(Preview) Netflix Opportunities and Anxieties, Merger Hurdles to Come, Hollywood’s Endgame and What Comes Next

Andrew and Ben talk through Netflix’s proposed $72 billion deal to buy Warner Brothers, including the logic for Netflix, the frictionless nature of competition on the internet, and the threat that Netflix sees from YouTube. Then: David Zaslav’s windfall, and an argument about the regulatory questions that may scuttle this deal. At the end: The better business model between YouTube and Netflix, an emailer wonders why everyone is mourning the end of a Hollywood business that can’t succeed in the modern marketplace, groupchats and the college experience, and a word about Flighty.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Andrew Sharp?

  Hello and welcome to a free preview of Sharp Tech.

• 0:08Andrew Sharp?

  Hello and welcome back to another episode of Sharp Tech. I'm Andrew Sharp and on the other line, Ben Thompson. Ben, how you doing?

• 0:20Ben Thompson?

  I'm doing well, Andrew. I'm I'm girded.

• 0:22Andrew Sharp?

  Oh, boy.

• 0:23Ben Thompson?

  Is that the word?

• 0:25Ben Thompson?

  Girded, girded for battle.

• 0:26Andrew Sharp?

  Your loins are girded.

• 0:27Ben Thompson?

  Yes, we have both written about Netflix and Warner Brothers this week. I think some excellent points on both sides and some possible points of contention.

• 0:35Andrew Sharp?

  I would imagine there are some points of contention. We're going to talk through every aspect of the Netflix Warner Brothers proposed merger. And we're going to begin with Jean at UVA, who sent this email on Friday night. He wrote, Ben and Andrew, my friends and I found out about the Netflix Warner Brothers deal and our immediate reaction was devastated. We have to wait till Monday for the Ben Thompson take on this. And he included a picture of him and his two friends at an ice cream shop with their heads in their hands, really laying on the drama. Just tremendous nerd behavior that made my Friday night.

• 1:18Andrew Sharp?

  So I want to start with a thank you to Jean and his friends, counting the hours until Strategery published on Monday morning. Any thoughts on that note?

• 1:28Ben Thompson?

  I did do an emergency podcast with Michael Nathanson about this deal on Sunday. And we could have gotten out on Monday, but I'm not going to lie. This picture in the message made me feel like, no, I needed to get my take out first. And then I dropped the interview on Tuesday. So it turns out can be can be affected and influenced. So yes, thank you. Thank you for the note. It was very funny.

• 1:47Andrew Sharp?

  Absolutely. So as we talk through this deal, we did get a request for a good old fashioned antitrust argument.

• 1:55Ben Thompson?

  I know, it's been a while.

• 1:56Andrew Sharp?

  I want to put a pin in the regulatory angle at the top and focus first on the Netflix side. It's funny because you mentioned the Netflix Warner Brothers possibility, like maybe six

• 2:10Andrew Sharp?

  Weeks ago in a daily update. And when I was reading that daily update, my honest reaction at the time was, man, I'm surprised Ben is even dignifying these rumors. Because Netflix, I mean, they've become known for their restraint and fiscal discipline over the last couple of years. And Warner Brothers has been sold four times since 2001 and it just seemed like a crazy idea.

• 2:34Ben Thompson?

  You could rank all the acquisitions by how much of a disaster they were.

• 2:38Andrew Sharp?

  Exactly. Netflix going that direction seemed inconceivable, but here we are. So question number one for you. What have we learned about Netflix and its position in the market over the last week? What do you take away from their interest here?

• 2:55Ben Thompson?

  I have bad news for you, Andrew. Because I think the biggest takeaway cuts right back to where we're going to have the biggest point of contention on this podcast. My biggest takeaway from this is that Netflix is scared shitless by YouTube.

• 3:10Andrew Sharp?

  Yeah.

• 3:11Ben Thompson?

