How UK's Competition Law Could Impact Netflix's Proposed Acquisition Of Warner Bros Discovery

Netflix's proposed acquisition of Warner Bros Discovery's streaming businesses has been dominating headlines over recent weeks.

The deal has turned into a tense saga reminiscent of HBO's Succession, as Paramount Skydance lodged a hostile takeover bid and left the acquisition in the balance.

Regardless of the direction the transaction goes in, there are significant competition law considerations for multiple jurisdictions, including the UK.

From a UK competition law perspective, the proposed acquisition of WBD, whether by Netflix or by Paramount Skydance, would fall within the remit of the UK Competition and Markets Authority if it constitutes a "relevant merger situation" under the Enterprise Act 2002.

In practice, although the UK operates a voluntary merger notification regime, transactions subject to intensive scrutiny in other jurisdictions, particularly the United States or the EU, are more likely to draw CMA attention and prompt assessment of whether the statutory conditions for UK jurisdiction are satisfied.

Importantly, the CMA's decision to begin an investigation of its own initiative can be informed by the existence of merger control proceedings in other jurisdictions.

A relevant merger situation arises where two previously independent enterprises cease to be distinct and either the UK turnover or share of supply thresholds are met.

The CMA must then consider whether the merger has resulted, or may be expected to result, in a substantial lessening of competition in any UK market for goods or services.

The Substantial Lessening of Competition ("SLC") assessment compares the expected competitive conditions with the merger against the conditions that would likely prevail without it, known as the counterfactual.

This is fact-driven and takes into account numerous factors, including potential impacts on pricing, quality, output, innovation, and the ability of remaining rivals to effectively constrain the merged entity.

The CMA's Merger Assessment Guidelines also identify potential theories of harm, including horizontal and vertical effects.

Horizontal effects arise where the merging parties compete at the same level in the supply chain. In this case, both Netflix and WBD provide subscription video-on-demand services and the merger may give rise to horizontal competition concerns in UK streaming markets.

The CMA would consider market shares, concentration, the availability of alternative services, and barriers to entry, including the high costs of content production and technology, which may limit the ability of new entrants to discipline the merged entity.

Vertical effects arise where the merger combines enterprises at different levels of the supply chain, such as content production and distribution.

Vertical integration may give rise to an SLC if the merged entity is able to foreclose competitors by restricting or raising the cost of access to essential content, or by discriminating between its own downstream operations and competing platforms.

In the Netflix-WBD transaction, vertical concerns could relate to the merged entity's control over premium content. If the combined entity had the ability and incentive to restrict access to WBD content or impose unfavourable licensing terms, this could raise concerns regarding foreclosure and the potential for an SLC in the UK streaming market.

The counterfactual scenario is also something which will be taken into consideration by the CMA, comparing the competitive outcome under the merger to the situation if the merger did not proceed. The presence of alternative competitors, potential entry, and the availability of other streaming services inform this assessment.

Should the CMA identify a realistic prospect of an SLC, it may require structural remedies, such as divestment of content rights, or behavioural remedies, including commitments to license content on fair and reasonable terms. During Phase 1 (an initial review by the CMA), the parties may offer undertakings in lieu of a reference to address concerns and avoid an in-depth Phase 2 investigation by the CMA.

In addition to traditional merger control, the proposed acquisition could engage the CMA's powers under the Digital Markets, Competition and Consumers Act 2024 ("DMCC"). The DMCC allows the CMA to designate firms as having Strategic Market Status in respect of digital activities that are linked to the UK, such as streaming video-on-demand services.

To qualify, a firm must demonstrate substantial and entrenched market power and hold a position of strategic significance, for example by serving a significant number of UK users, enabling other firms to rely on its services, or being capable of influencing competitor behaviour.

If designated, the combined Netflix-WBD or Paramount Skydance-WBD entity would be subject to the obligations applicable to an SMS, which may include fair and non-discriminatory access to content, and mandatory merger notification obligations for future transactions.

While strategic market status ("SMS") designation is distinct from the Enterprise Act 2002 merger control framework, it provides the CMA with additional tools to address vertical foreclosure or other anti-competitive conduct in UK digital markets.

The proposed Netflix acquisition of WBD appears to raise potential UK competition law issues. Both horizontal aggregation in the streaming market and vertical foreclosure through control of content may be relevant.

Any CMA assessment would be evidence-based, taking into account market shares, competitive constraints, potential entry, and the counterfactual scenario. Where the CMA identifies a realistic prospect of an SLC, it has the power to require remedies to address competition concerns and protect consumers in the relevant UK markets.