Netflix Walks, Paramount Wins, and the Ellisons Take Hollywood

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From the Vox Media Podcast Network, this is Channels of Peter Kafka. That's me. I'm also Chief Correspondent at Business Insider, and this is a bonus emergency podcast for very obvious reasons. Uh on Wednesday, everyone thought Netflix was gonna buy or or had a reasonable expectation that Netflix might buy Warner Brothers Discovery. On Thursday, we learned that they're not gonna buy it, which means Paramount's gonna buy it. Here to explain all of this is CNBC's Alex.

Alex Sherman. Welcome back, Alex. Thanks, Peter. You pretty much just explained it there. Yeah. Podcast is over. Thanks for doing it. When when did when did your perception go from Paramount's made it made a bid. Now Netflix is gonna counter. That's what we all sort of thought was gonna happen this week, too. Netflix is gonna walk. Did you expect this?

Um did you have an inkling, I guess, is a more polite way of asking. I did not expect it to happen yesterday at all. Uh I actually got a call about twenty five minutes before the announcement. Um well I didn't get a call. I was I was reaching out to sources and I got one to call me back. And that was a plugged in person who told me It's over. Netflix is walking.

And so you learned before the news I learned about twenty five minutes before the news. Then I started frantically calling for a second source, didn't quite get there in time for the announcement. I think uh Did you want to just tweet it out? Netflix I heard I should have just tweeted it out, but that's not the way we do things that.

C N V C. Uh so, you know, I think I think Netflix at that point knew that I was onto the story and they w they were I think they were already gonna publish their thing anyways. But uh I look the whole thing caught me off guard, I will say. Uh I don't think anybody was expecting this to happen. w you know, w the same day that Warner Brothers Discovery's board decided that the Paramount uh offer was uh was superior, that's the word that they use, a superior offer.

And to be clear, it's hit table set with the the de the idea was w we sort of expected Warner Bros. to say, Hey, we've got a bid here from Paramount. Netflix, now it's your turn to respond. Yeah, four days. They had said four days. They had said they had basically had until Wednesday End of day next Wednesday to to return. And Netflix had said this is the offer we've made is we can go higher if we need to.

So everyone, I think, expected them to go higher. Why do you think they didn't come back? Yeah. So, you know, look, I think there were first there was a little bit of mixed messaging there. You also had Ted Serando saying you just a day or two ago that they were gonna be very disciplined. on their bid. Um, but the paramount offer to your point, Peter, was only a dollar more than their previous offer. They went from thirty dollars a share to thirty one dollars a share.

So I think because the offer, the the the uh revised offer was not that much more. There was a decent chance that Netflix would be like, well, all right, well, you know, we'll bump our bid a little bit, and then we'll turn it back over to shareholders. You decide.

There's a shareholder vote was only in it gonna be in a few weeks from now, really. So we'll put out our offer, we'll put out your offer. If you decide, you know, you wanna go in Paramount's direction, go for it. Don't vote our deal. And if you like our deal, then approve it. Um, I did think that was an it was an inkling that that was gonna happen. Uh I think in the end, Paramount probably decided

We can definitely see where our own shareholder base thinks of this deal. The Netflix stock has tanked. since all of this started happening. Uh, you go back to, you know Early December. Uh it's down quite a bit. And in fact, cheers shot up ten percent upon the news that Netflix was walking.

Even this week, um, when it looked like Paramount's chances were improving, Netflix shares went up, which a real signal saying, Hey, hey, Ted Sarandos, we would like it if you didn't buy Warner Brothers Discovery. Right. So I'd have to think that that was part of it. Uh I think It's also likely that when Netflix first announced the deal, perhaps they thought the regulatory process would be easier for them. It certainly appeared as though

This was going to be a lengthy regulatory process, not to say Netflix wouldn't have been able to pull the right levers and make the concessions needed to get a deal done down the road, but it was not going to be smooth sailing. I think that part was quite clear, both in the United States. And in Europe. And maybe that was another part of this where the Netflix leadership decided, you know what? If this is gonna be that challenging for us.