  That like the, the, there is a, they can feel their share. I think you could go back a number of, you know, Netflix is inexorably growing as a share of TV. And you know, this is one of those things, I should probably go back and cite all these. But I've read Evli Netflix investor letter and their comments to the media. Netflix's investor calls are hilarious, by the way. So they, they used to have like interviews where one analyst was allowed to go on and ask them at the earnings call and like ask questions. As like a stand in for everyone. Now they have like, uh, they do have a group of analysts, but it's all like, like they're very controlling about this whole process. That has always been sort of interesting to me.

• 3:55Ben Thompson?

  But there was just sort of this ongoing sense, they include charts of their, their increasing share of TV. And part of that was to show how well they're doing. But also part of it was to show how much potential they still have. You know, like we're just a single digit share and it's like, it's three percent, then it's four percent, then it's five percent, then it's six percent. The problem with those charts is there is another. Entity that is growing faster than them.

• 4:23Andrew Sharp?

  Even more in extra.

• 4:24Ben Thompson?

  Three years ago.

• 4:25Andrew Sharp?

  Yeah.

• 4:26Ben Thompson?

  And that is YouTube and YouTube is so it's not just that you have a, a, and I'm talking specifically about share of TV. Like not, this isn't mobile. YouTube is actually far, far larger. We're talking about the TV specifically.

• 4:40Andrew Sharp?

  Yeah.

• 4:41Ben Thompson?

  Thing on your wall.

• 4:41Andrew Sharp?

  Total minutes watched on TV. YouTube now beats Netflix consistently.

• 4:46Ben Thompson?

  So it's not just that there is another entity that is doing better at the graphic that Netflix was so, so proud of for so long. That entity has a fundamental structural advantage, which is they get their content for free.

• 5:02Andrew Sharp?

  And it's unlimited content that they're able to serve. Sure.

• 5:05Ben Thompson?

  That's right. And it's, it's totally personalized. Like Netflix can talk about, oh, we have data and then we can personalize your, like, you want true personalization. That's what YouTube is. And I, you know, look, I could monologue for a while here, so feel free to jump in.

• 5:21Andrew Sharp?

  No, I'm enjoying it.

• 5:23Ben Thompson?

  Well, what I've enjoyed about this deal for me personally, and this actually, I owe Michael Nathanson for it because I think I kind of this crystallized for me while we were talking. And then I put it in my article, then, then, and then, uh, didn't post the interview till the next day. So sorry, Michael.

• 5:41Andrew Sharp?

  Sorry, Michael, and thank you, Michael. I love any interview you do with Michael Nathanson. Always a great podcast.

• 5:48Ben Thompson?

  Netflix is always like a core piece of it. So like we, we, we had to do this.

• 5:51Andrew Sharp?

  Well, you revisit the same Netflix argument that you've been having with Michael Nathanson for like seven years. So it's interesting to sort of chart the progress of the takes over time. Um, I enjoy that you kick things off that way. I will just note before you finish, um, I did the takeability rankings with tech companies last month and had a bunch of fun. Netflix was low on that list and they were low on that list. Well, a little bit because look, I, in my mind.

• 6:22Ben Thompson?

  You thought, you thought they graduated from the take game.

• 6:25Andrew Sharp?

  The game is over. There are lots of arguments about Netflix, going back to your conversations with Michael Nathanson. And they won was the way I saw it a month ago. And the fact that they are interested in this deal. I, I find myself wondering, is this a great opportunity where they can press their advantage? Or? Are they panicked about some of the failures they've had developing original content of their own, the ongoing costs licensing, the unwillingness of others in Hollywood to license content? And of course, the threat to Google. I've come away from the last week wondering whether they were way more vulnerable than anyone realized.

• 7:08Ben Thompson?

