Competition matters: Netflix? Paramount? Both bad for Warner

Business leaders like to say that what they want most from the law is certainty — clear rules to plan around. If that’s the case, they should be satisfied to learn that Netflix’s plan to buy Warner Bros. Discovery is illegal under US law, as is Paramount’s competing takeover bid.

The Clayton Act of 1914 bans acquisitions whose effect “may be substantially to lessen competition, or to tend to create a monopoly.” According to the Federal Trade Commission and Justice Department guidelines, both mergers appear to “raise a presumption of illegality.”

Some argue that Netflix’s merger deserves support because Paramount would be an even worse buyer. The case against Paramount centers on David Ellison’s ambition to build a media empire with his father’s money and to gut CNN, owned by Warner Bros. Discovery. Larry Ellison, among the world’s richest men and a major Republican donor close to Donald Trump, is widely assumed to back his son. If President Trump suggests the Netflix–Warner Bros. Discovery deal “could be a problem,” then Netflix, the thinking goes, must be the better option.

But you can’t run a rule-based system that way. Either merger is bad for the country, and both should be challenged. The message to Warner Bros. Discovery should be: If you must sell, find a buyer who isn’t a direct competitor.

Start with Netflix. Its proposed merger with Warner Bros. Discovery would be harmful economically and creatively. In the long run, buying Warner Bros. is likely to damage Netflix as well. The combination of close rivals usually works out that way.

Since its founding in 1923, Warner Brothers has made bold creative and business bets: adopting sound films early; betting heavily on television in the 1950s; pioneering superhero films in the 1970s; and, through HBO, inventing premium television with “The Sopranos” and “The Wire.” Its creative gambles — including the anarchic sensibility of Looney Tunes — reflect what competition is supposed to do: force differentiation.

Netflix is itself the century’s great media innovator. From its origins as a DVD-by-mail service, it succeeded where earlier attempts to blend entertainment and the internet failed. It proved the viability of streaming, pioneered binge releases with “House of Cards,” and popularized global originals like “Squid Game.”

Combined, the companies might produce a cash cow, but the whole would be less than the sum of the parts. Netflix suggests it might keep HBO separate, but what parent company allows itself to be outbid by its own unit? The more likely outcome is a bland homogenization, a loss of distinct sensibilities.

Antitrust enforcers will note that Netflix and Warner Bros. Discovery are direct competitors in premium streaming services — Netflix at No. 1 and HBO-Discovery at No. 3 or 4. Merging them eliminates a head-to-head rival, enabling price increases and reducing competition for films and TV. When the next “White Lotus” is pitched, Netflix and HBO are expected to compete for it. Eliminating one bidder is textbook lost competition.

Netflix will argue that its real competitors are YouTube and TikTok. This rests on a false equivalence: that because both long-form premium television and short-form social video involve moving images, they are substitutes. It’s like insisting Maxim’s and Pizza Hut compete because they both serve food. The law can’t be that stupid.

A Paramount acquisition would be no better. Beyond overlapping streaming services, Paramount and Warner Bros. are direct competitors as major film studios with theatrical releases. By its own rules, the federal government should challenge such a merger. If Washington backs off — perhaps due to perceived Trump-Ellison ties — California could bring its own challenge to protect film industry workers.

Why is Warner Bros. Discovery selling at all? It is spinning off its cable channels, so the issue is not the health of its core business. Its streaming divisions are profitable. The real problem is the crushing burden of debt from its previous ill-advised mergers. Ego-driven, hype-addled decision-making — the curse of the mogul — created the mess.

Yet Warner Bros. Discovery still makes entertainment millions want to watch and retains the pioneering spirit of its founders. Freed from money-losing cable divisions, and after finding a noncompeting buyer or collecting the $5.8 billion breakup fee if regulators block Netflix, it could be well positioned to rise again — assuming the law does what it should.

The New York Times