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  Good evening from New York and Happy Thanksgiving to you all. I am about to conduct my end-of-year executive poll, so let me know if there are any questions I should include. If you don’t already subscribe to this newsletter, fix that here. And if you missed our recent dispatches on Netflix and podcasts, I broke it down in a video. Five things you need to know
The end of Netflix as we know itIn meetings with senior leaders at Warner Bros. Discovery, the top brass at Netflix assured their counterparts that they would continue to release the studio’s movies in theaters. They also promised to keep producing TV shows for licensing to third parties, according to people familiar with the matter. While those are standard practices at Warner Bros., they would mark a major break from tradition at Netflix, which has shunned theaters and kept pretty much all of its original programming within the confines of its service. Yet as Netflix pursues an acquisition of assets from Warner Bros., the company isn’t just contemplating the biggest acquisition in its history (by a mile). It is proposing a deal that would change the company forever. By purchasing Warner Bros., Netflix will absorb a traditional entertainment company — a studio that pumps its movies and TV shows through different windows and pipes. Netflix would also double in personnel overnight, welcoming thousands of employees from a traditional Hollywood background. Netflix has long prized its distinct culture of radical honesty and decentralized decision-making. Co-founder and former CEO Reed Hastings wrote an entire book about the Netflix culture and believes it is a primary reason he was able to outmaneuver legacy Hollywood studios. While bankers have long pitched Netflix on acquiring libraries and studios, the company has avoided major deals. Hastings had an aversion to acquisitions that stemmed from his experience at his previous company, Pure Software. “We come from a deep heritage of being builders rather than buyers,” co-Chief Executive Officer Greg Peters said at Bloomberg Screentime in October. That philosophy has worked pretty well, even if the company’s efforts to build its own movie studio and animation house have resulted in a largely forgettable stream of films. While competitors responded to the rise of streaming by merging and restructuring, Hastings built the most valuable entertainment company in the world. Investors are skeptical of a Netflix bidNetflix’s pursuit of Warner Bros. hasn’t won over investors. The shares have declined 16% over the past month as the talks have intensified. Netflix could argue that is because of the reaction to its most recent earnings report, yet even typically sympathetic analysts, such as LightShed’s Rich Greenfield, have questioned the logic of the deal. Major acquisitions and mergers in media frequently fail. They are a huge distraction and are often done more out of ego than necessity. A deal for Warner Bros. will take at least a year to get approved and even longer to digest. Members of Congress have already come out against Netflix. (All three of the bidders would face regulatory scrutiny, though the President has a clear favorite.) “One should have a reasonable amount of skepticism around big media mergers,” Peters told me. “They don’t have an amazing track record.” Detractors say Netflix’s pursuit of Warner Bros. is a sign the company has run out of ideas. The boost from its crackdown on password sharing has slowed. Its advertising business is a nice addition but not transformative. And its investment in gaming is a work in progress that may never pan out. Netflix isn’t interested in two-thirds of Warner Bros. Discovery — the cable networks and streaming service, and would be paying a lot for the studios and library. Whatever the exact terms, it will be a steep price. Netflix could wait for Comcast or Paramount to do the deal and then license their titles. If they win, both of those companies will have plenty of debt to service. This formula has long worked for Netflix, which has become Hollywood’s biggest success story by being different than major studios — not copying them. Netflix could take $60 billion and invest in new businesses. Instead, it is pursuing a shrinking company that will consolidate its lead in its existing area of expertise. It’s the kind of deal a legacy player makes — not a disruptor. The rationaleNetflix has explored big deals in the past, most notably for the Paramount studio. Peters’ co-CEO Ted Sarandos has long coveted studio lots and entertainment franchises, and has said the company will buy intellectual property, as it did with the Roald Dahl catalog. Because Netflix has never owned a substantial library of its own, it has relied on third parties to supply the majority of its programming. That is true for popular reruns like NCIS and Grey’s Anatomy, as well as new hits such as Nobody Wants This and Wednesday, which are produced by Disney and Amazon/MGM, respectively. Warner Bros. owns one of the best libraries of films and TV shows in the world and would give Netflix proven intellectual property, including DC Comics, Friends and Looney Tunes. Assuming the HBO library is also involved, Netflix