We just don't want to also have to get into a bidding war here. That I'll say part three to answer your question is that because the bid was only a dollar more. Uh, I think Netflix also felt this could in fact get into a bidding war where if Netflix upped its bid, perhaps then Paramount would up its bid again, and then this would be a back and forth situation.

Where Netflix was like, uh, we don't even need to get into that. We're not comfortable with that. We'll just call it quits here. And then the last point I would say. It and and I know that there's like a a section of uh social media out there that likes to poo-poo this one, but I can tell you that I had uh private conversations with people that I trust. a around the Netflix uh universe, uh or or in fact that work at Netflix, who told me initially that when Warner Brothers went up on the block

they were concerned only that it didn't go into the hands of somebody for cheap. That's what I was told directly. And so Uh Netflix decided to take matters into their own hands with that. And in fact, they put in a bid and ensured it did not go. for cheap. And I think that Netflix leadership became enamored with Warner Brothers Discovery the more and more they looked into it and realized and thought about it. It was like, how would this fit with us?

And certainly I don't want to say that they didn't want the asset or this was all just a ruse to drive the price up.

But'cause that's pretty extreme, right? And there's actually legal there's legal consequences. I don't think that's true at all. But I do think it's true that always in the back of Netflix's mind They felt like, well, worst case scenario here, if we walk away with a breakup fee and we force Paramount to pay up the nose for this, that is not a bad situation necessarily for us or at least It puts it it it's it's sort of the

the least bad situation if Warner Boat's Discovery is going to go to a competitor, right? Make we have to lose, but we've we've basically wounded you by getting you to spend all this money. And and and the Netflix people for years when

Fox and Disney can buy and other mergers are being floated. I would say, Hey, how come you guys aren't bidding on this? And they would say, Well, we don't want to buy companies. You know, we wanna buy we wanna spend money on talent. And they would also say, And by the way, we're very happy for Fox and Disney to spend two years

uh integrating and going through regulatory clearances. We're very happy to see what was then called Time Warner get tied up in court for years when ATT was buying it. We can just move ahead. Um but by the way, one of those companies are one of those companies that said that over and over again was Netflix to like every other job. No, Netflix, Netflix always said that and then of course forgot that when they wanted to buy Warner Media. Um

But back to to to why they walk, right? So there's the price stuff, but We always knew that Paramount was gonna spend more. Paramount said over and over, we're gonna spend more. Um You would think if Netflix had already said we're gonna spend twenty-seven dollars in change per share, that they could add another dollar. Um it is surprising to me that they are surpr

prized by the blowback enough not to bid more. And similarly on the regulatory stuff, I know that Ted Cerandos had made a lot of entreaties to Trump, but he knew that Trump and Allison had a tighter bond. It is surprising to me that they were surprised. And you never know. A lot of this is just the power of images and photos, but that those shots of Ted Serandos leaving the White House

yesterday afternoon, looking kind of glum. There's actually if you can look on Getty, there's also amazing shots of him taking a selfie with some guy in front of the White House. Uh and Ted Serranos looks like he would rather be anywhere else than taking a selfie with that guy in the White House. Um

suggests that they underestimated how much political pressure there would be. Do you think this is more of if if we had to make you choose, do you think this is more of a money thing or a we can't get this deal done thing? Yeah. I don't wanna the the cop out answer is both, I think. I do really think the answer is both so I think that's a fair answer. I mean

Th the clearly shareholders didn't like the money aspect of this and tied into that was there was inherent risk that the deal wouldn't get done and they'd be tied up in this for a long time. So I I I I think I I you know and and look, I think the other part of it is I i I call it political or whatever, but I I do feel like Uh, Netflix did not want to uh have this thing drag out for a long period of time.

And then be forced into a position again where in order to get the deal done, it had to make all of these concessions it didn't want to. And I think that the T leave suggested that's where we were headed.

So Paramount has already basically said this deal has been pre approved by Pam Bondi and the DOJ. That's not officially true. In theory the DOJ can can can review this and and they might, but, you know, Pam Bandi works for Donald Trump. If Donald Trump wants this deal to go through, Pam Bandi is not gonna stop it by by filing a suit. Uh you've heard rumblings from the uh California State's Attorney General saying, Hey, we're gonna try to stop this. We don't know what Europe's gonna do.

