Early Monday morning, AT&T announced a sudden change of direction: it reached an agreement to disband WarnerMedia – a consortium of Warner Bros., HBO, CNN, DC Comics and others – into a new company to be merged into Discovery. While Discovery’s list of Cooking Channel, Travel Channel and Food Network is much less exciting than WarnerMedia’s lineup Batman, Harry Potterand The throne game, the combined company assembles the components needed to build a new streaming giant. And it’s already clear that this new Discovery-Warner hybrid has Disney on display.
“It’s a combination of bringing both sides of the business together and creating more attractive direct consumer production for HBO Max or Discovery Plus,” says Neil Macker, a stock analyst at Morningstar. Limit.
WarnerMedia has worked well so far. Its streaming platform, HBO Max, hit 64 million subscribers a year after its launch. But it’s only about half the size of Disney Plus (which is about a year and a half old) and a third of Netflix’s size. And it seemed that AT&T had no constant interest in seeing it overtake them. AT&T CEO John Stankey said Squawk on the street on Monday, WarnerMedia needed a home where shareholders would be willing to “take that ride” to see the company grow as large as possible.
The rationale for the deal makes sense for AT&T. The telecom company never intended to do a stellar mission in the media industry (see: Verizon and Yahoo, AOL and Time Warner, Snyder Cut), and can use the proceeds from the sale to still build a very large 5G network.
But WarnerMedia can be a bigger winner. It gets out hard leadership and it becomes the star of a new business. It’s a much larger company than Discovery, with $ 30.4 billion in 2020 revenue for Discovery’s $ 10.7 billion. And Discovery is poised to spend large amounts on content to enable WarnerMedia to match its competitors: it plans to invest $ 20 billion a year in content, competing with Netflix ($ 17 billion) and surpassing Disney (which is set to reach $ 14-16 billion by 2024).
Even before a new investment, a combined content library for companies offers benefits to both parties. The new company brings together WarnerMedia’s list of pop culture phenomena – the types of great shows and movies known to attract sign-ups – with Discovery’s deep reality shows that “thrive well on streaming platforms,” Macker says, and are generally helpful in retaining subscribers.
In an interview this week, Discovery CEO David Zaslav mentioned WarnerMedia’s great features – The throne game and Single life came up a lot – and praised the fact that the company had the right to show these titles itself. The combined company isn’t entirely the mindset of ever-changing content stores that can make tops disappear from streaming services on a monthly basis, and it can guarantee a steady hit list, just like Disney Plus offers.
“Another thing we don’t have is some companies don’t,” Zaslav told CNBC, is a “great, great IP”.
It’s a major leg in Netflix, which doesn’t have a long list of iconic features. And it’s hard not to hear Zaslav aim for Disney when he tells Bloomberg that the acquisition “makes us a truly huge global IP business to compete with the best in the industry”. (In the past, he has been a former Disney Plus manager rumored as a challenger to manage the merged entity.)
Zaslav’s goals are great. At CNBC, he discussed “hitting 2-, 3-, 400 million homes in the long run,” doubling Netflix’s current one.
The plan is to do more than just build a huge Disney Plus competitor. In the television and film industries, revenues are beginning to shift to streaming. But Discovery still has a huge TV business that it plans to continue to grow. The company has sought to expand its news and sports channels across Europe (Zaslav suggested CNN could be involved), and the addition of WarnerMedia’s programs and additional channels will allow Discovery to “serve advertisers” and sell its content as a package over cable, he said.
Macker says it’s the same strategy that Disney follows: using existing successful companies – in Disney’s case, ESPN, movie studios and soon again Theme Parks – to build the next growth area. “All those parts make money,” he says. “You invest directly in consumers for long-term growth.”
WarnerMedia and Discovery continue to face serious challenges. It immediately seems likely that WarnerMedia could fall into a leadership vacuum when looking at the deal with the company’s CEO allegedly looking for an exit. And while Discovery is eager to build a streaming giant, it’s ultimately not the job of Discovery’s current management and shareholders. AT & T’s shareholders own most of the combined company, so Zaslav must sell them with this investment – an investment that Stankey suggested that AT&T investors were unsure of.
For the most part, merging the two companies seems to be a bet that the current streaming landscape – with a choice of large and small streaming devices – will not last much longer. Combining WarnerMedia and Discovery is a coping with an accident that can destroy smaller services and become stronger on the other side. These two companies are not allowed to do anything special or unique: they just do what they already do – but together and bigger. That’s good news if you want to subscribe to fewer services at once, even if it takes a while before we know if they lead to better performances.