This episode of The Town is presented by the Walt Disney Animation Studios, Zootopia 2. Now nominated for the Academy Award for best animated feature. The Hollywood Reporter hails Zootopia 2 knocks it out of the park with dazzling visuals, sophisticated humor, and genuine emotion. For your consideration for best animated feature.
It is Wednesday, February 18th. If you listen to The Town or you work in the town, you know who Ted Sarandos is. He's the co-CEO of Netflix and arguably the most powerful person in the film and TV business, certainly in streaming. These days, he's also playing the role of hype man of sorts. Hype man for his $83 billion acquisition of the Warner Brothers studio and HBO Max, the deal that Sarandos thought he had all sewn up back in December. But Paramount and the Ellison family have not gone away.
Pretty much since the Netflix and Warner deal was announced, the Ellisons have been trying to undo it, slowly sweetening their offer, rounding up Middle East money to help pay for it. And when the Warner board kept rejecting them, they took it directly to shareholders. It's gotten to the point this week where the deal got so sweet that the Warner shareholders were getting antsier and Warner and Netflix finally said enough's enough and they reopened the sale process. Pretty extraordinary move, but it's only for 7 days. And the Warner board said it still supports Netflix and has set a March 20th date for its shareholder vote. Just wants to hear what the Ellison's best and final offer is and finally put this to bed.
Remember, Netflix has agreed to pay $27.75 a share, all cash, for the studio and streamer. Plus, the shareholders get the value of Discovery Global, the TV unit that will be left over after this deal. The Ellisons are offering $30 per share for the whole company. The Warner says a Paramount banker said they'd go even higher to $31. Now they have those seven days to decide if they want to go even higher than that. Hence Ted the hype man who's now doing TV and appearing in front of Congress and telling anyone who will listen in town why the Netflix bid is way better than what Paramount is offering for Warner, for consumers, and he argues for the industry. That's been the focus on this show.
So, I'm happy to have Ted back today to explain what's going on with this deal and give us his argument. A disclaimer, this show is produced by The Ringer, which has a podcast deal with Netflix, but this show is not on Netflix. We're also a little longer today, but this topic obviously extremely important to the future of Hollywood. So, I wanted the time to grill Ted on why he agreed to this 7-day extension, whether he's sweating the government after that super awkward hearing in DC, and ultimately why Netflix-Warner is good or at least the least bad for Hollywood. From The Ringer and Puck, I'm Matt Belloni, and this is The Town.
Okay, we are here with Ted Sarandos, the co-CEO of Netflix, returning champion to The Town. Welcome back, Ted.
Ah, it's good to be here. I've been waiting for you to call me a returning champion. I love it.
All right. Well, I appreciate you coming on today because I have many, many questions. I think people around town have many questions for you. You are on this, I call you a hype man because you are now in the position of selling this deal that you already signed to the Warner shareholders. These Paramount guys will not go away. Pretty predictable that they would not go away. I think you and I both know David doesn't seem like the kind of guy who's just going to go quietly. They feel like you guys swooped in here. They had a whole plan. He was, you know, furiously texting David Zaslav like a scorned boyfriend trying to get in the room and what are you doing to me? Now you have this 7-day period that you have agreed to. And I want to know why you did this because the Paramount side would say this is an acknowledgment that you guys have rigged this deal from the beginning and that their deal is better for the shareholders and now you're finally, there's enough noise around it and enough shareholders are telling you that it's good enough that you kind of have been forced into allowing this. I imagine you disagree.
I do disagree and it's exactly the opposite of that. It's giving the Warner Brothers Discovery shareholders exactly what they deserve, which is clarity. The Paramount people, they've been out just flooding the zone with a bunch of false information about the deal, about the regulatory process. You talked about the scorned, you know, person on the other side of the deal. It feels like just a lot of whining. They had nine chances to bid. This is their ninth bid, Matt.
Oh, I counted 10, but it's okay.
