Though Netflix did ultimately end up stepping back from the deal, allowing Paramount Global to take the lead, this article explores the alternate scenario: what if Netflix were successful? What if the biggest video streaming service acquired one of Hollywood’s most influential studios?
From an economic, market-based standpoint, this would be an example of vertical integration – when a company has control over multiple stages of its production and distribution process, as opposed to relying on other suppliers. Netflix would now have ownership over the actual production of the film and television shows in its distribution, the result of this market structure being (after hefty upfront acquisition costs) a reduction in production-related costs. As opposed to being involved in expensive long-term licensing agreements, owning the content allows Netflix to internalise the theoretical profit that comes from the production and release of all the film and television handled by Warner, adding to Netflix’s overall margins.
The expanded Netflix company would also benefit from economies of scale through technology, marketing, and other fixed costs being spread over larger combined operations, reducing the average cost per film and show produced. Assuming minimal inefficiency from operational complexity across the larger-scale firm, Netflix theoretically benefits vastly from this acquisition, costs-wise. Additionally, Netflix’s ownership over exclusive, high-demand content gives them additional price-setting power for their customers, who cannot access the content elsewhere, making their demand for Netflix subscription less price-elastic (less sensitive to price increases). Netflix can increase margins by raising subscription prices with a lower risk of losing users – the consequence of this being long-term share price strength, following the initial downward pressure due to high up-front financing costs.
As Netflix expands its market share, the film and television industry also shifts closer towards an oligopoly, dominated by a small number of large firms. Since each firm in the market now has fewer rivals, competition may take a hit: SVOD brands feel less need to set aggressively low prices, as well as invest as much in innovation to improve the quality of their output. Film and television audiences’ enjoyment from these services could take a hit as a result.
More recently, the public has been critical about Netflix for another reason: declining production value. Audiences were quick to point out weak creative decision-making in Stranger Things’ final season, for example. Weak dialogue, tacky visuals and gaping plot holes turned a record-breaking, award-winning cultural phenomenon into a subject of criticism and disappointment, almost a full decade later. Ratings fell significantly, with Rotten Tomatoes’ audience rating falling to nearly 60%, far below the 80%-90% range of earlier seasons. The general worry is that Netflix is prioritising high production volume over the quality and authenticity of the content itself.
An important question is subsequently raised – what would happen to the quality and creative direction of Warner Bros. content under Netflix’s recent production model? Furthermore, what measures would other platforms have to take to keep up with Netflix? A group focus shift from production quality to engagement metrics and binge-ability could have drastic implications for the film and television industry as a whole.
Due to the nature of the entertainment industry, success of this would-be acquisition should be judged by the impact on audiences, rather than firm-side performance. Taking into account the pricing power issues, as well as the concerns over production quality, both of which come at the expense of audience experience, it can be concluded that a Netflix acquisition of Warner Bros Discovery could have done far more harm to the entertainment industry, than it might have done good.