that disappeared forever. What was far more lucrative was making the films shown in those theaters: you could film a movie once and make money on it again and again.

In this Hollywood was the tech industry before there was a tech industry, which is to say the studios were the industry that focused its investment on large-up-front costs that could be leveraged repeatedly to make money. Granted, Warner Bros., along with the rest of Hollywood, did come to own large theater chains as well as part of fully integrated companies, but when the Supreme Court, with 1948’s Paramount decrees, forced them to split, it was the theaters that got spun out: making content was simply a much better business than distributing it.

That business only got better over time. First, television provided an expansive new licensing opportunity for films and eventually TV shows; not only were there more televisions than theaters, but they were accessible at all hours in the home. Then, home video added a new window: movies could not only make money in theaters and on TV, but there were entirely new opportunities to rent and sell recordings. The real bonanza, however, was the cable bundle: now, instead of needing to earn discrete revenue, the majority of Hollywood revenue became a de facto annuity, as 90% of households paid an ever increasing amount of money every month to have access to a universe of content they mostly didn’t watch.

Internet Distribution and Aggregation

Netflix, which was founded in 1997, also started with distribution, specifically of DVDs-by-mail; the streaming service that the company is known for today launched in 2007, 100 years after the Warner brothers bought their theater. The differences were profound: because Netflix was on the Internet, it was available literally everywhere; there were no seats to clean or projectors to maintain, and every incremental customer was profit. More importantly, the number of potential customers was, at least in theory, the entire population of the world. That, in a nutshell, is why the Internet is different: you can, from day one, reach anyone, with zero marginal cost.

Netflix did, over time, like Warner Bros. before them, backwards integrate into producing their own content. Unlike Warner Bros., however, that content production was and has always only ever been in service of Netflix’s distribution. What Netflix has understood — and what Hollywood, Warner Bros. included, was far too slow to realize — is that because of the Internet distribution is even more scalable than content.

The specifics of this are not obvious; after all, content is scarce and exclusive, while everyone can access the Internet. However, it’s precisely because everyone can access the Internet that there is an abundance of content, far too much for anyone to consume; this gives power to Aggregators who sort that content on consumers’ behalf, delivering a satisfying user experience. Consumers flock to the Aggregator, which makes the Aggregator attractive to suppliers, giving them more content, which attracts more consumers, all in a virtuous cycle. Over time the largest Aggregators gain overwhelming advantages in customer acquisition costs and simply don’t churn users; that is the ultimate source of their economic power.

This is the lesson Hollywood studios have painfully learned over the last decade. As Netflix grew — and importantly, had a far more desirable stock multiple despite making inferior content — Hollywood studios wanted in on the game, and the multiple, and they were confident they would win because they had the content. Content is king, right? Well, it was, in a world of distribution limited by physical constraints; on the Internet, customer acquisition and churn mitigation in a world of infinite alternatives matters more, and that’s the advantage Netflix had, and that advantage has only grown.

Netflix Buys Warner Bros.

On Friday, Netflix announced it was buying Warner Bros.; from the Wall Street Journal:

Netflix has agreed to buy Warner Bros. for $72 billion after the entertainment company splits its studios and HBO Max streaming business from its cable networks, a deal that would reshape the entertainment and media industry. The cash-and-stock transaction was announced Friday after the two sides entered into exclusive negotiations for the media company known for Superman and the Harry Potter movies, as well as hit TV shows such as “Friends.” The offer is valued at $27.75 per Warner Discovery share and has an enterprise value of roughly $82.7 billion. Rival Paramount, which sought to buy the entire company, including Warner’s cable networks, bid $30 per share all-cash for Warner Discovery, according to people familiar with the matter. Paramount is weighing its next move, which could involve pivoting to other potential acquisitions, people familiar with its plans said.

Paramount’s bid, it should be noted, was for the entire Warner Bros. Discovery business, including the TV and cable networks that will be split off next year; Netflix is only buying the Warner Bros. part. Puck reported that the stub Netflix is leaving behind is being valued at $5/share, which would mean that Netflix outbid Paramount.

And, it should be noted, that Paramount money wouldn’t be from the actual business, which is valued at a mere $14 billion; new owner David Ellison is the son of Oracle founder Larry Ellison, who is worth $275 billion. Netflix, meanwhile, is worth $425 billion and generated $9 billion in cash flow over the last year. Absent family money this wouldn’t be anywhere close to a fair fight.

That’s exactly what you would expect given Netflix’s position — and the most optimistic scenario I painted back in 2016:

Much of this analysis about the impact of subscriber numbers, growth rates, and churn apply to any SaaS company, but for Netflix the stakes are higher: the company has the potential to be an Aggregator, with the dominance and profits that follow from such a position.

To review: Netflix has acquired users through, among other things, a superior TV viewing experience. That customer base has given the company the ability to secure suppliers, which improve the attractiveness of the company’s offerings to users, which gives Netflix even more power over suppliers. The most bullish outcome in this scenario is Netflix as not simply another cable channel with a unique delivery method, but as the only TV you need with all of the market dominance over suppliers that entails.

