Netflix and the Hollywood End Game
Monday, December 8, 2025
Warner Bros. started with distribution. Just after the turn of the twentieth century, Harry, Albert, Sam, and Jack Warner bought a second hand projector and began showing short films in mining towns across Ohio and Pennsylvania. In 1907 they purchased their first permanent theater in New Castle, Pennsylvania. Around the same time, they began distributing films to other theaters, and by 1908 they were producing their own movies in California. In 1923 the brothers formally incorporated as Warner Bros. Pictures, Inc., becoming one of the five major Hollywood studios.
What the brothers realized early on was that distribution was not a particularly good business. You had to maintain the theater, source films to show, and your profit was capped by seating capacity, which you had to work constantly to fill. Every empty seat represented revenue lost forever. Producing films, on the other hand, was far more lucrative. A movie could be made once and monetized repeatedly.
In this sense, Hollywood was the tech industry before there was a tech industry. Studios invested heavily upfront in assets that could be leveraged again and again. While Warner Bros. and its peers did at times own large theater chains as part of vertically integrated businesses, the 1948 Paramount decrees forced a breakup. The theaters were spun out because content creation was simply the better business.
That business improved over time. Television created expansive new licensing opportunities for films and later TV shows. Homes had more televisions than cities had theaters, and access was constant. Home video added another window, allowing movies to generate revenue through rentals and sales. The largest windfall came from the cable bundle, where roughly 90 percent of households paid increasing monthly fees for access to vast amounts of content they mostly did not watch. Hollywood revenue became a de facto annuity.
Internet Distribution and Aggregation
Netflix, founded in 1997, also began with distribution, specifically DVDs by mail. Its streaming service launched in 2007, exactly 100 years after the Warner brothers bought their first theater. The differences were fundamental. Internet distribution meant Netflix was available everywhere, with no physical infrastructure to maintain. Every additional customer carried near zero marginal cost, and the potential market was theoretically the entire world.
Over time, Netflix, like Warner Bros. before it, backward integrated into content production. Unlike traditional studios, however, Netflix’s content production has always existed solely to serve its distribution. Netflix understood something Hollywood was slow to grasp. On the Internet, distribution is even more scalable than content.
This is not immediately obvious. Content is scarce and exclusive, while Internet access is universal. Yet universal access creates an abundance of content far beyond what anyone can consume. This shifts power to Aggregators that organize content on behalf of users, delivering a satisfying experience. Consumers flock to the Aggregator, suppliers follow, content increases, and the cycle reinforces itself. Over time, the largest Aggregators gain overwhelming advantages in customer acquisition and churn reduction. That is the true source of their economic power.
Hollywood studios learned this lesson painfully over the past decade. As Netflix grew and commanded a superior stock multiple despite producing what many considered inferior content, studios believed they could win by leveraging their content libraries. Content was king in a world constrained by physical distribution. On the Internet, customer acquisition and retention in a world of infinite alternatives matter more. That was Netflix’s advantage, and it has only grown.
## Netflix Buys Warner Bros.
On Friday, Netflix announced it would acquire Warner Bros. for $72 billion. The deal follows Warner Bros. Discovery’s plan to split its studios and HBO Max from its cable networks. The transaction values Warner Discovery shares at $27.75, with an enterprise value of approximately $82.7 billion.
Paramount had submitted a $30 per share all cash bid for the entire Warner Bros. Discovery business, including cable networks. Netflix, by contrast, is acquiring only the Warner Bros. studio assets. Reports suggest the remaining business is being valued at roughly $5 per share, implying Netflix effectively outbid Paramount.
It is also worth noting the asymmetry in resources. Paramount’s bid would not have been supported by its operating business, which is valued around $14 billion, but by the personal wealth of David Ellison’s family. Netflix, meanwhile, is valued at approximately $425 billion and generated $9 billion in cash flow over the past year. This was not a fair fight.
This outcome aligns with a scenario outlined in 2016, where Netflix was positioned not as another cable channel, but as a dominant Aggregator with power over suppliers. Netflix’s superior viewing experience drove user acquisition. Its user base attracted suppliers, which improved its offerings, which attracted more users. In the most optimistic outcome, Netflix would become the only TV service consumers need.
One obvious path would have been Netflix becoming the primary buyer for Hollywood suppliers, as seen in its relationship with Sony. However, several developments may have pushed Netflix toward outright ownership.
In 2019, Netflix launched Formula 1: Drive to Survive. The show dramatically increased the value of Formula 1 media rights, yet Netflix captured none of that upside. In 2023, NBCUniversal licensed Suits to Netflix, turning a dormant library show into a streaming phenomenon and revealing Netflix’s ability to dramatically increase IP value. In 2025, KPop Demon Hunters became a global hit, largely enabled by Netflix’s algorithmic distribution.
Great content still needs distribution and effortless access to prove its worth. KPop Demon Hunters succeeded on merit, but only because those merits were accessible on the world’s largest streaming service.
Netflix executives appear to have concluded that licensing leaves money on the table. If Netflix can uniquely increase IP value, owning that IP becomes the logical step. Forcing consolidation in Hollywood and removing a rival streamer in the process only strengthens the case, despite the risks and high price.
## Netflix’s Market and Threat
The removal of a rival streamer raises regulatory scrutiny. Media mergers receive intense oversight, and this deal will be no exception. President Trump publicly noted concerns about market share, signaling a lengthy Justice Department review.
This deal differs from past cases. It is partly vertical, with a distributor acquiring a supplier, which is typically approved. However, Netflix is likely to make Warner Bros. content exclusive over time, sacrificing short term licensing revenue for long term pricing power.
It is also partly horizontal, as Netflix is effectively acquiring and shutting down a competing streaming service. Horizontal mergers receive greater scrutiny because they reduce competition. Netflix may argue that HBO Max customers largely overlap with Netflix subscribers, and that consumers benefit by paying for fewer services in the short term.
Ultimately, the case hinges on market definition. If defined narrowly as subscription streaming, Netflix faces challenges. If defined as TV viewing broadly, including linear TV and YouTube, Netflix’s share is far smaller, and its primary threat becomes clear.
That threat is YouTube. YouTube dominates consumer time spent, including on TVs, and does so with content acquired for free. It will always have more new content than any professional studio.
Professionally produced content’s advantage lies in longevity and rewatchability. Libraries matter. Netflix’s ability to make library content more valuable explains why it may be initiating Hollywood’s end game now. The true threat to Hollywood is not just free distribution, but the fact that anyone can now create content, and that reality is already winning in the market.