Again, we're just speculating, but is there any reason to think this deal gets stopped? For regulatory reasons now. Probably less likely than Netflix, I would say. I think the California AG one is real. I mean, there's gonna be a lot of job losses, I think, attached to this. in Hollywood that w probably were not going to happen in a Netflix deal because have we ever seen an attorney general suit stop and merger? R right. I mean, uh I'm trying to think now. That's a good question. Um

I don't think it's unprecedented, but I cannot think of a deal off the top of the case. Rare if rare if ever. It's rare. You can't think of it. It's rare. Okay. Yeah. Uh it's it's and Europe Europe might try to stop it. Europe has has stopped other deals in the past, although it seems like Europe's less interested in stopping deals Donald Trump likes right now. Yeah, also I think Europe is Particularly attuned to big tech not getting all that much larger. Netflix, I think.

fell into that bucket much more so than Paramount, which is really not big tech at all. It's legacy media. Um so I would imagine the regulatory path is probably smoother from that end in Europe uh than it would have been for Netflix. Okay, let's let's walk through what happens to to each of these three players now. Um

Warner Brothers Discovery, we assume is going to get bought by Paramount. So the big assets there, there's the TV and movie studio, there's HBO, and there's this collection of TV networks. The one everyone in my world and your world cares the most about is CNN. David Elson hasn't said what he's gonna do with any of these assets, more or less, except I guess make more movies. That's been his pitch to to

to Hollywood, but we don't know what that means for leadership at any of these companies, who's gonna run them. Do you have any sense of what happens to any of these No, I mean I'll I'll uh I'll front run my own story here that I'm currently working on real time for CNBC. Uh there is a lot more Anxiety. depression among Warner Brothers Discovery employees with this going to paramount.

than th than what I picked up on in terms of had this guy. A lot of them a lot of them had said if we have to get bought, we'd prefer to get bought by Netflix. Correct. And so why is that? Well Netflix is not really in the business that Warner Brothers Discovery is in for most of their businesses. I mean, they're not really in the theatrical business. They're not really even in the prestige TV business.

So a lot of those leaders would have been left alone de facto because there aren't existing leaders at Netflix that do those jobs. That is not the case at Paramount. Um And and that goes across the board. So we're talking they have a movie studio, they have a streaming, they have a news business, they have a sports business. They have a streaming business. There's just so much overlap here that this is why Paramount has put out.

the six billion dollar synergy number or whatever the latest version of that is because there's gonna be a lot of job cuts. that are involved here. And so part of the whole premise of this deal is that there's so much overlap that we need to suss out who's going to run all of these divisions. And then whoever doesn't run these divisions will lose their job.

Yeah, so that that's yes, along with thousands of other employees. Along with thousands of other employees. Yes. So there'll be a lot of cuts at the leadership level and there will be a lot of cuts at the rank and file level up for lack of a better term.

Um so that leads to kind of a depressing scenario from the Warner Brothers Discovery uh standpoint. So I don't think anybody has a good sense yet of who's going to run these divisions. It's just so early on at this stage. But as my story will say, that's kind of g assuming this deal does in fact get done. That's the next chapter here. The next chapter is to figure out, okay, we've got all of these people now. How are we gonna restructure this thing?

so that we put the right people in charge. How fair is that process gonna be from a meritocracy standpoint versus uh, you know, well we're paramount, we're coming in and so we're making the calls here and, you know, it it'll just be it'll be Old school Paramount buying Warner Brothers Discovery and we're gonna take over from a cultural standpoint and a relationship standpoint. Like we'll see, but that's why there's so much anxiety on the WBD employee side.

As an aside, the the idea of of combining in particular CNN with CBS. has been around for years and years under many different ownerships. I don't know why it's always CBS, but this is not the first time people have contemplated that. And I think there's an alternate reality where you go, Yeah, it makes perfect sense to take a

a big news gathering operation that's on broadcast TV and one's on cable and yes, there'd be some cuts, but you could make something really, really strong if you combine those two assets in theory. Yeah, just a quick note about why it's C B S. Well, it's not going to be NBC'cause they already have MSNBC and it's not going to be Fox because they already have Fox News. So really it was just ABC or CBS in terms of network news that didn't have an associated cable news network.