They might count if they make another one, it'll be 10. But I would say look, this was an incredibly well-defined process. There was a deadline. There was a criteria that the bids had to meet. Multiple companies bid on it. We won and we did it by following the rules of engagement.
But this is an unusual process. I mean typically you would not reopen the negotiation while also Warner has set a shareholder meeting for March. I mean you guys seem to have a coordinated press strategy here. Like it seems like this is you guys saying, 'Okay, we need to go through the motions here and reopen this just so people feel okay with it, but we're not going to, you know, really engage that much.'
Look, Matt, our deal is superior. That's why we won the bid. And the Discovery Board has been unbelievably diligent in tracking that down and sussing that out, risk-adjusting all the price of the deal. It brings the most value to Warner Brothers Discovery shareholders for sure. And they agree, they continue to endorse the deal. What came with that seven-day window is a hard date for the shareholder meeting on March 20th where they will vote on this and the Warner Brothers Discovery Board continues to endorse our deal over the Paramount deal or any other alternative deal. What I think gets lost in this, and this gives us the opportunity to talk a little bit more about it, is, you know, not only did we meet the criteria of the bid, meaning bidding for the assets that were for sale, but the other part of this, Matt, that's really important is I think along the way people kept thinking, oh, we just hope there's not a deal at all. So, there was some fantasy happening.
The sentiment about that around Hollywood is rampant. And when people ask me, which one do you prefer, I do tell them. I said neither is great here. You either have one company becoming by far the dominant player, arguably game over for the subscription streaming business and then the other company is going to combine two legacy studios and lay off thousands and thousands of people.
Well, you're right with the second half of that statement.
Okay. But am I not right about the first also?
No, you're not. I tell you, look, I think what I've been saying for a long time, this entertainment landscape has never been more competitive. You want YouTube in this equation, but this is combining number one.
It's a fantasy to exclude YouTube, Matt.
Okay, but let me just say what? I don't believe it is a fantasy. I think that YouTube is not a buyer of $20 billion worth of content.
Not the Oscars, not the NFL, not NFL football. The two exceptions.
No, those are the first steps. That's not the exception.
Okay, but if you are a creator and you have a show or a movie, you are not taking it to YouTube. You're going to combine the number one and number four subscription streamers, that's over 400 million subscribers, with the next biggest being about half as big. Doesn't that arguably kill competition?
How is it that we lose projects all the time in the marketplace? Remember that when I talk about a diverse marketplace, I'm talking about people can choose very freely between linear TV, which still is about 40% of TV engagement, and a sea of other entertainment choices that all have different, you know, what's interesting about this time that we're living in right now. You can go out, I could count on one hand the number of times we've been in multiple bidder situations for projects.
Yeah. None of them with YouTube. Let's be honest.
No, that's not true at all. In fact, the Oscars was the most recent example of that. But the Oscars is a unicorn. That is one thing. The Brazil NFL game is another recent example of that. So when I look back at this and I think what's happening today you could never do before. You could upload your movie to Tubi right now and start getting earning ad revenue from the viewing on Tubi right now. That didn't exist 5 years ago. This is the, and that business is growing faster than all of us in terms of the fast video.
In terms of the audience. Now you keep focusing on this engagement thing. I just feel like.
There's no money without that. There's no money without that.
I get it. But there is no money for creators without someone willing to front the money to pay for it. And if we look in the Penguin Random House case, the Justice Department did look at how the market for creative talent would be impacted by a merger. And I think if you're looking at this and you're looking at the SVOD market, subscription streaming, you've got to take a hard look at what Netflix would be owning in this market.
But Matt, it is again, it is a very narrow and unrealistic and it doesn't reflect how the consumers entertain, you know, use entertainment today. That's why I'm arguing that it is a very diverse marketplace. There are multiple buyers. There's multiple places to sell. This does not remove one buyer from the market. One less project to go to a movie screen, one less day on a movie screen. I'm going to keep Warner Brothers film and television operating largely as it is today. Going to keep HBO running largely as it is today. Separate buyers who will continue to compete for projects. Remember.