would control Game of Thrones, The Sopranos and Sex and the City. Those franchises would bolster Netflix’s offering of older programs, supply titles for remakes (a la Wednesday), and boost Netflix’s nascent business in consumer products and in-person experiences. Warner Bros. also owns a small video-game studio. Theater owners are skeptical of the company’s pledge to keep releasing movies for the big screen, saying management is just promising this to get the deal approved. Netflix would be contractually obligated to do so with some titles and could then abandon the practice. But take a look at Sarandos’ past comments on theaters. His aversion is twofold: Theaters are declining, and original movies don’t work. While Netflix isn’t going to put risky original titles in theaters, Warner Bros. has some proven theatrical franchises. And while Netflix has never licensed titles to third parties, it’s never owned anything like Warner Bros., which operates the biggest TV studio in the world. Warner Bros. produces Ted Lasso for Apple and You for Netflix, and licenses old hits to other outlets. Many Warner Bros. movies are available outside of HBO Max. If Netflix didn’t sell anything to third parties, it would be sacrificing billions of dollars a year. It’s possible Netflix would absorb Warner Bros. without changing its mind about theaters or syndication. But while Netflix has core principles, it has always been flexible. It was never going to sell advertising, until it did. It was opposed to live sports, until it wasn’t. It’s been against big deals, until it finds the right one. The best of Screentime (and other stuff)
The music industry’s AI deal frenzyThe music industry is shifting from litigating to negotiating with AI companies. In recent days, Warner Music announced deals with Stability AI and Udio, while all three major label groups – Warner, Sony Music Entertainment and Universal Music – backed a new AI streaming service called Klay. Both Warner and Universal have now partnered with Stability on smaller deals around AI tools. The bigger deal is that they’ve both settled their lawsuit against Udio, a startup that can now create a legal way for people to make generative AI music. (Sony hasn’t settled.) “This is the moment to shape the business models, set the guardrails, and pioneer the future for the benefit of our artists and songwriters,” Warner Music CEO Robert Kyncl wrote this past week in a blog post outlining his company’s approach to AI. Warner and Universal announced these new deals right before delivering their latest financial results, an effort to convince Wall Street they have a plan for AI. Yet shares of both companies didn’t budge much. Most industry experts are skeptical of the Udio deals. The industry-sanctioned version of new technology has historically lost to the brasher upstart. Creating a new, industry-backed product will take months if not years – time its larger rival, Suno, can use to extend its lead. Suno is on track for $200 million in revenue and just raised $250 million at a valuation of more than $2 billion. Universal, the largest music company, was the first to do an Udio deal and is using a playbook it has employed time and again. It picks off a smaller, weaker player that doesn’t have the same resources to compete and forges a deal that is in its interest. When Universal Music was pushing its “artist-centric” music ideas, it started with places like Tidal and the small European music streaming service Deezer. If that previous effort is any indication, the majors will eventually reach deals with the big players like Suno and OpenAI – only they won’t get to dictate the terms. These new AI deals create something of a framework. And the combination of litigation and competing products apply a little pressure to the larger players. Whether any of these new AI tools will be as revolutionary as they promise is another story. Artists already use tools like Suno to generate ideas and may use others to create music. But Suno isn’t a service that will fundamentally change how the average music fan accesses songs. Klay seems more interested in competing with YouTube and Spotify, market leaders that are already working on AI tools to satisfy fans. YouTube soars, Disney doesn’tStreaming has increased its share of TV viewing by more than 5 percentage points from a year ago, according to Nielsen. That growth comes out of broadcasting and cable. YouTube accounted for almost half, increasing by 2.3 points. Roku grew by 1 percentage point and Netflix added half a point. The only streamer that didn’t add to its total was Disney, which was flat. That’s two years of no growth for Disney in streaming.  The No. 1 album in the world was…Rosalía’s Lux. I am surprised and tickled that this gem is proving to be so commercial. It dethroned Taylor Swift for a week! (She’s already reclaimed her throne.) Deals, deals, deals
Weekly playlistI am alternating between catching up on Slow Horses and All Her Fault. Peacock has a bona fide smash on its hands in this soapy drama. It dwarfs the numbers from Paramount’s Tulsa King and Apple’s Pluribus. More from BloombergGet Tech In Depth and more Bloomberg Tech newsletters in your inbox:
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