Uh and I think the thinking always was it's more likely to be C B S than than Disney. Um so that's why I think it's been C B S. And is there anything in David Ellens Ellison's history, older history, and then in the last year of history when he's been talking about this deal or what he wants to do that gives you any sense of sort of what he might be interested in in terms of

the movie division, which and by the way, the the the Warner Brothers movie studio is also a giant T V studio, enormously valuable for that. And when it comes to HBO, I mean he really has said very little, but is there anything that you can cling to and go, Oh, maybe maybe this means this for the Warner Brothers uh side I mean Not a lot. Like you said it. They've said they want to make more movies. So they want to make thirty movies a year, I think is the number that this been

thrown out, that's a lot of movies per year. Many people have noted that you have to go back to like the nineteen seventies for studios to make that many movies in a year. So we'll see if that actually pans out. I mean, David Ellison's personal taste appears to be these like kind of action movies. So I would imagine that they'll go. Action movies, things things that were successful before. Let's make more of them, which by the way, is most movie studios. For sure. Yep.

Um but no, I think the answer to that is like there's a lot of just guessing involved there. And I don't think we have heard a coherent strategy in terms of Um exactly what we're going to find out for changes if there are significant changes at the Warner level. Again, Netflix, Ted Serandos.

over and over again, very clearly stating he did not want to change the Warner Brothers business. He was basically like, We're gonna own this, but it's gonna be business as usual. And that I think made a lot of the Warner Brothers employees feel more calm about the situation uh until David Ellison says the same thing. And frankly, even if he does say the same thing, I just don't think they can believe him because of the uh leadership overlap that we just discussed.

Uh so let's talk about what what becomes of Paramount once they buy this asset. The thing that everyone is pointing out is that Warner Brothers Discovery has a ton of debt already. Paramount is taking on a huge amount of debt to make this deal done. One of the reasons Warner Brothers Discovery in its most recent incarnation struggled is because they had this huge debt overload. That all seems like a reasonable concern

On the other hand, even though Paramount is a public company, it's really a private company. It's controlled by the Ellisons. Do they get to play by different rules when it comes to How they service the dead, what yeah how they care whether they care about share prices. I mean, this thing they bought was worth seven dollars. uh a year ago. Now they're paying thirty-one dollars for it. It seems pretty likely that at some point that stock price is going to decline again.

Um, but again, Larry Ellison is one of the richest men in the world. So maybe he's not playing by the same rules. Yeah, I don't think they have to exactly play by the same rules. They do have to service the debt. Yeah. So that is a factor, whether you're a private company or a public company. And You know, there's um There's a lot of this money that's sovereign wealth money. I I don't know exactly how much

input these sovereign wealth funds are going to have over the directional company or not. I think we're remember, remember uh recently Paramount said, uh yes, we're taking twenty four billion dollars from three Petro states. But Warner Brothers Discovery, because you raise your eyebrows at this

They have prom these petrostates have promised to to have zero zero influence over the company. They won't have a board seat, they won't have voting. They're just letting their money rise. Exactly. Why why would I be so silly to think that they might actually have a a a quiet opinion on how their money was being how many, many billions of dollars of their money was being spent. Um if for a United States media company on a large

So look, again, we'll see exactly how that plays out. Yes, to your earlier point, I do absolutely feel like the rules are different because this is a quasi-controlled company by the Ellison family. It is not nearly the same. as a pure play publicly traded media company. That said, uh

There's no it is still a publicly traded company. They still will have analyst reports and investor bases. And so, uh, again, the near term I think is going to be uh Rocky in terms of How do we convince the street that this is going to be anything different than the plethora of other horizontal legacy media mergers that we have seen over the past ten years, one after another after another.

