Netflix claims it must acquire Warner Bros. Discovery to compete with YouTube, but antitrust experts doubt regulators will buy that argument.
Netflix’s $72 billion acquisition of Warner Bros. studios Discovery and HBO Max will face scrutiny from regulators in the US and around the world, given its magnitude and combined 428 million subscribers.
Netflix insists the deal is necessary to challenge Alphabet’s YouTube, which media analytics firm Nielsen ranks as the most-watched TV distributor in the United States.
However, lawyers say the Justice Department probably doesn’t view Netflix and YouTube as interchangeable rivals, given the difference in their content, audiences and business models.
“Netflix is trying to say it competes with YouTube because people only watch a certain amount of content a day,” said Abiel Garcia, an antitrust partner at Kesselman Brantly Stockinger. “That argument ultimately fails.”
Netflix spends billions of dollars on original scripted movies and series, such as Stranger Things y KPop Demon Hunters. It frequently dominates Nielsen’s ranking of most-watched original series, with eight of the top ten in a recent ranking. Subscribers pay between $7.99 and $24.99 per month, while ads remain a small but growing source of income.
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YouTube, on the other hand, thrives on user-generated content and advertising based on music videos, tutorials, and content creators. It surpasses Netflix or traditional television in viewing time, driven by creators like MrBeast, with more than 450 million subscribers, renowned artists and children’s hits like Cocomelon.
In October, YouTube had 12.9% of the streaming audience, compared to the 9% projected for Netflix once combined with HBO Max after the merger.
Regulators will know the difference
Experts said the Justice Department is unlikely to consider such videos as a substitute for Netflix shows and movies.
“Netflix will have a hard time arguing that YouTube is substitutable for the type of content that is on HBO Max and Netflix,” said Robin Crauthers, a partner at McCarter & English and a former DOJ antitrust lawyer.
While companies often try to defend their mergers by pointing to competition from a broad universe of established and emerging players, antitrust enforcers are experienced at finding the ways in which mergers quash competition in specific submarkets.
For example, the Federal Trade Commission (FTC) convinced a court that Whole Foods Market’s acquisition of competitor Wild Oats Markets reduced competition among “premium natural and organic supermarkets,” even though Whole Foods argued that it competes with conventional supermarket chains.
The FTC also successfully challenged the merger between American handbag and accessories maker Tapestry and its rival Capri, as a way to reduce competition in the “accessible luxury” market.
The judge who blocked the Tapestry deal relied on documents showing that the companies themselves considered accessible or affordable luxury to be a valid category, contradicting their argument during the trial that accessible luxury was not a well-defined part of the industry.
Netflix faces document examination
Because of recent reforms to the merger clearance process, Netflix will have to turn over more of its internal competition analyzes sooner, said Shaoul Sussman, a former FTC antitrust attorney.
“That will definitely give the government an advantage in the investigation,” said Sussman, of the law firm Simonsen Sussman.
If Netflix’s documents don’t mention YouTube as a major competitor, or if they focus on categories that exclude YouTube, such as paid subscriptions, that will undermine the company’s argument, the lawyers said.
Netflix has also presented the deal as a way to reduce prices for the vast majority of HBO Max subscribers, who are already Netflix customers, allowing the company to bundle both products, Reuters reported last week.
But the DOJ is highly skeptical of claims that the mergers bring cost savings that will be passed on to consumers, Crauthers said, and will also consider whether the deal would allow Netflix to raise prices for subscribers who don’t purchase both services.
With information from Reuters
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