  Well, I don't know. I don't know that I put it as vulnerable, but just sort of zooming out. Let me get to my sort of insight that this is a story as old as the internet, which is the threat to professional media from the masses like me, right? Like, I know, I think like people now would like consider me like a professional media creator, or whatever it might be, but I'm still a guy on a WordPress blog at the end of the day. You know, there's just this, this aspect of these were gatekeepers in both a positive and a negative sense. Like if you wanted to write something that people read, you had to get into the newspaper because how were people gonna act like, what are

• 7:51Ben Thompson?

  you gonna do? Like printed out, like, like a crazy person on a street corner sort of passing out pamphlets? Like, like you, you needed to actually get the content into people's hands so they could read it. And newspapers were the way that you did that. And do letters to the editor. That's how I started, writing letters to the editor in college.

• 8:11Andrew Sharp?

  So did I. I wrote an angry letter to the Boston College student paper and they ended up publishing it. And I was officially a published author.

• 8:20Ben Thompson?

  I love it. The, and so there's, you know, the internet made that different. Anyone can publish. And, you know, one of my, I actually think the best, one of my better articulations of aggregation theory was actually in 2014. And I didn't, number one, it speaks to the power of branding. Yeah, I think, I think I've referenced this, like, economic power in the age of abundance is like the name of the title. Not so catchy. Didn't really stick. But it was about this, I think I put in there, I put a couple of. Or graphs or drawings, that's like, look, I have readers in like, at that time, I think it was like 150 countries.

• 8:59Ben Thompson?

  Now I think I might, I don't know if I have North Korea yet, but like, I haven't looked for a while, but I have readers in literally every country in the world. Or basically every country in the world. I shouldn't, you know, I'm just screwing up my language.

• 9:09Andrew Sharp?

  Let's call it half, yeah.

• 9:10Ben Thompson?

  I have subscribers everywhere, like the, and I am for those, anyone who reads me. Every minute spent reading me is a minute not spent reading something else.

• 9:25Andrew Sharp?

  Yeah.

• 9:25Ben Thompson?

  And that something else could be other bloggers, it could be Twitter, it could be the New York Times, it could be your, your local newspaper. And the, this speaks to the point that there is, the only point of competition left is time and attention.

• 9:41Andrew Sharp?

  Mm-hmm.

• 9:41Ben Thompson?

  And, and so you're, you're, that, like, I am not the New York Times, they are a publicly listed company, they make a lot of money, they're, like, you know, I've, I've raved endlessly about how they've handled the transition, you know, especially over the last 10 years, just, just from a business perspective, setting aside, you know, all, like editorial, just really brilliantly, they've also sort of cleaned up the entire space because everyone just subscribes to them first. So their success is very much at the cost of a lot of other newspapers.

• 10:11Andrew Sharp?

  Including the Washington Post, for example, yeah.

• 10:13Ben Thompson?

  Yeah, like, like, like, like, no one holds them responsible for everyone else getting decimated. And they are one of the chief entities that ought to be held responsible. Um, but, but the, this is just, the, the, the point of competition is shifting. And this is a core problem, again, I'm talking about newspapers, but this sort of matters everywhere. And it certainly matters in media. YouTube is absolutely a competitor for Netflix. And I'm willing to go to the mat fighting with you about this point.

• 10:40Andrew Sharp?

  Yeah.

• 10:40Ben Thompson?

  So. In that context, what do you do? Because YouTube owns that supply. You, you, you, now Netflix is doing these deals with Spotify. You, this is how you opened your piece, which, you know, I want you to sort of articulate your thesis in a little bit. But with some of like ringer content, for example, and which is, it's like, is it professional content? Is it whatever?

• 11:05Andrew Sharp?

  Yeah, I don't really know what that deal is supposed to be.

• 11:08Ben Thompson?

  If you create video content, you do it on YouTube. Like, that's where the audience is. If you want to get any sort of growth, if you want to have any sort of breakthrough. And they monetize you. Like, like, one of the brilliant parts of YouTube is how from the very beginning, they have helped creators monetize. And it's, it is actually a beautiful manifestation of Google's, what's the word? Uh, enlightened selflessness, like, like where they've shared a lot of revenue with creators all along. And does that mean their, their revenue is actually zero marginal cost content? Yes, I think it does, because that revenue is, because there's inventory. So it like, it's matched, but setting aside, they own that space.