They all lead to value destruction. There is not a single example, I think, that you can point to of a large uh mega media merger between two legacy media companies that has really gone well. So I don't know why I would think this one would go all that way. We're Netflix. Uh that's and and we're not dumb and so we know what we're doing. And then also just just to be clear, I think Netflix was a little different in the sense that Uh A, it's not as much of a legacy media company, and B, it was

M more of a vertical merger in some senses than a horizontal one. You know, you're gonna add things we don't have. And also we're not taking on your declining cable T V S which is what Paramount is. But you know, Comcast bought NBC, that was less of a disaster, certainly. Um, you know, I think that has they bought NBC at the right time, um, and that has been a

a at least a good acquisition for Cocktail. And what do you think the Ellisons think? Because again, this is not the first time someone will suggest it to them, hey, the the the track record for these deals is pretty bad. Um what makes you think it's gonna be better? And and by the way, Larry Olson, he's not c you know, he is one of the richest men in the world. He doesn't like to lose his money. He what what do you think he's going to he and his son are gonna get out of this deal?

Well, I mean what are they gonna get out of this deal? I think his son uh is going to get the job of a lifetime out of this deal. I think his son has gone from running a borderline irrelevant film studio to one of the largest uh media companies in the world. Do I think That's a nice gift? Yes. Do I think that the Allisons are gonna make f a fortune off of this investment. Again I

I I don't know how anyone could say the answer to that is yes. I just all evidence suggests that this is gonna be a slog for a long time. Now maybe There's a lot of I mean, you'd have to be wish casting to say this was some sort of, you know, genius investment on the sense of the Ellison families. Like maybe they

put this stuff together with TikTok and Oracle and they you emerge with some thing on the other end that's amazing. But like all that stuff is so wishy-washy to me that I I I it's hard for me to um To say I believe any of it. Yeah, I mean the I guess the most basic argument is look, we we have enough money that we can play for years and decades if we want to. These are giant assets. There's only so many of them. Some of them are in decline.

but we believe they will be valuable for years and years to come. And we don't really know how it's gonna work out, but we'd rather own them than not own them. Again, like the uh in many ways I this deal is identical to the Discovery Warner Media deal from the Discovery side, right? If you are David Zaslov and you are running Discovery and you have the chance to merge

with Warner. Of course you are going to want to merge with Warner. You you have taken your piddly little media company and merged it with a much larger one to give yourself more runway. It is the exact same scenario here. Even after buying Paramount, that Paramount Skydance company is still subscaled. to all of the big media companies and certainly subscale to all of the big tech media companies that either dabble or go fairly full throttle in modern media, YouTube, Amazon, Prime, et cetera.

Which by the way, when they do have regulatory hearings, they will point over over and over. Hey, we're small compared to the big tech companies. That's who you gotta really worry about. And and they are small compared to the big guys, to to to be fair.

Uh, and so now of course if you are Paramount and you are a you know, w whatever the value of that company was, twelve billion dollars or so and you have a chance to become a$100 billion company, if you combine these things with the debt, you're gonna take it because you now have a fighting chance.

to compete with the biggest players in the industry for sports rights, for top movies, for top TV shows. Like you just have the balance sheet to be able to do it. So it makes all the sense in the world if you want to be in this business.

for the Ellison family to do this. Do I think that they are going to enrich themselves by doing this? No. Do they have to enrich themselves? Absolutely not. Larry Ellison is one of the wealthiest men in the world. Uh so they have the they they have the ability and the runway to be able to do this. With some long term thinking. And if it all goes wrong in the end, well, like at least they had fun doing it. There's worse jobs than running a major media company.

Oh, it's like you wrote a title for my for my uh story. Thank you for that. Um, let's talk about Netflix briefly. Um they got a two point eight billion dollar consolation fee. uh for the deal breaking up. There's a sort of snap wisdom like, oh, they're the winner here because they didn't have to pay. Um, they didn't get suckered into a bid. Um, they shown financial discipline.

uh maybe they could go buy something else. All all that makes sense to me. On the other hand, they thought that that a big chunk of Warner Brothers Discovery was worth them spending seventy two billion dollars, eighty three billion dollars with debt. They this is clearly something they thought was important. Um What about the theory that if they thought this was important enough to spend$73 billion on and didn't get it, that indicates there's some weakness.

Yeah, I think there's a little bit of truth to that. Um I think it caught people off guard that they were so interested in this and so willing to pay that much money and so uh it's only logical that you would think, hm, well, why d why was this so important to them. Uh I think you can rationalize or justify some of it at least by very simply saying, well, they felt this was Amazing generational IP. It doesn't come up for market all that much.

