With Netflix’s offer of $27.75 per share in cash to purchase the studio and streaming businesses of Warner Bros. Discovery, there has been speculation as to whether the acquisition will face tougher antitrust regulatory scrutiny than Paramount Skydance’s $30 per share cash bid for the entirety of Warner Bros. Discovery.
Based on the criteria discussed, a Netflix buyout seems likely to harm consumers, whereas a Paramount buyout appears unlikely to harm them, making a Paramount acquisition more likely to survive antitrust scrutiny.
U.S. large company mergers are covered by Section 7 of the Clayton Antitrust Act. The operative phrase in the law is “No person engaged in commerce… shall acquire, directly or indirectly, the whole or any part of the stock where…the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly.”
The DOJ examines an accepted merger and determines whether to sue to block it using four criteria established by the Supreme Court to determine if a merger will harm consumers as a result of:
Harm does not have to be proven with certainty, only that it may occur.
The Supreme Court established, in United States v. Philadelphia National Bank, 374 U.S. 321 (1963), that if a merger results in an “undue percentage share…[in a] highly concentrated market”, it is “inherently likely to lessen competition substantially.” The Biden Administration established 30% as the percentage share that the case refers to.
A Netflix merger would combine the #1 and #3 streaming services in the U.S. According to Prof. John M. Yun at George Mason University’s Antonin Scalia Law School, this would result in Netflix owning around 35% share of the streaming market. The possible consumer harm would come in the form of price increases, as even Netflix admits there is 75% consumer overlap in Netflix and HBOMax. As these two entities produce the most (and arguably highest quality) content, they have achieved “must-have” status among consumers.
There is also a distinct possibility of reduction in both output and quality. Netflix would have little incentive to produce as much content as it currently does. Additionally, Netflix will burden itself with at least $60 billion in new debt, which incentivizes reducing output to service the debt.
Those cost reductions seem likely to result in a decline in innovation, particularly in regard to content strategy, but also with respect to platform features and pricing models. After all, since Netflix will become the single “must-own” streaming service, there’s no reason to innovate. Additionally, for all its recent struggles, Warner Bros. Discovery still represents something essential: an alternative center of gravity.
Netflix is extraordinarily good at scale. It is not designed to be a pluralistic ecosystem. It is designed to operate as a predictable platform.
Finally, a Netflix merger not only removes a competitor from the market, but the third largest competitor.
Netflix certainly has defenses against these arguments. It will argue the “relevant market” defense. In United States v. Philadelphia National Bank, 374 U.S. 321 (1963), the Supreme Court decided that in order to determine legality of a merger, the market in question had to be defined and the concentration of ownership within that specific market would be scrutinized. Netflix will argue that market analysis should include streaming content of all kinds, enlarging the relevant market from percentage share of audience to percentage share of hours used. It will argue that YouTube, TikTok, gaming, and linear television should be considered the relevant market.
The DOJ will counter with Ohio v. American Express Co., 138 S. Ct. 2274 (2018) in which the Supreme Court decided that, “The relevant market must include products that are reasonably interchangeable by consumers for the same purposes.” Are free, ad-supported, short-form, low quality platforms of TikTok, gaming, and cute kitten user-generated content reasonably interchangeable for the professional, expensive, long-form content of Netflix and HBO/Max?
Were Netflix to raise prices, will subscribers cancel it and move to YouTube and TikTok? These are the questions a judge will have to decide.
From a consumer-substitution perspective, the platforms do not appear reasonably interchangeable.
FTC vs. Meta /Within (2003) supports this counterargument. Meta tried to claim that its Supernatural service competed against all fitness and digital app services. The FTC won its case by saying the market was much narrower, and limited to the universe of virtual reality fitness maps.
In 2020 and 2023, the DOJ and FTC issued guidelines regarding vertical mergers. Two guidelines are relevant in this matter.
The first is “input foreclosure”, which means withholding content licensing to other streamers. WBD currently releases its own content on HBOMax and licenses its content to other competitors, making it widely available to consumers. Netflix can take advantage of existing WBD and HBOMax franchises and programming and withhold it from competitors.
The second element is “customer foreclosure”. That is, a vertical merger that reduces the number of buyers in a market is anti-competitive. HBOMax is the #3 service because it is a major buyer. With it out of the market, sellers will have one less purchaser to sell to.
I already mentioned how production would be curtailed, and the merger would result in one less employer in Hollywood. When one entity becomes the dominant buyer of creative labor, which is what will happen with a Netflix acquisition, the market stops functioning like a market. It begins to resemble administrative allocation rather than market exchange.
This can only lead to wage suppression across the board, reduced residual payments, and likely reduced creative freedom. With the next round of Hollywood labor contracts around the corner, a Netflix win would further gut a labor market that has already been kneecapped by reduction in production due to the pandemic, decline in movie viewership, and the Writers Guild strike.
In today’s market, Netflix touches everything. Should Netflix absorb Warner Bros., it will consolidate HBO, Warner Bros. Pictures, DC, Turner’s library, and one of the deepest catalogs of storytelling ever assembled. Regardless of statistical claims of market share, Hollywood effectively becomes a one-buyer town.
Taken together, these factors suggest that a Netflix acquisition would face a high likelihood of extended DOJ scrutiny and a meaningful risk of litigation.
Paramount appears to be in a far better regulatory position should it acquire WBD. There are only three minor paths of anti-trust attack by the government, all of which are plausibly defended.
First, the DOJ could argue that the transaction would reduce the number of major film studios from five to four, which would reduce content diversity (since there will be fewer decision makers regarding what films are approved, or “greenlit”, for production).
Second, the merger will result in the same monopsony concerns, with there being one less buyer in the market.
Third, the DOJ might argue that combining the studios will allow them to strongarm movie theatres to get a more favorable revenue-split. In turn, theatres will be forced to raise ticket prices, harming consumers.
Paramount’s defense to the first challenge has already been announced. It will increase its output of films from fifteen to thirty. It’s a credible claim because that’s the whole reason Paramount wants the deal in the first place — it needs to scale. If anything, cost efficiencies through scale, and the combination of franchise potential incentivizes Paramount to increase production.
This significantly weakens the monopsony argument, because more production staff will be employed, not less. Achieving scale will also allow the combined entity to more efficiently produce lower-budget prestige films than the entities have been doing separately. That will also result in an increased diversity of content.
As for the third issue, the last thing Paramount wants to do is scare moviegoers away by causing ticket price increases. Again, the purpose of the acquisition is to produce more tentpole films and have those stay in theatres longer. Paramount is not going to squeeze movie theatres for a bigger cut at the risk of losing paying audiences.
Paramount also knows that the movie theatres it relies on are struggling. It is self-defeating for a combined Paramount-Warners entity to further harm their partners.
There are also potential pro-competitive efficiencies in a Paramount purchase. The combined entity creates a stronger fourth competitor capable of challenging Netflix, Amazon, and Disney. As mentioned, Paramount will ramp up to 30 theatrical films annually. Indeed, preserving the traditional theatrical windows will benefit theaters, Paramount’s own revenue stream, and consumers who prefer theatrical experiences will not be threatened. Should the predicted $6 billion in synergies come to pass, those savings may show up in reduced costs to consumers.
Paramount appears to have a cleaner and faster path to regulatory approval than Netflix. There are multiple potential avenues for DOJ challenge, and Netflix appears to have limited pro-competitive offsets relative to Paramount. Any review could take 12 – 18 months if there is a trial. Paramount appears to have minor exposure to DOJ challenges, strong defenses, as well as pro-competitive potential, and a review path of under a year.
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Larry Meyers is a former TV writer, and a financial policy analyst.