• 11:49Ben Thompson?

  They own that space more than Netflix could ever dream of owning Hollywood content, even if this deal goes through. So what do you do? What I think's been revealed over the last, I would say 10 years or so, is what distinguishes professional content at its best is it's a little bit more like music than I ever appreciated.

• 12:15Andrew Sharp?

  Hmm.

• 12:16Ben Thompson?

  So I wrote an article differentiating between different types of media and why different industries played out differently with these internet dynamics. And I did like print and I did TV, then movies, they might've been together, I can't remember. And I did music. And the thing about music was, I was pretty early on that actually the labels are doing, all things considered, doing pretty good. They're the poster child for the internet ruining their business model, Napster comes along, all that sort of thing. But why? And the reason is because with music, yes, of course, new releases matter. Spotify's ability to create hits or, you know, make people aware of new things is very powerful and useful. And they're making real money selling the access to sort of help that happen. But at the end of the day.

• 13:02Ben Thompson?

  I get my Spotify unwrapped.

• 13:04Andrew Sharp?

  They're making money from Biggie Smalls and Tupac and all sorts of music we still listen to 30 years later.

• 13:10Ben Thompson?

  And it's 90s alternative. That's what I listen to, right? Like, uh, and then the, uh, and like you listen to the same songs again and again and again and again and again and again and again and again. And as you get older, it gets worse. Uh, you're and the, and the, the thing about music is once you create, once a song is published, it's part of the library. And so there's a bit where the, the, the power of the labels, it's not perfect. It's not absolute. Spotify has real power, but their power is more cemented and permanent than you might think because of the control they have of libraries.

• 13:46Andrew Sharp?

  Yeah.

• 13:47Ben Thompson?

  That actually, there are some shows that are like that on TV. You have your friends here. You have The Office. You have Seinfeld. You have these, and it's really interesting how a lot of these sort of shows don't get made anymore.

• 14:01Andrew Sharp?

  Mm hmm.

• 14:02Ben Thompson?

  But these are shows that you come back to as comfort food, sort of again and again. There are content that people enjoy. Like, there's a bit where they don't, I don't, I would like to be a music person and be into the new bands and I just don't have the time and mental energy to do that.

• 14:19Andrew Sharp?

  Neither do I, which I think signifies we're officially old. It's like, listen to a new album, come on.

• 14:24Ben Thompson?

  But the great thing, like just leaning into how washed we are, gives us sort of real expertise in this area, right?

• 14:34Andrew Sharp?

  Yeah.

• 14:34Ben Thompson?

  And I think I'm not a, like, I'm famously not a TV watcher, right? I, I, I'm a big TV watcher, but if it's sports, like I'd, I'd, I will watch sort of any sort of sports content. But I can recognize and appreciate just having friends on in the background. Maybe you're watching, maybe you're not, is pretty great. And that's distinct from, I'm gonna watch this new show and I'm gonna lean forward and I'm gonna lock in and sort of see what's happening versus a, oh, I'm watching the show and I'm also scrolling on my phone and I'm making dinner or sort of what, you know, whatever it might be, or someone calls me and it's fine. I can pause it or I can not pause it because I've seen the show like 57 times. My, we, we went to Canada fishing this, this, uh, this summer.

• 15:17Ben Thompson?

  On the drive back, me and my buddy, who used to watch every episode of Seinfeld on Thursdays in high school.

• 15:23Andrew Sharp?

  Mm hmm.

• 15:24Ben Thompson?

  Put on like season seven, which I think was the all time great season and just plowed through like 15 episodes on the like this 12 hour drive. It was awesome. It was so great, right? And like, guess what? I was an attentive driver on the road because I didn't need to pay close attention because I've seen all these episodes, but it was also so delightful. And we were actually then recalling like in high school, like certain things that that was like tied to this. It was like

• 15:47Andrew Sharp?