We're gonna get into that. I mean, but look at what happened with Wuthering Heights. Perfect example.
I knew you were going to go there.
You guys bid aggressively on Wuthering Heights, offered almost twice as much money. The filmmaker chose to go with Warner Brothers for much less money because of the theatrical distribution. Would you allow your two divisions to go at it like that if you own both?
100%. We go at it now. So, of course, we would.
But you don't go at it with two divisions you own. When you look at Wuthering Heights, I knew that you'd go there because you've been talking a lot about it recently.
I think what people miss about our movie deals, we don't pay back-end. We pay it up front and we guarantee it.
Okay. I get it. But I guarantee you the Wuthering Heights filmmakers are going to end up with more money if that movie gets to $400, $500 million.
I hope they're hugely successful in whatever choices they made. They had two choices. They had probably multiple choices and they will continue to under this deal.
I mean, it's produced by MRC. Look how much more money they made on House of Cards than they made on Ozark. Perfect example. They owned House of Cards in many territories. They did not own Ozark. You guys had gotten your act together by then.
You're talking about arbitraging the market or so that's not the, those are simple.
But it's about the talent, how much the talent participates in success.
But what I'm saying is that they are guaranteed success with us. So that model works. I'm telling you.
A certain modicum of success.
These things are highly negotiated and they're modeled in success. We don't model like okay if this movie fails here's how much we'll pay you. We say no if it's usually successful here's how much you'd have made and we're guaranteeing it. We discount it a little bit because we are accelerating it and guaranteeing it. But they're making, this is a very competitive model. And by the way when we finish this deal we'll be in the theatrical business and we'll have more firsthand exposure to those models and probably just be just as happy to figure that out.
Well that's actually my question. We don't have to debate backends or no backends, but will you keep the Warner's model where they do offer upside in success?
Not changing anything about the Warner Brothers model compensation for filmmakers at all.
Okay. So, you went there. So, let's go right into the regulatory stuff. You argue in your statement that, you know, Paramount is talking all about how they have a path to regulatory victory here. Netflix does not. The skepticism on that Capitol Hill hearing was pretty loud on your deal. Why is it that you say that you guys have just as easy a path to regulatory approval as Paramount does?
Well, I'll start with the first big one which is any deal this size would have regulatory scrutiny from the buyer and the seller 100%. So keep in mind this is nothing unusual about that. The rules of regulatory, you know, are laid out in the 2023 merger guidelines. And what we're seeing today is those guidelines being played out in real time. We are deep in the process with the DOJ and the European regulators and regulators all around the world on this deal. We've done our, us and WBD have already done our HSR filings. Everything is moving along the way it's supposed to. And these deals should be scrutinized. It's very important to protect consumers and to protect the industry in the way that they do. We're like I said in the middle of a very normal process here. What I think is also important to understand is that this deal, what we have to make sure people understand is it is pro-consumer, it is pro-creator, it is pro-innovation, it is pro-growth. That's what I think is the real key is that since we've been making our own original things, right? We've driven 150,000 jobs in the US on our productions. That's not including day players and extras and all that. $250 billion of economic impact. We film all over the United States. We filmed in all 50 states, so like 1,200 locations, 1,700 productions. So, we are a growth engine and we've been growing every year and we've forecast continued growth. So, when I look at this and say there's a lot of reasons why this deal is very good for the industry and for consumers, 100%.
No, I get that. And you went on CNBC and you talked all about this.
Yeah. But I think what gets ignored, Matt, is how dangerous and risky LBOs are.
Yeah. We talk a lot about media mergers that didn't work because there's a lot of media mergers that don't work. For sure. I think Disney and Fox might have been one that people would look at and say, 'Hey, they used to make 30 movies, now they make 20. What is that? Is that winning?' Well, no, but it's exactly what Paramount's offering.
