This week the Senate Judiciary subcommittee responsible for antitrust issues held a hearing on the proposed merger between Netflix and Warner Brothers Discovery. The Monopoly Man in attendance embodied the concern that was top of mind for every committee member: Netflix is already the dominant player in subscription video-on-demand, and its acquisition of Warner Bros. could cement its unrivaled monopoly.
As Chairman Mike Lee put it, Netflix could become “the one platform to rule them all” if the merger is allowed to happen. This outcome would harm both consumers of streaming services as well as the talent that generates such compelling content.
Not surprisingly, Netflix CEO Ted Sarandos tried to deflate concerns by casting a sprawling definition of the relevant market in which Netflix competes. His prepared remarks mention YouTube, Netflix’s purported rival, 25 times. “Including YouTube and the like, Netflix accounts for less than 10% of TV viewing,” Mr. Sarandos insisted.
Bruce Campbell, Chief Revenue and Strategy Officer for Warner Bros., added that Netflix competes against short form user-generated content, like TikTok and Instagram.
It shouldn’t require an antitrust economist to understand why their comparisons to ad-supported, amateur-produced content are misleading. But here goes one anyway.
Just because two services compete for viewers’ attention does not imply that they are in the same antitrust market. If policymakers included all things that vie for viewers’ attention, they would have to include gorgeous sunsets alongside Netflix, YouTube and TikTok in one massive attention market.
To define the contours of a market, the courts rely on a hypothetical monopolist test. This test considers whether a single seller of a defined set of products could profitably raise prices of those products by a small but significant amount (called a “SSNIP”) above competitive levels. When performed in merger review, the test is applied initially over the smallest set of products offered by the merging parties.
Applied here, one might ask, could a subscription video-on-demand (SVOD) provider raise its prices beyond competitive levels without shedding too many viewers. If yes, then a relevant antitrust market exists, as that provider enjoys pricing power. If not, the market would be expanded to include nearby substitutes, with the test repeated until a profitable price hike is achieved.
Evidence suggests Netflix already enjoys substantial pricing power. It has been able to increase the cost of its standard and premium packages by 29% and 39%, respectively, since 2020, while still continuing to amass more viewers. Netflix also charges a price premium relative to its peers, which further indicates power. If it were constrained by user-generated platforms, as the merger proponents would have you believe, then subscribers would cancel their subscriptions in favor of YouTube or TikTok. Yet they haven’t.
Mr. Sarandos’s and Mr. Campbell’s stories about competing with user-generated platforms don’t pass a sniff test either. Content on YouTube, for example, is overwhelmingly produced by amateur creators—which is a major factor in why such videos are generally free or ad-supported. By contrast, Netflix invests significantly in high-quality content. It plans to spend as much as $20 billion this year.
Think of it this way: When a family sits down to movie night, they are not flipping to YouTube. Conversely, when they want a DIY tutorial or a clip of a cat playing piano, they are not opening Netflix.
Under a reasonable definition of the SVOD market, Netflix’s market dominance is impossible to ignore. It currently has about a third of all streaming subscribers worldwide. The addition of Warner Bros.’ HBO Max, which controls another 13%, would create a streaming giant with nearly half of all SVOD subscribers.
Mix in Warner’s vast content catalogue, and users would essentially have to keep their subscription to access mainstream movies and films. Smaller streamers would likely have to consolidate just to keep up, kicking off a snowball effect in the market.
Several lawmakers raised the point that such control would give Netflix immense power to push an ideological agenda. While the debate over Netflix’s “wokeism” at the hearing might be ancillary to traditional antitrust concerns, it warrants consideration whether any one company should have that kind of unilateral control over what content viewers receive. As Mr. Sarandos and Mr. Campbell both pointed out, entertainment shapes culture.
Netflix is the number one SVOD provider, with 325 million subscribers globally. Warner Bros., with 125 million subscribers, is the fourth largest. Putting these two giant streaming services under one roof is the epitome of a horizontal merger that would hurt consumers. It would confer significant power to raise prices and stifle competition. No amount of CEO spin can change those basic facts.
The question now turns to whether Trump’s antitrust enforcers will buy what Netflix is selling, and if not, how the Warner Bros. board will respond?
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