Why Paramount needs WBD’s content might much more than Netflix

“We definitely wanted this asset, we didn’t need it” – Netflix CEO, Ted Sarandos, said days after it announced its withdrawal from the Warner Bros. Discovery deal. When Paramount Skydance’s escalated its bid to $110 billion, Sarandos claims he was clear that Netflix wouldn’t make a counter-bid. It wasn’t economically prudent to acquire such an expensive asset however much Netflix would have wanted to own it.

However, the deal is undoubtedly more valuable for Paramount Skydance. As Netflix evolved from a DVD platform into a mighty streaming service with a subscriber base of 325 million, every Hollywood studio forayed into streaming and Paramount was no exception. However, with a user base of just 79 million and huge losses, Paramount+ could certainly benefit from having HBO Max’s over 131 million subscribers.

Of course, HBO’s award-winning content, considered the gold standard in the entertainment industry, is something every streaming platform would dream of having. Therefore, it isn’t rocket science that once the Paramount Skydance-Warner Bros. Discovery deal consummates, the former will put HBO Max at the forefront and at a later stage would probably merge Paramount+ with the former. The deal would also give Paramount access to Warner’s large pool of iconic intellectual properties—Game of Thrones, Harry Potter, DC and Looney Tunes, to name a few. In fact, most of the Paramount franchises are known to be struggling. The Warner Bros. Discovery deal would obviously come with its legacy studio and theatrical might as well as bring news channels, CBS and CNN together.

Considering its streaming platform’s low subscriber base and burgeoning losses, the analyst community also doesn’t rule out that the legacy studio could actually consider shutting down Paramount+. This would make job losses imminent. There could be job losses not just at Paramount+ but in others part of the business too. After all, Paramount Skydance already has huge debts in its books and plans to partly fund the Warner Bros. Discovery deal by borrowing around $58 billion. Paramount Skydance will definitely embark on a cost cutting strategy once its shareholders give a nod to this deal.

A Win-Win for Netflix

So, what’s going to be the future of Netflix going forward? Had the deal worked in its favour, it could have been a superpower in the content industry. “It will continue to do what it is best at, which is making great content,” says a senior official of a leading Indian media company. She is not surprised at Netflix’s decision to exit the deal. “Wall Street has started looking at returns and not so much subscriber base. It’s about how much profit you are making and Netflix has been focussing a lot on returns. Even in India they chose not to invest in IPL because it is irrationally expensive,” she explains.

The CEO of a leading content production company talks about how Netflix has always succeeded in outwitting the legacy studios. “When they started spreading globally, a lot US studios pushed back by quadrupling the licence fee for the content they licensed to Netflix. By then Netflix had 60 million subscribers in the US and another 40 million globally (in 2012). When the licence fee quadrupled, they started making original content. That’s when they greenlit House of Cards.”

“It was a blowout. They dropped all episodes together, introduced binge watching. Reed (Reed Hastings, co-founder, Netflix) had said that Netflix's biggest competitor was sleep, it completely changed the game,” he adds. Even if Paramount+ and HBO Max get together, their subscriber base would be 210 million, way behind the 325 million subscribers that Netflix is claiming. In fact, the streaming giant’s exit from the bidding has led to its share prices going up by 24%. Netflix shares had fallen more than 18% since it announced its pursuit of Warner Bros. in December last year.

Netflix will also be richer by an additional $28 billion. This is the termination fee that Warner had agreed to pay Netflix if the deal didn’t work out, which now will be paid by Paramount.

The Warner Bros. Discovery deal also came with the risk of political trouble for Netflix. Because of the sheer size of the deal ($72 billion), the streaming platform needed government approval and the Paramount CEO’s proximity with the Trump administration is well-known. The latter had demanded that the streaming platform remove a board director who was a former Biden administration official.

The combined might of Paramount and Warner Bros. Discovery could become a challenge for Netflix which has licensed a lot of their premium content like Game of Thrones, but analysts feel that Paramount will be so busy stabilising its ship in the short to medium term that any damage to Netflix is unlikely.