They say they're going to keep 30 movies, 15 and 15. I don't, I think that seems to be lip service. The market for movies seems to be that major studios do make about 20 not 30 a year. It's very difficult as you guys know to pump out that many movies per year.
We know how hard it is every year. Yes.
And I would tell you this even though the, I mean beyond just how they're going to do when they run it, just start with the very idea that LBOs in general are very high risk. You know this one is particularly risky. It has contingencies, personal guarantees, foreign sovereign funds, investment, people that could fall out at any point in these things. And these things are risk weighted when you look at.
It has the world's fourth richest guy backstopping it. At least they say that.
I mean, if you remember the Twitter lawsuits, you know, to try to commit the richest guy to his deal. It's a lot of the same players involved here. So when I look at this and think, look, this is by contrast, our deal is clean with reputable global banks. We have a healthy balance sheet. We're committing to continue to operate and grow this company.
Yeah. But they're offering all cash for the entirety of the company.
Yeah. Which is also less risky for the shareholders of Warner Discovery than what you're offering which requires them to essentially take a flyer on this Discovery Global unit that may or may not be valued like Versant, may or may not be sinking or melting or whatever the metaphor, you are asking them to take a risk on that.
Yeah. Well, Matt, I'm telling you, also buying the whole company means buying those European sports networks, which opens yourself up to a whole another level of regulatory scrutiny because European sports rights are very heavily regulated and television and broadcast and cable across Europe is very heavily regulated. So, buying the whole company, you're buying those assets and upsetting European broadcast as well. They'd also be putting CNN under the same banner as CBS News and two big news organizations, folding two of the big five studios down to one. So, I'd say look, we've seen why these things don't work. We've seen why LBOs don't work and we're addressing why media mergers haven't worked in the past. Because we do not own these assets already. We do not have a theatrical studio. We do not have anywhere near the production capacity and capability that Warner Brothers does. We do not have a third party television production unit. What we do share is HBO and Netflix. And what I'd say is that those are very complimentary businesses. This is very much a vertical merger. And I'd say if 80% of the members at HBO have a Netflix subscription, I think that's a very strong case that this is a complimentary business and this is a vertical merger.
We will get to that. On the regulatory issue, has the typical DOJ investigation of you guys, has that broadened into a larger investigation of a potential monopoly? That is something that is going around now in these circles and you've sort of danced around that in other interviews. Are they taking a hard look at your general business?
I have not danced around it. I did tell you that everything that's going on right now with the DOJ investigation is laid out in the 2023 merger guidelines. It's not going beyond that. It is not unusual. Including talking to competitors, including talking to suppliers, understanding the broad landscape is very important to establish this. And by the way, there is no metric. There's no definition of the market that would put us at 50% plus of the market and certainly not 70% plus where normally a Title 2 thing would come into play.
Well, in some of these European markets, you do have a pretty big, if you look at the market for subscription streaming as well as the market for creatives, you do get up there. But it's a matter of semantics. I mean, they have stats, you guys have stats. It's sort of useless to compare them against each other.
Remember of all these years we've been so successful like by way of example in the UK, Adolescence is only the second time we've even broken into the top 50 of the UK. Broadcast dominates television in the UK and that's pretty common around Europe.
It's so funny because you went on CNBC and you talked about how great a year you just had. 325 million subscribers, you grew revenue 16%, operating income by 30%. You took notes. I love this. Yeah. Why do you need Warner Brothers?
We don't. We do think that it's an accelerant to an already successful business model. It ensures a continued growth into the next century. With Netflix, it's that combination of their IP, a decade of, you know, we've been doing it for about a decade. They've been doing it for about a century. So, I think that putting those assets together and putting them to work to create more jobs, more series, more films.
I get the messaging. I get the messaging. But.
