Agreement between Netflix and Warner Bros.: regulatory issues arise

He netflix and Warner Bros. Discovery The deal came together quickly, but its path to regulatory approval may not be as quick.

Netflix surprised the media industry on Friday when it announced its proposed $72 billion deal to acquire iconic movie studio Warner Bros. and streaming service HBO Max. The combination brings together two of the most popular streaming platforms in the sector. Netflix reported 300 million global subscribers by the end of 2024, the last time it reported the metric. HBO Max had 128 million customers as of September 30.

Netflix currently has 46% of global monthly active streaming mobile app users, according to data from market intelligence firm Sensor Tower. Combined with HBO Max, that share would increase to 56%, it found.

“This deal cements Netflix's position as the leading streaming service for original content,” according to an analyst research note from William Blair on Friday.

The size of the deal makes it ripe for scrutiny, both from industry experts and U.S. lawmakers.

The Trump administration is viewing the merger with “great skepticism,” CNBC reported Friday, and Sen. Elizabeth Warren has already called for an antitrust review.

“This deal looks like an antitrust nightmare. A Netflix-Warner Bros. deal would create a massive media giant with control of nearly half the streaming market, threatening to force Americans to pay higher subscription prices and fewer choices about what and how to watch, while putting American workers at risk,” Warren, a Massachusetts Democrat, said in a statement.

The merger would also give Netflix control over famed movie studio Warner Bros., further consolidating the movie space and raising concerns that the number or typical window of popular releases could shrink.

It is typical that in the days and weeks following the announcement of a deal of this scale, interest groups, politicians and corporate competitors will report wrongdoing on antitrust grounds.

The Justice Department will most likely review the deal, as it has done other media mergers in the past, and this could take some time. Justice Department reviews can take anywhere from months to more than a year.

Netflix said Friday that it expects the transaction to close in 12 to 18 months, after Warner Bros. Discovery spins off its cable network portfolio into Discovery Global.

Netflix executives said Friday they were “highly confident” the deal would win regulatory approval.

“You know, this deal is pro-consumer, pro-innovation, pro-worker, pro-creator, it's pro-growth,” Netflix co-CEO Ted Sarandos said during an investor call after the acquisition was announced.

“Our plans here are to work very closely with all appropriate governments and regulators, but [we’re] “We are really confident that we are going to get all the necessary approvals,” Sarandos added.

As part of the deal, Netflix agreed to pay a $5.8 billion breakup fee to Warner Bros. Discovery if the government blocks the deal.

Netflix's offer beat competing offers from supreme skydance and Comcast.

Analysts at Deutsche Bank and William Blair were at least minimally convinced on Friday about the deal's chances of going through.

“A merger of Warner Bros. Discovery and any of the three bidders would likely be successful even if the Justice Department sued to block a proposed combination,” Deutsche Bank analysts wrote in a note Friday, citing the views of a Justice Department veteran who, according to analysts, “does not see any significant antitrust issues in any of the three scenarios.”

“However… we do not know all the detailed facts that will be collected and analyzed by the Department of Justice, nor do we know who the judge who will hear the case will be, and both factors may have an impact on the outcome,” the Deutsche Bank analysts noted.

Paramount, for its part, has been fanning the flames.

Paramount's lawyers sent a letter to Warner Bros. Discovery this week, first reported by CNBC, arguing that the sales process had been manipulated in the direction of Netflix. The Wall Street Journal reported that in a separate letter, Paramount said a Netflix transaction would likely “never close” due to regulatory hurdles.

Paramount was the only bidder seeking to buy WBD's huge pay-TV network portfolio, and is unlikely to quietly abandon the process.

Wall Street hoped President Donald Trump's second term would usher in a trading windfall. However, economic uncertainty has slowed the process for some companies and regulatory hurdles have played a larger role than anticipated.

“Under Donald Trump, the antitrust review process has also become a cesspool of political favoritism and corruption,” Warren said in Friday's statement. “The Department of Justice must enforce our nation's antitrust laws fairly and transparently, not use the review of the Warner Bros. deal to invite influence peddling and bribery.”

Paramount's merger with Skydance was left in limbo for more than a year before it finally gained federal approval in July.

The Federal Communications Commission (which is unlikely to review the Netflix-WBD alliance since it does not involve a broadcaster) approved the $8 billion merger shortly after Paramount agreed to pay $16 million to Trump to settle a lawsuit over the editing of a “60 Minutes” interview with former Vice President Kamala Harris. Paramount had also ended its diversity, equity and inclusion policies earlier this year after the FCC said it would investigate the company over its DEI programs.

In September, the newly combined Paramount Skydance, led by David Ellison, set its sights on Warner Bros. Discovery. The company is now considering making a hostile bid directly to WBD shareholders and attempting to unseat Netflix as a potential buyer, CNBC reported Friday.

Ellison's billionaire father, Oracle co-founder Larry Ellison, is known to be close to Trump.

The argument over whether to approve Netflix's proposed acquisition of Warner Bros. would likely come down to streaming issues: first, about pricing for consumers and, second, how to define Netflix's audience.

The price of streaming subscriptions has increased across the board in recent years. In 2022, Netflix instituted a cheaper ad-supported model after years of resistance in an effort to attract more customers. The following year, disney followed up with its own more affordable plan.

Netflix is ​​used to revolutionizing the legacy media industry. The company ended its DVD rental business in 2023 and dedicated itself entirely to streaming. Since then, it has taken on massive scale and taken over the zeitgeist with original series like “Squid Game,” “Wednesday,” “Stranger Things” and “Bridgerton.”

Its maverick approach to the media and growing presence in the industry may be its salvation in the eyes of regulators.

“My expectation from a regulatory standpoint is that Netflix will advocate and discuss with its advisors a very broad definition of what its market is… so that would include broadcast, cable, subscription and ad-supported streaming,” said Jeff Goldstein, partner and CEO of AlixPartners, and co-head of the US Media group.

“And most importantly, that would include YouTube,” he said.

YouTube has come to dominate the industry when it comes to viewership. Nielsen reported once again in October that YouTube had the highest share of television usage, with Netflix in sixth place and Warner Bros. Discovery in seventh. Traditional media companies with linear networks (Disney, NBCUniversal, Fox and Paramount) filled the gaps in between.

Critics of the deal will define Netflix's scope more narrowly to try to demonstrate outsized dominance, Goldstein said.

“I think streaming is not a category. TV viewership is a category… you know, eyeballs might be a category,” media industry titan John Malone told CNBC in November when asked about antitrust issues surrounding the WBD sale process.

“But if you're going to expand the category to that, you have to include YouTube, Facebook and social media, TikTok,” he said. “I mean, that's really the question: Is streaming a category? … Are studios a category … and that's going to be looked at closely? These regulatory things are a little difficult to predict.”

— CNBC's Julia Boorstin contributed to this report.

Disclosure: Comcast is the parent company of NBCUniversal, which owns CNBC. Versant would become the new parent company of CNBC following Comcast's planned spinoff of Versant.