The markets were thrilled when Netflix’s attempted acquisition of Warner Bros Discovery fell through. A stock that had been punished over the last 6 months was rewarded with a 16% jump.
But the markets have it wrong. The streaming giant is facing a peak subscriber problem, and the WBD acquisition was the best lifeline in sight.
What’s the peak subscriber problem?
In the 10Q filings that Netflix released for Q2 - Q4 2025, Netflix acknowledged a problem. Their growth was slowing significantly because they had penetrated the US (and other developed) markets pretty thoroughly. They had reached peak subscribers. There weren’t opportunities to grow the subscriber base at record levels.
"In countries where we have been operating for many years or where we are highly penetrated, our membership growth is slower than in newer or less penetrated countries... Competitors include other entertainment video providers... video gaming providers, as well as user-generated content... and more broadly other sources of entertainment, such as social media."
Even their paid sharing crackdown against password sharing had run its course. They got the additional revenue from people getting kicked off shared accounts, but leadership recognized that this was a one-time tailwind, not an ongoing revenue stream. They’d squeezed all the juice out of the password crackdown, and changed their tone from potential growth driver to fully realized.
How did Netflix address the problem?
Internally, Netflix was aware of the slowing growth, so they stopped reporting subscriber numbers in their SEC filings. Instead, they began focusing more on revenue and margins like a traditional, old-school media conglomerate.
"In addition, as we've evolved our pricing and plans from a single to multiple tiers with different price points depending on the country, each incremental paid membership has a very different business impact. It's why we stopped providing quarterly paid membership guidance in 2023 and, starting next year with our Q1’25 earnings, we will stop reporting quarterly membership numbers and ARM."
The fact that they stopped reporting the subscriber numbers - especially when Netflix was famous and respected for it - is a big deal. That’s a massive change in strategy by the leadership.
How would the WBD acquisition have helped?
The obvious answer is that it provides an immediate boost to subscriber numbers. Netflix can hand-wave away the slowdown in their organic growth numbers by focusing all the attention on the massive and immediate new influx of subscribers.
There’s a secondary benefit too. As Netflix acts more like a traditional media company, their focus on revenue and margins would have been helped by acquiring all of WBD’s IP (Harry Potter, DC Universe). They wouldn’t have had to pay rental fees anymore. They could have squeezed the bottom line instead of being beholden to a third party.
Both of these together speak to a macro shift from internet startup disrupting media to media conglomerate focusing on profitability.
What’s next after the bid failed?
Expect deeper scrutiny from Wall Street on Netflix’s subscriber numbers. Interestingly, Netflix stock was punished by their pursuit of WBD, and then rewarded when the deal fell through. Expect this to flip in the coming months, when the flatlining subscriber growth gets more attention from Wall Street analysts. With their P/E sitting at 37x, this stock isn’t cheap. They’re going to need to justify such an expensive multiple by reframing the growth narrative.
To this end, Netflix is focusing on other revenue streams to bolster their bottom line - specifically, ads.
"Tap into additional revenue and profit pools - in particular scaling ads to become a more meaningful contributor to our business in '25 and beyond."
It’s their way of continuing to increase revenue without depending on subscriber growth. It’s also why they’re making a push into live sporting events, something they said they’d never do. Nothing sells ads like live sports. Netflix getting into WWE Raw, for example, isn’t for the sport - it’s because they need to attract advertisers.
What should we keep an eye on?
Three things:
Subscriber numbers - should confirm that growth tapers off.
Other attempted acquisitions - unlikely, because there aren’t many ripe opportunities, but interesting to see if they try the same strategy elsewhere.
Success of ad business - how quickly can they scale? Are they adding a lot of live events to make ads more attractive?
Either way, it’s clear that Netflix’s future success will no longer be tied to their “North Star” metric of subscriber growth. Their days as a growth stock may be over. This next era of Netflix may look a lot like the heydays of media companies - smart acquisitions, cost management, and ad revenue.
Meet the new king, same as the old king.