Keeping It Simple

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Netflix earnings shed light on why it needs Warner - Heard on the street - WSJ

The new Netflix is still a ways off, but the old one is doing fine. Given what Netflix is trying to accomplish, though, fine doesn't quite cut it.

Netflix 's shares slipped Tuesday after the streaming giant posted generally strong fourth-quarter results. That came just hours after the company amended its acquisition deal with Warner Bros. Discovery . Netflix will now pay all cash for the storied Hollywood studio and its associated streaming business, removing a stock component that was looking problematic considering Netflix shares have tumbled more than 30% in the past three months.

That theoretically should strengthen Netflix 's hand against competing bidder Paramount Skydance , which has offered a higher price for the entire company but faces the prospect of having to take on a crippling amount of debt to pay for the deal. Warner now expects to hold a shareholder vote on the deal by April, which might also work in Netflix 's favor, given that it limits the time for Paramount to press a proxy challenge to take over the Warner board.

Still, a combined Netflix -Warner would also need to survive the regulatory scrutiny that will likely last into next year. That includes getting a nod from President Trump , who has expressed personal interest in Warner's fate and is close with Paramount backer Larry Ellison .

In the meantime, Netflix is showing that its core business remains strong but is also challenged by size and scale. The company grew revenue by 16% last year but sees only 13% growth this year, at the midpoint of the projection it gave on Tuesday. And driving that growth isn't getting any cheaper, especially now that Netflix is seeking to be a player in pricey areas such as live sports. The company projected about $11 billion in free cash flow for this year, which was below the $12.1 billion analysts were expecting, according to estimates from Visible Alpha .

Dialing down the content spending doesn't seem to be an option, given the voracious appetite of Netflix 's global base of subscribers that now numbers more than 325 million. The company admitted in its shareholder letter Tuesday that engagement took a hit in the latter half of last year because of a lower volume of content it licensed from other companies. Netflix remains the undisputed leader in streaming, but competition keeps picking up. Market research firm Luminate estimates that the company's share of U.S. original content viewing time fell below 60% in 2025, a new low.

Netflix always has the option to raise prices to boost revenue growth. But doing so now with the scrutiny of the Warner deal might prove unwise. "If Netflix wants to convince regulators that the transaction is not anticompetitive and that it is pro consumers, increasing prices for their service could raise red flags," Laurent Yoon of Bernstein wrote in a report last week.

And if Netflix does end up closing the Warner deal, there remains the question of what the business looks like once the pure-play streamer also becomes a theatrical distributor and third-party TV producer. Netflix has appealed to investors over the past decade precisely because it has been able to focus on streaming without the baggage of managing a declining cable-TV business and dealing with a temperamental theatrical market.

Netflix has a very strong record of adaptation, evidenced by its not-too-distant past as a mail-order DVD outfit. But its future as a Hollywood studio conglomerate is a script investors haven't yet bought.