Key Points

Netflix's recent attempt to acquire assets from Warner Bros. Discovery (WBD) has led Wall Street and media industry observers to question whether the company needs to pursue more mergers and acquisitions as streaming competition intensifies. Co-CEO Ted Sarandos stated during Thursday's earnings call that although Netflix has historically viewed itself as a "builder, not a buyer," the bidding process for WBD demonstrates the streaming giant is capable of executing large-scale deals when necessary. An acquisition of Warner Bros. Discovery by Paramount would create a formidable competitor for Netflix and its peers.

For years, Netflix executives have consistently emphasized to investors that the company focuses on building its own assets rather than acquiring them. Now, this growth philosophy may be shifting. Netflix released its quarterly earnings report on Thursday. Typically, the company's earnings calls center on metrics like user engagement, content investment, price increases, and subscriber numbers. While Thursday's call touched on these topics, following the bid for Warner Bros. Discovery, analysts also pressed for details on Netflix's M&A intentions. In the latter half of last year, Netflix emerged as a bidder for Warner Bros. Discovery, surprising the industry and markets. Even more startling were reports in December that Netflix had reached an agreement to acquire WBD's film studio and streaming assets for $72 billion. This potential deal initially caused a stir and prompted questions from within and outside the media industry about whether Netflix needs to engage in more acquisitions as competition in the streaming sector heats up.

Netflix Co-CEO Ted Sarandos said on Thursday that there were doubts, both internally and externally, about the company's ability to execute a transaction of such magnitude. "But we did see that the team was fully capable of taking on the task," Sarandos stated. "We learned a great deal about deal execution and pre-integration planning." Netflix explained that the rationale for considering a major acquisition is straightforward: although the company boasts a significant lead in subscriber count – announcing 325 million global paid members in January – it aims to further strengthen its IP and series library and deepen its involvement in film production. In February, Paramount and Skydance Media ultimately submitted a higher offer, scuttling the deal. Netflix chose to withdraw (and promptly received a $2.8 billion breakup fee). "But most importantly, we genuinely honed our M&A capabilities," Sarandos remarked. "The biggest takeaway from the entire process was testing our investment discipline."

Sarandos's more open stance on M&A has led some to speculate that the streaming giant might be seeking new acquisition targets. After all, its IP library and film business footprint remain at the level they were before the WBD bid. Although Wall Street clearly disapproved of Netflix's plan to acquire Warner Bros. Discovery – its stock fell 15% from the deal's announcement to its collapse, before recovering about 26% since – the media landscape would undoubtedly undergo a significant shift if Paramount's acquisition is approved. Paramount's proposed acquisition includes all of Warner Bros. Discovery's operations, encompassing cable networks, film studios, streaming platforms, and all other assets. This would create a super-competitor for Netflix and other media companies across multiple sectors. "The final outcome for Warner Bros. Discovery is highly significant. A merger of Paramount+ and HBO Max would reshape the streaming landscape, introducing competitive pressures Netflix hasn't faced before," said Mike Proulx, Vice President and Research Director at Forrester, prior to Netflix's earnings release. "I want to remind everyone that we said from the start that acquiring Warner Bros. was an enhancement, not a necessity. We are very confident in our core business," Sarandos stated on Thursday. He added that Netflix viewed the primary risk of participating in the bid as being a distraction from its core operations. "Our Q1 performance shows we were not distracted."

Nevertheless, Netflix's earnings report, particularly its forward guidance, appeared to disappoint investors. Despite Q1 revenue exceeding expectations and the WBD deal being terminated, Netflix maintained its full-year guidance, causing its stock to drop approximately 10% in after-hours trading. "More surprising this quarter is that the company's full-year margin guidance was not adjusted, even after exiting the Warner Bros. deal and accounting for related M&A costs," MoffettNathanson analyst Robert Fishman noted in a report on Friday. During the earnings call, Netflix did not dwell extensively on M&A, instead returning to familiar topics like user engagement, its growing advertising business, and content investment aimed at retaining subscribers (and justifying price hikes). This return to its traditional narrative seemed to be welcomed by the market. "With the WBD deal off the table, the company can refocus entirely on driving revenue and profit growth from its global subscriber base," Fishman stated in his Friday report. He added that Netflix management "highlighted the effectiveness of recent price increases and noted strong subscriber retention metrics," while advertising revenue is still expected to double this year. However, Forrester's Proulx noted in a post-earnings report that despite Netflix returning to "full execution of its tried-and-true operating strategy," questions remain. "This doesn't change the fact that competition in the streaming market is fiercer than a year ago," Proulx said. "Pricing power must be won quarter by quarter, and maintaining user engagement while raising prices remains a core challenge for the entire streaming industry. In a more competitive, consolidating market, Netflix is betting that solid execution of its core business will be enough to win."