  Were you a Seinfeld guy or a Simpsons guy growing up?

• 15:50Ben Thompson?

  Seinfeld. I was a Seinfeld guy.

• 15:52Andrew Sharp?

  Look, we were destined to podcast together. I was a Seinfeld fan as well. I listened to an interview with Julia Louis-Dreyfus earlier this week. And as I was listening to the interview, I found myself thinking, you know what? I need to revisit Seinfeld because I have very fond memories of growing up watching Seinfeld. It was syndicated when I was growing up. So I would watch it every day at 5:30. And that's the sort of content. They're not buying Seinfeld, but that's the sort of content that Netflix is acquiring if this deal goes through with Warner Brothers. And this is where I come back to the struggles that Netflix has had with their own original efforts because they've been unable to develop the sort of comfort food that people come back to over and over again on the Netflix

• 16:36Andrew Sharp?

  platform. So it's actually useful.

• 16:39Ben Thompson?

  You talked about sort of the flattening of TV and, and, and like overall, like what happened? Why, why can't they do this?

• 16:46Andrew Sharp?

  Well, I would say that the everything is now more disposable than it was 25 years ago, when there were more traditional distribution mechanisms. You would watch Seinfeld on TV every Thursday, for instance. And now there's just this river of content. As soon as I watch stuff, I forget it. And then there's something new on.

• 17:09Ben Thompson?

  And then you try to convince me to watch more TV. It's ridiculous.

• 17:13Andrew Sharp?

  Well, it's enjoyable. Look, we're all just waiting to die here trying to fill the time. So, but I

• 17:20Ben Thompson?

  When you put it that way.

• 17:21Andrew Sharp?

  I enjoy myself watching TV, but I feel like it's been rendered less meaningful than it once was. And particularly with movies, I actually cited an email that Stephen sent us. The market for mid-budget movies has been more or less destroyed. So my article about Netflix this week started with the irony that the Rewatchables podcast, as part of that Spotify deal, will be exclusive to Netflix beginning in January. And Netflix and the emergence of Netflix did more to kill the rewatchable movie than any entity on earth. And the ecosystem in Hollywood looks completely different than it did even 10 or 15 years ago.

• 18:05Andrew Sharp?

  What that creates is this new environment. Netflix needs to serve content to keep people engaged. And it actually makes sense to go back to a studio that has been making hits for 75 years and particularly has a lot of hits from 25 years ago that may help keep people engaged. Like, I understand the logic of this move from that perspective. I do find myself wondering whether it is, in fact, any sort of insulation from the disruption threat that YouTube poses with a never-ending avalanche of user-generated content that happens to be pretty popular.

• 18:47Andrew Sharp?

  I don't watch YouTube on my TV, but clearly lots of people do. I'm not sure how much Warner Brothers' content actually moves the needle as they try to fend off that threat.

• 18:56Ben Thompson?

  Well, the thing, this is sort of the contrast. The thing with YouTube, and I'm more familiar with this from the creator's side, just because I've talked to creators and, you know, Johnny, who is a part of the Scheckery Bundle, Asianometry is sort of amazing, and I feel bad for him sometimes because every YouTube creator you talk to, and I've heard similar things from like MKBHD, and I've talked to a fair number of other ones sort of off the record, the overwhelming inescapable sense that you are on a hamster wheel and you just have to keep going is like, kind of terrifying.

• 19:32Andrew Sharp?

  All right, and that is the end of the free preview. If you'd like to hear more from Ben and I, there are links to subscribe in the show notes, or you can also go to sharptech.fm. Either option will get you access to a personalized feed that has all the shows we do every week, plus lots more great content from Stratechery and the Stratechery Plus bundle. Check it out, and if you've got feedback, please email us at [email protected].