The Strategic Logic of the Netflix-Warner Bros. Deal

Not Another Trainwreck, But Hardly an Unalloyed Good

Source: Netflix, 2025

Here we go again! For the third time within a quarter century, the Warner Bros. studio assets have been acquired for more than $70 billion. Since I commented very sharply on the first two, lots of people are asking me my thoughts on the just-announced purchase of Warner Bros. by Netflix. I provide my response in this Playing to Win/Practitioner Insights piece called The Strategic Logic of the Netflix-Warner Bros. Deal: Not Another Trainwreck, But Hardly an Unalloyed Good. And as always, you can find all the previous PTW/PI here.

Third Time Lucky?

The first of these mega deals was in 2001 when AOL bought Time Warner in a deal that valued Time Warner equity at $166 billion. (While it was more of a merger than a takeover, it was technically structured as an acquisition). The next one was in 2018 when AT&T bought Time Warner for $85 billion. Both deals routinely make lists (like this one) of the worst takeover deals in business history.

The AOL Time Warner deal cratered almost immediately as the market realized that AOL was largely worthless, which was confirmed when AOL was spun off for a mere $3 billion in 2009. The selling shareholders initially thought they got an awesome deal because Time Warner shares were valued at a massive 70% premium over the pre-announcement price. However, the payment was in what turned out to be wildly overvalued AOL stock. In the end, Time Warner shareholders gave up 55% of their company — worth about $55 billion based on pre-announcement value of Time Warner — in exchange for an asset worth $3 billion. As a combination, AOL Time Warner was a disaster, but the shareholders of AOL made off like bandits.

In the AT&T Time Warner deal, AT&T learned not long after the dust had settled that this was a disastrous acquisition and, a mere three years later, sold the Time Warner assets to Discovery for $43 billion — a massive discount. As I have pointed out before, that is the equivalent of the AT&T executive team holding a bonfire of $38 million of shareholder cash every day for three consecutive years.

On December 5, 2025, Netflix reached an agreement to acquire the Warner Bros. assets for $72 billion. Of course, we don’t know yet how that will turn out. The first two deals destroyed over $50 billion of value for Time Warner shareholders and over $40 billion for AT&T shareholders, respectively. The hope is that this will be third time lucky — but the track record around the transfer of Warner Bros. assets hasn’t been good thus far.

Deeply Flawed Strategic Rationales

I knew the first two deals were doomed from the outset because the (so-called) strategic rationale for both was deeply flawed.

The stated strategic logic of the AOL Time Warner combination was that AOL would benefit competitively in the Internet access business, in which it was then the market leader, by having proprietary access to Time Warner content. Sounds great!

But the logic just doesn’t track. Time Warner’s value was based on its ability to broadly distribute its content. Content creation is a fixed cost business. Creators invest an enormous amount in creating the content and then to amortize that fixed cost, they strive to sell their content to as many users as possible.

AOL led in the Internet access business. But it was fragmented and AOL’s 30% market share at the time was by far the biggest. One of two things could have happened after the combination. First, Time Warner content could have given AOL a meaningful advantage over its competitors. That would have validated a key tenet of the rationale. But had that happened, the other 70% of the market would have boycotted Time Warner content because it was helping their competitor, which would have sabotaged the business model of Time Warner. Alternatively, Time Warner content may not have been able to move the needle on AOL advantage over its competitors, invalidating the entire premise of the combination.

That is, there was zero probability of the strategic success of the combination, which I described in this Harvard Business Review piece.

On AT&T Time Warner, the rationale was owner economics, a concept I hate in the general case, as I discuss in this piece, and my antipathy applies in spades to this case. The idea was that by buying Time Warner, AT&T gained the advantage of owner economics. Rather than buying content from outside providers and having to pay a profit-margin premium for it, AT&T would get it from Time Warner at cost — improving the (owner) economics of AT&T. Yup, that would be true. But then all the business Time Warner would have with its giant customer, AT&T, would be at zero profit, thus tanking the profitability of Time Warner, ensuring that its value would never be close to the $85 billion for which it was purchased.

Days after the merger, I pointed out this logical flaw to Fortune reporter Jeff Colvin, who had called me for my opinion, and I predicted that: a) the acquisition would be an unmitigated disaster; b) would be divested within five years; c) at a price half of the acquisition price; and d) would cost AT&T CEO Randall Stephenson his job — predictions that Colvin confirmed in an article at time of divestiture. The only thing on which I was (slightly) wrong is that I predicted AT&T would salvage 50% of the purchase price — it was 50.6%.

Both illustrate what I call the Impossibility Theorem, which describes a situation in which for the logic to hold, two things must be true, but if one is true, the other can’t possibly be. For example, if AT&T does benefit from owner economics, Time Warner can’t maintain its value. If Time Warner can maintain its value, AT&T can’t benefit from owner economics. Failure to understand the Impossibility Theorem cost shareholders roughly $100 billion across these two acquisitions.

