Those crazy guys over at Warner Bros. Discovery have been out and about a lot lately, talking up company prospects at investor events on multiple continents this past week. The thing is, the more the company’s top leadership talks about streaming, the more I keep wondering why they’re still in it.
As John Malone, the power behind the throne on WBD’s board of directors, put it at Liberty Media’s Investor Day last week: “At the moment, there’s a lot of blood flowing down the gutters, of people who are streaming, and some can afford it and some cannot.”
The point is, WBD might be one of the “cannots.”
WBD just reported that its combined streaming operations have nearly 95 million subscribers. That sounds like a lot, but it’s a small share of the globe’s streaming households, with some limits on where HBO Max can expand given other deals. And that modest number (it grew by 2 million last quarter) is spread across HBO Max, Discovery Plus and assorted odds and ends.
At some point next spring, WBD’s two main services will merge into one, CEO David Zaslav finally confirmed. That such a union would finally come roughly a year after WarnerMedia and Discovery Media merged, and close to two years after the corporate marriage was first announced, it begs the question of “what’s taking so long?”
Merging the two services certainly shotguns together two very different audiences: the coast-hugging, critic-driven fans of HBO’s edgy, expensive fare versus the downscale delights of dirt-cheap unscripted shows on D+. Can these audiences get along any better than, say, the U.S. House of Representatives?
Almost certainly.
Zaslav said during an investor day appearance that programming from D+ superstars Chip and Joanna Gaines had done well on HBO Max. Shows such as Property Brothers, Fixer Upper The Castle and The Craftsman are showing up on both services without incident. Probably other unscripted content that Discovery churns out would be just as successful on the Max were it there alongside Euphoria, Rap Shit, The White Lotus and The Sex Lives of College Girls.
Given that, why wait until spring?
LightShed Partners Rich Greenfield wondered in a note this week why Zaslav hasn’t extended his zeal for rooting out excess costs to killing off Discovery Plus. Yes, it’s basically a regurgitation of Discovery’s basic cable programming, but why keep paying for separate marketing, operations, customer service and other costs any longer than you have to?
Zaslav seemed to rationalize the separate services by saying D+ subscribers turn it on while cooking, doing Zoom calls (what?), helping kids with the homework as background noise.
While that’s certainly a use case, the same viewer service could be reliably achieved by creating a Discovery hub on HBO Max. And then you’d actually begin creating a service that people will watch all of the time, optimizing engagement and building stickiness in an increasingly competitive market.
“There is clear and compelling logic to combining Discovery Plus and HBO Max,” Greenfield wrote. “EVERY streaming service should be centered on optimizing for time spent to drive down churn and increase pricing power.”
This matters even more for HBO Max’s ad-supported version, and for any AVOD/FAST service that Zaslav might create.
But while delaying that services merger four to six months is a head scratcher, the bigger puzzler might be why WBD is continuing to operate any streaming service in its current condition?
While HBO Max is still studded with massive HBO hits such as House of Dragons, WBD is otherwise disinvesting in its streaming bell cow. Straight-to-streaming movies are done, the unit creating original programming has been gutted and even originals programming from legacy divisions such as CNN and Warner’s movie division are getting slashed.
Zaslav rightfully brags about the fine programs WBD makes for other companies, such as The Sandman for Netflix, two-time Emmy Best Comedy winner Ted Lasso for Apple TV Plus, and Abbott Elementary for ABC (and Hulu).
Great. As he mentions, being an arms dealer is “a very good business. There’s a lot of bidders for the content.”
What’s less clear is how the company decides what to keep as its services are getting de-emphasized, and what to sell, particularly with money so tight (the company still has $48 billion in debt).
CFO Gunnar Wiedenfels told a Morgan Stanley investor conference in Europe that the company is trying to eliminate consumer barriers to accessing content, whether it’s through a company app, through Amazon, or linear TV.
“We’re going to be open to all those forms of distribution…to get the best return for every dollar of content spend,” he said. That’s great as long as you’re getting people to spend more than it costs you to get it to them.
Zaslav also foreshadowed WBD’s likely withdrawal from the business of showing NBA games. Contract renewals are due in a couple of years and almost certainly will be crazy expensive, based on what’s happening already with other sports. Malone called those escalating prices, “a tax on the public,” and “prohibitively expensive.”
When it comes time to renew, Zaslav said the company would be “very disciplined. We don’t have to have the NBA. If we do a deal on the NBA, it’s going to look a lot different … There’s an argument why — you could put the NBA on HBO Max. You could throw in Bleacher Report, House of Highlights, all of our production. That could be a hell of a good hand. But I think you’ll see us being very, very disciplined on sport. We have enough without doing a new deal with anybody. I’d like to do a deal with the NBA, but we’re going to have to be — it has to be a deal for the future. It can’t be a deal for the past.”
HBO Max’s real problem is that it isn’t big enough to justify putting games there. For that matter, the economics don’t appear sustainable with other parts of WBD’s streaming operations, either. It continues to be what the analysts like to call “sub-scale,” with little real prospect get big enough to truly compete with Apple, Amazon and Disney.
The company is trying to build a direct-to-consumer ecosystem that won’t simultaneously cannibalize its legacy distribution relationships, Malone said.
It’s an admirable goal, but hugely challenging in the kind of headwinds WBD faces. Can Zaslav and Wiedenfels find the resources to improve access everywhere in a difficult economy, stout competition, and disinvestment/consolidation in streaming?
Or should they consider getting out of streaming altogether, focus on a Sony-style approach of selling great content to the highest bidder, while keeping costs as low as possible? That would allow the company to pay down its crushing debt, pretty up its balance sheet, and prepare everyone for the inevitable next mega merger/sale to come as soon as possibly 2024.
