Netflix’s $72 billion bet on Warner Bros. is as much a bet on the future of artificial intelligence (AI) and chips as it is on films and series, according to one of Wall Street’s main analysts, who said in an interview with Fortune that the deal cannot be understood without looking at Google’s technological ambitions.
Amid protests from the Ellison family, which feels aggrieved by the “tainted” sales process, and from independent producers and theater owners who talk about the “death of Hollywood,” Melissa Otto, head of research at S&P Global Visible Alpha, sees a different game being played. Otto said he believes the technology angle of the industry is being overlooked.
“I think there’s a much bigger conversation that’s being missed,” she said: Google and its TPU chips.
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A key question for the future of entertainment, Otto told Fortuneis control over premium video at scale in an era where generative AI will increasingly create, remix and personalize moving images. (Otto called this a “video corpus” that will train and feed the next generation of AI models.) In the long term, Otto added, this is a key part of the mystery behind why Netflix, which has historically been more of a builder than a buyer, would make Hollywood history by acquiring one of its biggest rivals and one of the city’s prestigious studios.
Co-CEO Greg Peters was asked directly about this the morning of the conference call with analysts about the historic merger. Rich Greenfield of LightShed Partners cited an earlier statement by Peters at a Bloomberg conference about the history of failed media mega-mergers, and asked, “Why is this going to end differently than every other media transaction of this scale and history?”
Peters, while clarifying that his remarks at the conference were a bit more nuanced, acknowledged that “historically, a lot of these mergers haven’t worked, some have worked, but you really have to look at it on a case-by-case basis.” Still, Peters argued that most previous big deals have shown a lack of understanding about the underlying business, and that Netflix understands these assets and has a “clear thesis about how the critical parts of Warner Brothers accelerate our progress.” He also admitted that Netflix is not an expert in large-scale mergers and acquisitions.
After all, this is expensive. “We are surprised that Netflix felt the need to spend more than $80 billion and pay a premium for something that Netflix itself disrupted,” Barclays analysts wrote in reaction to the deal, “and it is unclear what problem or opportunity Netflix is solving that could not have been achieved organically.”
In a statement sent by email to FortuneDave Novosel, senior securities analyst at Gimme Credit, said the deal also appears expensive to him, with Netflix taking on nearly $11 billion in debt.
“While WBD’s assets bring an incredible amount of compelling content, NFLX is paying a high EBITDA multiple of over 25x, which seems extravagant,” Novosel wrote. Once the announced synergies are achieved, he added, the resulting multiple, closer to 15x, appears more reasonable. Until that happens, “the enormous amount of debt that Netflix will need to raise to finance the deal will take leverage to well over 4x initially.” Novosel wrote that investors may need to be patient. The credit team at Bloombergmeanwhile, reported that the $59 billion bridge loan taken to finance this deal is among the largest in corporate history.
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Here’s what Otto sees happening in Northern California, far from Hollywood, where the Warner deal is everyone’s talk, and why Netflix made this big move.
Is the future of entertainment in Northern or Southern California?
Part of Netflix’s thesis, according to Otto, is that it is a technology company at heart and recognizes Google’s rapid advances in AI, particularly its advances in TPU chips.
“What TPU chips do really well is in the video modality of generative AI,” said Otto, as they essentially turn mathematical representations into moving images, in the same way that GPUs revolutionized natural language AI by tokenizing and modeling text. Instead of ChatGPT and text, think Gemini 3 and YouTube videos.
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Netflix already lags behind YouTube in total share of streaming time, with Bank of America Research recently citing Nielsen data showing that YouTube had 28% of streaming in the US, compared to Netflix’s 18%. Otto said this threatens to increase further when and if Google’s TPU chips turbocharge content made with generative AI.
“I’m sure that’s feeding into the strategy,” Otto said. “If I were Netflix and I knew that Google, one of their formidable competitors, had this chip technology and was basically investing billions and billions of dollars into developing the infrastructure so that they could carve out the corpus of video modality into generative AI, I would want to build a moat around my business.”
On the surface, Netflix is buying a traditional studio with a deep library, beloved franchises, and a global brand — and paying dearly for it. The combined streaming and studio business generates about $25 billion in revenue and roughly $4 to $5 billion in EBITDA, but streaming margins remain thin, making the economics of the business difficult in the near term. Executives emphasized overlapping subscribers, obvious cost cuts and an expected $5.5 billion in efficiencies, the kind of “low-hanging fruit” that could occupy management for the next 12 to 24 months, Otto said.
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But in a world where TPUs can make high-quality video “basically for free,” any player lacking both the chips and the content could find themselves at a disadvantage as AI reshapes how entertainment is produced and consumed. That makes Netflix’s big investment in Batman, Harry Potter and the like a different kind of moat, and a different game from the classic Hollywood rivalries of old. Otto said it’s plausible that generative AI entertainment could be seen as an extension of the recent intellectual property wars that have flooded Hollywood with superhero movies and sequels, with Disney’s Marvel Studios ushering in a computer-generated revolution in the 21st century. “I think that’s not a far-fetched assumption.”
By absorbing Warner Bros., Netflix increases the volume and diversity of content that can power recommendation systems, experimentation, and eventually its own AI-powered video tools. Otto also noted that the deal potentially gives Netflix more exposure to advertising, an area where Alphabet dominates and where Warner Bros. it still generates $6-7 billion in advertising revenue. Although the ultimate fate of this advertising talent remains uncertain as it could go to the spin-off that includes WBD’s cable assets such as CNN and TNT. (Netflix has only been active in advertising since 2022, having been a premium subscription service since it switched from DVD rentals to streaming in the late 2000s.)
Imagine a world, Otto said, where you could create your own versions of the crime classic Columbo starring an AI-generated version of legendary actor Peter Falk, who died in 2011. (Columbo has had several TV homes, none from Warner Bros. or Netflix, as it was initially owned by NBC in the 1970s and then ABC from the late 1980s.) “Nowadays, boy, wouldn’t that be interesting?” Otto asked rhetorically.
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In many ways, she added, this moment is notable because Netflix may end up being neither a subscription nor an advertising business, but an AI-based business that doesn’t exactly exist yet. “It’s kind of exciting because it means it’s an open game for anyone,” Otto said.
Otto also raised the specter of TikTok, the social media giant partially controlled by Larry Ellison.
“They are also a formidable competitor,” she said. What is likely, he added, is that the future will be unpredictable. The rise of AI “could deliver some truly incredible innovations in the coming years.” She agreed that this could create a boom for show business lawyers fighting rights over things like Falk’s likeness, which was a major issue in the recent Hollywood strikes.
“That could be the real story,” she said.
[Disclaimer: O autor trabalhou internamente na Netflix de junho de 2024 a julho de 2025.]
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