We should our our equity is is valued quite high at this stage, not to say it wouldn't be down the road, but it is right now. The market thinks very highly of us. Uh it's time to flex a little bit. and prepare ourselves for the future in a way that we can do it and the blowback won't be devastating.

So even if our shares do go down twenty five percent or whatever, that's w we're we' we'll we'll live with it. And then as soon as we integrate this thing and people see that we keep growing, you know, our our stock price will bounce back and that'll be it. Um I the signal to me is not so much that Netflix shareholders should be freaking out over this. Um, but more of that, I think Netflix is in the market for legacy IP.

Uh and so I've heard that, although I think what else would they buy? What else would they buy? Great question, right? Great question. Uh and I think that will probably be the subject of stories the next week or so. You know, I like if if if Universal and and some of the NBC library were ever to be put up on the market, I could see

Netflix potentially being interested there. I don't think they would want to run the NBC broadcast network, so you'd have to figure out how to suss that apart. But you know, beyond that, there's not all that much out there. And I think that was maybe one of the reasons they were so interested. in this deal, because there simply isn't all that much out there, and this was out there.

So Right, because the bankers are all saying, oh no, you've taken out your checkbook. It'd be a shame to put it away. Why don't we do why don't we uh why don't we bring you over to this show? I'm not sure that's gonna happen. I would certainly say in the near term, you're not gonna see that. We already know what the Netflix shareholders think of all of this.

So it just strikes me as illogical that Netflix would run out and make some other big IP purchase and go down this road again. Uh, but again, I if if there was some sort of media company that said we're for sale, take a look. Uh i I think Netflix will be there looking.

Let's let's step back for the whole thing. Um you write about business, I write about business. But there's also like a culture component to this story. And and I would argue something about America in this story too, right? This is a deal that when you step back, looks like It was engineered by one of the president's closest allies, who's also one of the richest men in the world. And this deal was put through, was was constructed so it would be approved by the president of the United States.

and a rival bid that wasn't approved by the United President of the United States didn't go through. And so this is a deal blessed by the Donald Trump administration. Um how should we feel about that? And how should we feel just as consumers of culture to have all of these assets controlled by one person regardless of who it is?

Yeah, I mean on the first front, I think Well Any rational thinker should be concerned by levers that are pulled that are borderline uh illegal or veered toward bribery or anything like that. I also think people need to keep a longer-term mindset over this. So, you know, again, assuming laws are not changed. Donald Trump will only be president for another what is it, three years now? Um, however long it feels like, this media deal will last far longer than that.

So the the CNN of the next three years will not be the CNN of the next ten years, fifteen years, twenty years. Uh certain changes will be made uh to certain parts of this media company that may very well completely be undone five years from now. So, and also frankly, the world of modern media is changing so much that The there's no doubt in my mind that the CNN of today is not going to be the CNN of five years from now. Anyways, Donald Trump aside.

So I that's what I would say basically in in a long term thinking here, which is that this deal will outlast all of that. And yes, there are concerns that so many of these media assets are controlled by the same person. But like again You know, that's really no different than all the other big media companies as well. Like Amazon owns so much, Google owns so much, Apple owns so much that these are concerns because they're giant companies. Um but this one in particular to me

strikes me as not all that much different than the other major media companies. A lot of these assets, like Elizabeth Warren has done it a couple of times and I think Bernie Sanders too, where they've shown, look at all the assets that are going to be owned by this. And it's like MTV and VH1 and Company Central, like you do need to have a little bit of perspective that these assets are dying.

They are dying assets that do not hold nearly the cultural relevance that they once did. So while that may be scary to somebody who's fifty years or older, it is not at all scary to the younger generation uh who are much more involved. with other people. You don't think your kids are are are are are concerned about the the future of VH one? Yes, exactly.

So I I tend to be less of an alarmist on this one, I think, than a lot of other people are. Alex Sherman, it's been a busy 24 hours. You've got a bunch more to do. I'm going to let you go. Thank you for joining us. You can follow Alex on air and on the internet. Internet at CNBC. Thanks, Alex. Always a pleasure, Peter. Du som lyssnar på True Crime. Nu samlas poddar, författare och kriminalexperter på en och samma plats.

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