Netflix-Warner Bros.

This all begs the question, is this just another Warner deal based on a fundamental strategic fallacy? No, it is not. There is no insane argument about owner economics or vertical integration. This is a plain, old-fashioned bulk-up/consolidation move. With the acquisition of Warner Bros., Netflix bulks up and drives consolidation in its two core businesses: content creation and content streaming.

Netflix started in media content distribution and led by pioneering Internet streaming, becoming the dominant player in that arena. It distributed the content created by the traditional major players in that space, such as Universal, Paramount and Warner Bros. However, during the 2011–2015 period, all the new streaming players, including Netflix, started spending aggressively in content creation of their own. As a result, Netflix is now a major player in both content streaming and content creation.

However, in streaming, Netflix is no longer the sole dominant player. Based on recent numbers, Netflix still has the biggest US subscriber base with 81 million. But Amazon is close behind with an estimated 75 million. Disney’s Hulu is next with 64 million. But if you combine the three Disney streaming platforms (Hulu — 64 million; Disney+ — 55 million; and ESPN+ — 25 million), it is far ahead of Netflix with 134 million streaming subscribers. Globally, Netflix leads with 302 million subscribers to Disney’s 221 million (combined) and Amazon’s estimated 200 million.

But with the Warner acquisition, which includes its HBO Max service, Netflix jumps slightly ahead of Disney in the US (139 to 134 million) and dramatically widens its global lead with 430 million to Disney’s 221 million and Amazon’s 200 million.

This is simple straightforward bulking up in Netflix’s core streaming business — overcoming its scale deficit in the US and extending its scale advantage globally. That is a simple and powerful strategy logic.

In content creation, Netflix was a big part of the dramatic transformation by which the players that have entered content creation since 2011 now make up 50% of the estimated content creation spend. But prior to this deal, Netflix was a mid-tier player in that game, spending an estimated $17 million in 2024 compared with Comcast-Universal at $37 million or Disney at $28 million. However, adding in Warner’s $14 million makes Netflix one of top tier content creators.

To the extent that scale matters in streaming and content creation — and I think it does — the strategic logic of this makes lots of sense, in stark contrast to the previous two trades of Warner Bros. assets.

The Rub

When the AOL Time Warner and AT&T Time Warner deals were announced, there was huge uproar over antitrust concerns. Would the vertical integration hurt consumers? Would AOL and AT&T become dangerously dominant in their primary markets because of their ownership of Warner content? I didn’t worry for a second because regulators don’t have to protect consumers from mergers that are going to crater and I knew both deals were destined to fail miserably. Regulators only need to worry about mergers that are likely to succeed!

And they should worry about this one.

The Netflix press release is quite something. It makes two claims aimed specifically at potential antitrust concerns. Bold-type callouts claim that the combination will: 1) Offer More Choice and Greater Value for Consumers, and 2) Create More Opportunities for the Creative Community. I understand why companies do this kind of thing. Netflix would love to have readers be insipid enough to believe these two things because that would suggest there are no antitrust problems about which regulators should be concerned.

The problem is that both claims are flat out false. When you reduce the number of major competitors by one, you do not provide more choice or greater value for consumers. If you buy the competitor and leave it alone, at best you provide the same choice and the same value. But to leave it alone is not why a company pays a huge takeover premium to buy a competitor.

And when you reduce the number of major industry players by one, you do not provide more opportunities for suppliers to that industry. You reduce by one the number of customers who compete for their services.

I can totally understand why Netflix wants to reduce competition from other streamers and other content creators. In streaming, it started with a near monopoly but has lost its lead in the US market and is no longer far ahead globally. Getting rid of one major streaming competitor and bulking up makes lots of sense. In content creation, when all the new players entered, including Netflix itself, they created a bonanza for content creation talent. It has never been a better time for talent, as exemplified by the Shonda Rhimes’ $450 million production deal with Netflix. Bulking up to have more buying power over content talent, plus eliminating one major content competitor makes total sense.

But dissimulating about it? Not a good look.

Practitioner Insights

You will be fed all sorts of ridiculous so-called strategy logic on a regular basis. It can be vertical integration, owner economics or having one less competitor will deliver more choice for consumers. Some are the product of utter cluelessness, others fundamental dishonesty. Sometimes somebody else (like me) will help you expose the logical fallacies.

Other times, you will be on your own. For those times, it is important to practice your critical eye for strategy logic. When you read or listen to someone espousing a strategic logic, practice interrogating it. Don’t just accept it. Instead, take it under advisement and ask whether there is a better, more profound logic to explain the situation — e.g. Time Warner shareholders were about to be taken to the cleaners by AOL shareholders, owner economics is a fraudulent concept that will cost AT&T shareholders dearly, and Netflix isn’t motivated by consumer choice or creative community welfare but rather by increasing its scale and reducing competitive intensity in its core businesses.