Netflix, Warner, and Vertical Integration

News broke this morning that Paramount, led by David Ellison, has made a hostile takeover bid for Warner.  Paramount has made this move after Netflix announced it had agreed to purchase Warner (including HBO) for $72 billion.  Investors did not react well initially to the Netflix deal.   The stock price dropped upon the acquisition announcement (as often occurs for the acquiring firm when mergers are announced).  

In this post, I'm not providing an overall evaluation of the deal.  However, I would like to focus on one facet of the potential acquisition that will be challenging for Netflix.   For years now, Netflix has been a vertically integrated entertainment company.  In other words, they have created content in their studios and distributed that content on their own streaming platform.  However, they have not distributed content on other platforms.  It has been a closed system.  Now, they are acquiring Warner.  That studio produces content for many different distribution outlets, not just HBO Max.  The question becomes:  What will other content buyers think when Netflix becomes the owner of Warner?  Might they wonder why Netflix would be willing to put some content up for sale/distribution on other platforms?  Might they think: If the content is so good, why not stream it on Netflix?  Will they ponder: Are we getting access to lesser quality shows that Netflix does not want to stream on its own platforms?   

Herein lies a key challenge with vertical integration.  You may find yourself competing with your customers (Netflix competes with other media distribution outlets such as other streaming platforms, cable networks, broadcast networks, etc.).  When you compete with your customers, it creates potential conflicts of interest.  Making the Warner acquisition a success will require navigating these challenging relationships.  Others in the entertainment business do it, but some have found it very difficult at times.  Netflix does not have much experience with this type of arrangement to this point.  

Of course, you might argue that they could avoid this problem if they simply distribute all Warner content on their own platforms (Netflix and HBO Max).  However, you then have to ask: Did they have to spend $72 billion on an acquisition to gain access to that valuable content?  Perhaps, but you do have to apply the ownership test.  In other words, would some other organizational arrangement have accomplished similar goals without the hefty price tag?