By Joe Flint
A $40 late fee on a Blockbuster Video rental led to the creation of the company that has swallowed Hollywood.
Software entrepreneur and movie buff Reed Hastings was hit with sticker shock one day in the 1990s, when he returned an overdue film. Seeing the success Amazon was having selling books, Hastings figured a similar approach could work with movies -- without penalizing customers.
He and partner Marc Randolph launched Netflix with 925 movie titles and 30 employees to stick them in envelopes and drop them in the mail. Nearly three decades later, that scrappy DVD company not only dominates the global subscription streaming landscape, but is now eating Hollywood itself.
It just reached a deal to buy some of Hollywood's most iconic properties: the Warner Bros. movie and television studios and HBO.
On Friday, Netflix agreed to acquire Warner Bros. for $72 billion after the entertainment company splits its studios and HBO Max streaming business from its cable networks, beating rival bidders Paramount and Comcast. The deal stunned Hollywood, where many assumed David Ellison's Paramount was the most likely suitor.
After Paramount's aggressive unsolicited approaches to buy all of Warner Discovery prompted the company to put itself up for sale, Netflix's winning bid came together at a breakneck pace.
Warner Discovery Chief Executive David Zaslav and Netflix co-CEO Ted Sarandos are friends that have spent time together in the midst of the dealmaking process, including in September, when Zaslav and Sarandos watched the Canelo Alvarez-Terence Crawford boxing match together in Las Vegas.
Netflix was "aggressive about pursuing the value," said former Warner Discovery board member John Malone, who now serves as an adviser to the company.
Disrupting an industry
Piece by piece, Netflix has disrupted a more-than-century-old industry, from the way consumers rent movies and TV shows, to the cadence at which new series are released and even the economics of how entertainment is made.
Consumers accustomed to TV ad breaks and weekly releases loved Netflix's "binge" model. A subscriber could watch as much "Law & Order" as they wanted.
As the streamer's subscriber base grew, it began to offer original programming. At the time, traditional Hollywood companies were wary of eroding their base of cable customers with direct-to-consumer offerings.
Netflix's corporate culture was far different from the norm in Hollywood. Executives embraced radical candor, paid staff handsomely and viewed high turnover as a sign of success. Managers were told to embrace a " keeper test" when it came to staff. If an employee wasn't worth fighting to keep, out they went.
When Netflix first launched its streaming service in 2007, big studios eagerly licensed their TV shows and movies to the platform. It was fresh revenue and there was a little concern that they were helping build a beast that would soon be a danger.
Asked whether Netflix was a threat to Hollywood, then-Time Warner Chief Executive Jeff Bewkes said it was "a little like the Albanian army is going to take over the world."
On Friday he said the remark was "unfortunately flippant," and made when Time Warner, Warner Bros.' parent company, had just emerged from its disastrous AOL merger and he didn't want to admit how big of a concern Netflix actually was.
Much of Hollywood viewed Netflix in its early days as an outsider that wouldn't grasp the alchemy of making a hit show. It paid huge sums to persuade creatives to take the leap.
It made a two-season commitment to the political drama "House of Cards" to woo the project away from HBO. That show became the streamer's first big original success, followed by "Orange Is the New Black."
Netflix courted top creators including Shonda Rhimes and Ryan Murphy with lucrative deals, resulting in more hits and subscribers. Rivals bemoaned the free-spending outsider, which had become hard to outbid and was poaching executives from traditional studios with big pay increases.
With its original movies, it largely circumvented movie theaters, putting films directly onto the service. It spent gobs on Oscar campaigns for "Roma" and "The Irishman."
It generally released movies straight to its streaming subscribers, a stark change from traditional studios that debuted films in theaters first and made audiences wait, sometimes months, to watch at home.
Over the years, Netflix has released more movies in theaters, but often for short windows and to appease famous directors and qualify for awards consideration.
It began to build a stable of popular franchises like "Stranger Things," "Bridgerton" and "Squid Game." Over time, the upstart became the streaming leader with an enviable subscriber base and low cancellation rates.
Disrupting itself
After a rare quarter of subscriber losses in 2022, Netflix started to transform itself again. It embraced businesses it once kept at arm's length, from advertising and live sports rights to limiting password sharing.
Commercials were anathema to Hastings, but Netflix has now built an ad business. After years of permitting account sharing, Netflix cracked down on the practice in earnest in recent years, delivering a revenue windfall.
Lately it has also ventured into big sporting events that it once avoided because of the cost of rights, such as carrying the NFL on Christmas.
The Warner deal itself is a change for a company that prided itself on building rather than buying. It comes with still other forms of reinvention.
Netflix, which has historically opted to keep its series in-house, has said it will continue Warner Bros. operations, including selling shows to other networks, as Warner has in the past with "Abbott Elementary."
It also plans to continue releasing Warner films in theaters, a practice that could help keep actors and filmmakers from taking projects elsewhere.
The deal gives Netflix, which has built its original content library from the ground up, a huge vault of TV and movie franchises, from Harry Potter to DC Comics. Beloved movies and shows like "Friends" help keep subscribers watching for long periods.
It comes with the iconic Warner Bros. lot in Burbank. Sarandos has been eager to own a studio lot, say people who have worked closely with him.
Sealing the deal
Just seven weeks ago, the streaming company suggested it wanted to avoid a big merger. Netflix co-Chief Executive Greg Peters played down the idea of making a play for Warner Bros. Discovery.
"Big media mergers don't have an amazing track record over the history of time," Peters said at a Bloomberg conference in October.
But Netflix had been quietly studying the Warner Bros. entertainment assets, people familiar with the matter said. Warner Discovery was preparing to split itself into two companies -- one made up of the studios and streaming and the other housing cable networks. Netflix smelled an opportunity.
Competition for eyeballs was increasing from rival streamers, YouTube and free ad-supported services, as well as social-media platforms including TikTok. Netflix didn't want to miss the chance to own what are considered crown jewels of entertainment.
On the heels of Paramount's merger with his Skydance, David Ellison submitted several unsolicited bids for all of Warner Discovery, including its cable channels. Those overtures were rebuffed. Warner started a sales process that drew in Netflix and Comcast.
On Thursday, Netflix made its best offer yet: a massive cash-and-stock deal with a $5.8 billion breakup fee. It sealed the deal later that night.
There is a long road ahead. A senior Trump administration official said Friday that Trump advisers, including White House officials, are concerned about Netflix's deal, The Wall Street Journal reported. The companies said they expect the regulatory review process to take at least a year.
Netflix will take on significant debt to finance the transaction and has never integrated anything as big as the Warner assets.
"We can't stand still, we need to keep innovating and investing in stories that matter most to audiences," Sarandos said on an investor call Friday.
Write to Joe Flint at Joe.Flint@wsj.com
(END) Dow Jones Newswires
December 05, 2025 21:38 ET (02:38 GMT)
Copyright (c) 2025 Dow Jones & Company, Inc.
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