Over the last six weeks, friends and many Media Realism (MR ) readers have contacted me asking for my opinion on the Netflix/Paramount tango over the Warner Bros. buyout.
I hesitated to respond as I wanted to look at it carefully and there were a great many moving parts in the deal.
Early on, some said that this was a win/win for both contesting parties. I was not sure but after a month has passed, I now see Netflix as the clear winner by walking away from the deal.
Paramount is now committed to taking on a huge amount of debt. Some estimates go as high as 80 billion dollars. Yes, Larry Ellison of Oracle has the financial muscle to back up his son David at Paramount but that is a staggering amount of money that may limit content development. I would not be surprised if the new Paramount/Warners combo shoots for new films that are almost formulaic. There may be some sequels or prequels of existing successes that may not be blockbusters but will have limited downside risk.
Talent of all kinds (actors, writers, directors et al) may not be thrilled as there are now fewer people giving the thumbs up to projects. Consolidation means fewer slots for young talent and ideas to break through.
Also, my crude analysis of the financials shows that much of the EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) comes from cable channels that are struggling right now and on a downward curve.
Also, how will this play with European regulators? They are almost certain to be more difficult that Washington has been so far with Paramount.
By sidestepping this deal, Netflix can focus on many things, and they received a $2.8 billion termination fee by bowing out of the bidding war.
Netflix is a global player and much of their new growth is coming from outside North America. They have approximately 320 million subscribers. Think about that for a moment. Eash month on their VISA bills, 320 million subscribers pay Netflix. Yet Netflix knows what each subscriber is watching. If they package it up and sell targeted advertising based on viewing, they can slice and dice the data and put a spike in advertising revenues. I would not be surprised if Netflix advertising doubles in the next couple of years.
Are there any clouds on the horizon for Netflix? One big one that all players will face. You guessed it—AI.
The fragmentary evidence that I have seen shows that there will be a great deal of AI generated content that is of high quality in the next few years. Netflix will need to address that quite strongly or face some stiff competition. They have clearly won the streaming war to date and made it profitable but, in a market economy, innovators will always create challenges.
If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com or leave a message on the blog.
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