But you asked me the question. And I'm telling you, that's what it's about. It accelerates an already successful business model to have more. Remember, our whole business model has always been about more, not less. So, remember you probably were among them saying, 'They have too much on Netflix. There's too much to watch.' Well, I remember the days when I could see you at a party and ask you about a show and you of course had seen every episode because you saw every episode of every show that was on Netflix. Now, you probably don't even know half the shows that are on Netflix.
I would impress you still today if you ask me those questions.
Okay. But I will tell you though that Matt, it's like I said, that has been our business model and I think it's one that has worked. And if you look at us, look at Netflix versus HBO by way of example and you've got basically we are high engagement low churn, they are low engagement high churn. So you put those assets together and you find a better spot for them to get more engagement on that high quality programming that they have. It's a big win for creators and for consumers and those folks are all going to get a big discount. By the way.
I get what you're saying, but the reason I asked the question is because I think there's a sense that this pursuit of Warner is because of some weakness in your business that maybe we don't know about. Whether you guys see growth plateauing, whether you see the future being all about IP because of what YouTube is doing and others because of these things and that's why the share price is down by a third since October. Why do your investors not like this deal?
I think there's about a lot of segment headwinds and market headwinds, too. And I do think the market doesn't like uncertainty, and that's why we put this 7-day clock on Paramount to bring some closure to this thing because people do not like the uncertainty. I don't know if they do or don't like the deal, but it's definitely a departure from our previous history, which has always been to build and never to buy.
You guys were sterling. Everybody loved your model. everybody there. And then you guys disrupted your own model here by saying, 'No, no, no, no, no. We need these other assets. We want to go into theatrical distribution even though we've been crapping on it for 15 years. We want to sell to outside parties even though we've talked about how everything should go on Netflix for 15 years.' Like that's what I think the uncertainty is, is you have changed your tune so dramatically in order to go after these assets. People are skeptical.
Yeah. Look, Matt, and we deserve the skepticism, but I'd say every time we have pivoted the business, which by the way, we're pretty good at pivoting the business when it's time to.
Let's not talk about Qwikster.
And it, well look, you can because it turned out pretty good, right?
And I also think when you look at it right now and think, you know, a couple years ago, we were not doing advertising. That was we were classically counter-positioned against linear television and that's the way we did it. Now we get into it and now it's a huge growing business for us and I think our investors and you guys too are glad we got into it and I feel like we're going to do the same thing here which is this gives us an opportunity. It's very rare to have an opportunity to expand the business into new ways and do it in a way and accelerate our core business in ways that are super complimentary to what we're doing and not distracting it. If we were spending startup resources on selling programming to third parties or putting movies in theaters, we couldn't have built Netflix into what it is today. But Netflix is what it is today and we're able to do more of these things and take on the real expertise of theatrical distribution that Warner Brothers has. They just opened their ninth number one film in a row. So when we've got.
And they're going to win best picture is something I know you guys have really coveted over the years.
Yeah, look we've had 10 nominees or so, 11 sorry, 11 nominees and eight years in a row we've been there. What I'm mostly proud of is like, you know, we're making great movies but if we're going to get into the theatrical business we want to win and you know nine number ones in a row is pretty sweet.
Let's get into that because I want to get very specific with you on the stuff that you've said about Warner Brothers because as you know I've been critical of the whole windowing question. Windowing is absolutely key to the future of the movie business and you.
I'm not, by the way this is not, I'm not doing any coded talk with you though when I talk to you about it. This is when I say it's going to be traditional, it's going to look like it did last year and the year before that.
Let's get you on the record here. 45 days. You said we will honor the 45-day window. Does that mean 45 days to HBO Max? Does that mean 45 days to transactional purchases, then premium video on demand, then something like 90 days to HBO Max? What does it mean?
It means 45 days of theatrical exclusivity, which has been the issue that people have been mostly pushing for and most which I think has the most impact.
