Netflix’s streaming dominance fuels its attempt to redefine the market

This week, a Senate Judiciary subcommittee handling antitrust matters convened a hearing regarding the proposed merger between Netflix and Warner Brothers. The presence of the Monopoly Man symbolized the primary worry for every member of the committee: Netflix is already the leading force in subscription video-on-demand, and its purchase of Warner Bros. could solidify its unmatched monopoly.

As Chairman Mike Lee stated, Netflix might become “the one platform to rule them all” if the merger proceeds. This result would be detrimental to both streaming service consumers and the creative talent that produces such engaging content.

Unsurprisingly, Netflix CEO Ted Sarandos attempted to minimize these concerns by proposing an extremely broad definition of the market in which Netflix operates. His prepared comments mentioned YouTube, a supposed rival of Netflix, 25 times. “When you include YouTube and similar platforms, Netflix makes up less than 10% of TV viewing,” Mr. Sarandos asserted.

Bruce Campbell, Warner Bros.’s Chief Revenue and Strategy Officer, supported this view by saying Netflix competes with short-form user-generated content, such as that found on TikTok.

One shouldn’t need to be an antitrust expert to see why comparing Netflix to free, ad-supported, amateur content is deceptive. Nevertheless, an explanation follows.

The fact that two services compete for audience attention does not mean they belong to the same antitrust market. If regulators considered everything that competes for viewers’ attention, they would have to place beautiful sunsets in the same massive “attention market” as Netflix, YouTube, and TikTok.

To establish market boundaries, courts use a hypothetical monopolist test. This assessment examines whether a single seller of a specific group of products could profitably impose a small but significant non-transitory increase in price (a “SSNIP”) above competitive levels. In merger reviews, this test is first applied to the smallest group of products the merging companies offer.

In this context, the question is whether a subscription video-on-demand (SVOD) provider could raise its prices above competitive levels without losing a significant number of subscribers. If the answer is yes, then a relevant antitrust market exists because that provider has pricing power. If not, the market definition would be broadened to include close substitutes, and the test would be repeated until a profitable price increase is possible.

Available evidence indicates that Netflix already possesses considerable pricing power. The company has successfully raised prices for its standard and premium plans since 2020, all while continuing to grow its subscriber base. Netflix also commands a price premium compared to its competitors, which is another sign of market strength. If the company were truly constrained by user-generated platforms, as merger advocates claim, subscribers would be canceling their Netflix subscriptions for YouTube or TikTok. However, this has not happened.

The arguments from Mr. Sarandos and Mr. Campbell about competing with user-generated platforms are also unconvincing. For instance, the vast majority of content on YouTube is created by amateurs, which is a key reason such videos are typically free or ad-supported. In contrast, Netflix makes substantial investments in high-quality, professional content, with plans to spend as much as $17 billion.

Consider this: When a family plans a movie night, they do not turn to YouTube. Conversely, when someone wants a DIY tutorial or a funny cat video, they do not open the Netflix app.

Using a sensible definition of the SVOD market, Netflix’s dominance is clear. It currently holds a significant share of all global streaming subscribers. Incorporating Warner Bros.’s service, which controls an additional 13% of the market, would create a behemoth with nearly half of all SVOD subscribers.

Combined with Warner’s extensive content library, users would effectively be forced to maintain a subscription to access popular movies and shows. Smaller streaming services would probably need to merge to survive, initiating a snowball effect of consolidation within the industry.

Several legislators also noted that this level of control would grant Netflix immense power to promote a specific ideological agenda. Although the hearing’s debate about Netflix’s “wokeism” may be secondary to standard antitrust issues, it raises a valid question about whether any single corporation should have such unilateral authority over the content audiences see. As both Mr. Sarandos and Mr. Campbell acknowledged, entertainment influences culture.

Netflix is the top SVOD provider globally, with 325 million subscribers. Warner Bros., with 125 million subscribers, ranks fourth. Combining these two streaming giants is a classic example of a horizontal merger that would harm consumers by giving the new entity significant power to increase prices and suppress competition. No amount of executive rhetoric can alter these fundamental facts.

The central question now is whether the current administration’s antitrust regulators will accept Netflix’s argument, and if they do not, how the Warner Bros. board will react.