The most obvious way that this scenario might have developed is that Netflix ends up being the only buyer for Hollywood suppliers, thanks to their ability to pay more by virtue of having the most customers; that is the nature of the company’s relationship with Sony, which had the foresight (and lack of lost TV network revenue to compensate for) to avoid the streaming wars and simply sell its content to the highest bidder. There are three specific properties I think of, however, that might be examples of what convinced Netflix it was worth simply buying one of the biggest suppliers entirely:

• In 2019, Netflix launched Formula 1: Drive to Survive, which has been a massive success. The biggest upside recipient of that series, however, has not been Netflix, but Formula 1 owner Liberty Media. In 2018 Liberty Media offered the U.S. TV rights to ESPN for free; seven years later Apple signed a deal to broadcast Formula 1 for $150 million a year. That upside was largely generated by Netflix, who captured none of it.
• In 2023, NBCUniversal licensed Suits to Netflix, and the show, long since stuck in the Peacock backwater, suddenly became the hottest thing in streaming. Netflix didn’t pay much, because the deal wasn’t exclusive, but it was suddenly apparent to everyone that Netflix had a unique ability to increase the value of library content.
• In 2025, KPop Demon Hunters became a global phenomenon, and it’s difficult to see that happening absent the Netflix algorithm.

With regards to KPop Demon Hunters, I wrote in an Update:

How much of the struggle for original animation comes from the fact that no one goes to see movies on a lark anymore? Simply making it to the silver screen used to be the biggest hurdle; now that the theater is a destination — something you have to explicitly choose to do, instead of do on a Friday night by default — you need to actually sell, and that favors IP the audience is already familiar with.

In fact, this is the most ironic capstone to Netflix’s rise and the misguided chase by studios seeking to replicate their success: the latter thought that content mattered most, but in truth great content — and again, KPop Demon Hunters is legitimately good — needs distribution and “free” access in the most convenient way possible to prove its worth. To put it another way, KPop Demon Hunters is succeeding on its own merits, but those merits only ever had a chance to matter because they were accessible on the largest streaming service.

In short, I think that Netflix executives have become convinced that simply licensing shows is leaving money on the table: if Netflix is uniquely able to make IP more valuable, then the obvious answer is to own the IP. If the process of acquiring said IP helps force the long overdue consolidation of Hollywood studios, and takes a rival streamer off the board (and denies content to another rival), all the better. There are certainly obvious risks, and the price is high, but the argument is plausible.

Netflix’s Market and Threat

That phrase — “takes a rival streamer off the board” — also raises regulatory questions, and no industry gets more scrutiny than the media in this regard. That is sure to be the case for Netflix; from Bloomberg:

US President Donald Trump raised potential antitrust concerns around Netflix Inc.’s planned $72 billion acquisition of Warner Bros. Discovery Inc., noting that the market share of the combined entity may pose problems. Trump’s comments, made as he arrived at the Kennedy Center for an event on Sunday, may spur concerns regulators will oppose the coupling of the world’s dominant streaming service with a Hollywood icon. The company faces a lengthy Justice Department review of a deal that would reshape the entertainment industry.

“Well, that’s got to go through a process, and we’ll see what happens,” Trump said when asked about the deal, confirming he met Netflix co-Chief Executive Officer Ted Sarandos recently. “But it is a big market share. It could be a problem.”

It’s important to note that the President does not have final say in the matter: President Trump directed the DOJ to oppose AT&T’s acquisition of Time Warner, but the DOJ lost in federal court, much to AT&T’s detriment. Indeed, the irony of mergers and regulatory review is that the success of the latter is often inversely correlated to the wisdom of the former: the AT&T deal for Time Warner never made much sense, which is directly related to why it (correctly) was approved. It would have been economically destructive for AT&T to, say, limit Time Warner content to its networks, so suing over that theoretical possibility was ultimately unsuccessful.

This deal is more interesting.

• First, it is in part a vertical merger, wherein a distributor is acquiring a supplier, which is generally approved. However, it 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).
• Second, it is also in part a horizontal merger, because Netflix is acquiring a rival streaming service, and presumably taking it off the market. Horizontal mergers get much more scrutiny, because the explicit outcome is to reduce competition. The frustrating point for Netflix is that the company probably doesn’t weigh this point that heavily: it’s difficult to see HBO Max providing incremental customers to Netflix, as most HBO Max customers are also Netflix customers. Indeed, Netflix may argue that they will, at least in the short to medium term, be providing consumers benefit by giving them the same content for a price that is actually lower, since you’re only paying for one service (although again, the long-term goal would be to increase pricing power).

The complaint, if there ends up being one, will, as is so often the case, come down to market definition. If the market is defined extremely narrowly as subscription streaming services, then Netflix will have a harder time; if the market is defined as TV viewing broadly, then Netflix has a good defense: that definition includes linear TV, YouTube, etc., where Netflix’s share is both much smaller and also (correctly) includes their biggest threat (YouTube).

That YouTube is Netflix’s biggest threat speaks to a broader point: because of the Internet there is no scarcity in terms of access to customers; it’s not as if there are a limited number of Internet packets, as there once were a limited number of TV channels. Everything is available to everyone, which means the only scarce resource is people’s time and attention. If this were the market definition — which is the market all of these companies actually care about — then the list of competitors expands beyond TV and YouTube to include social media and user-generated content broadly: TikTok, to take an extreme example, really is a Netflix competitor for the only scarce resource that is left.

Ultimately, however, I think that everything Netflix does has to be framed in the context of the aforementioned YouTube threat. YouTube has not only long surpassed Netflix in consumer time spent generally, but also TV time specifically, and has done so with content it has acquired for free. That is very difficult to compete with in the long run: YouTube will always have more new content than anyone else.

The one big advantage professionally-produced content has, however, is that it tends to be more evergreen and have higher re-watchability. That’s where we come back to the library: implicit in Netflix making library content more valuable is that library content has longevity in a way that YouTube content does not. That, by extension, may speak to why Netflix has decided to initiate the Hollywood end game now: the real threat to Hollywood isn’t (just) that the Internet made distribution free, favoring the Aggregators; it’s that technology has made it possible for anyone to create content, and the threat isn’t theoretical: it’s winning in the market. Netflix may be feared by the town, but everyone in Hollywood should fear the fact that anyone can be a creator much more.

---