HAPPY FRIDAY WAR & PEACENIKS! LET’S DISCO!
Yesterday, for the first time ever, Warner Brothers Discovery announced their combined earnings. The BIG big story, though, was not what’s happened, but what’s to come: How will these two companies and platforms combine to create the scale necessary to compete with the likes of Disney and Netflix AND Apple and Amazon, while cutting the $4 billion in overhead that board member and Discovery Yoda John Malone is looking for?
And that’s precisely why WBD stock dropped 12% after the call. Everyone in media was waiting with baited breath for these earning. Then David Zaslav stepped to the mic for yesterday’s earnings call to paint a grand vision of… how to cut costs.
“The biggest decision for any big media chief executive officer is how much to lean in to the future. Warner Bros. Discovery Chief Executive Officer David Zaslav has chosen strategic limbo.” - CNBC
Before we look at the “big” plans for Disco Brothers, some context:
The Pizza Hut/Taco Bell combination of Discovery and Warner Media was supposed to combine two audiences and expertise into a modern media company with the scale to compete in the new era of media.
The graphs above attempt to portray just where WBD sits in the media ecosystem. The combined companies are incredibly competitive… in linear, MVPD-based Pay TV. Which is like having a great position in buggy-whips, as the auto assembly line was being invented.
In fact, Zaslav seemed to double down on this POV during the earnings call, when he justified killing CNN+, CNN’s only streaming product, in the crib: “We see live news as critical to the linear pay-TV service.” Linear Pay TV will lose 8 million subs this year. It will lose 20 million subs in the next 3. How is making that model central to a long term plan a good idea?
While 91 million D2C subs (growing to 140 mil) combined between Discovery+ and HBOMax et al, puts Disco Bros in a strong position among its competition, the graph clearly shows how far they are behind Disney and Netflix in making it into a real business - especially with Disney+ and Microsoft bringing ads to these services in 4Q. What’s more, While WBD nearly doubles Paramount’s D2C revenues, The Disco Brothers DO NOT have any FAST products to compete with Paramount’s PlutoTV, which will likely do $2 billion in advertising in 2022; nor do they seem intent on creating a real streaming product for CNN, just as ABC, NBC and CBS (Disney, NBCU and Paramount) have created strong FREE streaming News products in FAST with national and local content.
While it may be unfair to compare WBD’s ad revenues to Amazon and YouTube, what Zaslav seems to fail to realize: That’s precisely who Warner Brothers Discovery is now competing with for the fastest growing segment of the ad economy: CTV. To put a finer point on this, Amazon and Apple are BOTH going all-in and directly head-to-head with WBD in one of Warner Media’s supposed core strengths: Sports. Turner Sports was a major player in the genre for decades. In the past year, NBCU, Disney, Apple, Paramount and Amazon have all upped their sports game, leaving WBD playing catch up, ion what will be one of the most important segments in the impression based ad economy.
And this goes to the heart of the issue for WBD coming out of their first earnings call - and why “the street” reacted as it did…
WBD announced that they would be combining HBOMax and Discovery+. They announced that they would be sharing content across the two services in the build up to the 2023 combo. They talked about how this will save money. Zaslav also talked about the importance of movie theaters, and pay tv; the importance of getting paid for subs, not just scale.
But combining those two services will be VERY HARD. Technologically speaking, it’s a huge lift, especially since both companies’ tech stacks are simply terrible. It will cost a fortune. And that is the easy part.
Combining those two services, and combining the programming, ad sales, distribution, engineering, tech stacks/teams are hard AND costly things to do - especially while investing in programming and marketing that will grow your business and compete with the largest media companies on earth, and the largest companies in the history of mankind - while simultaneously cutting $4 billion in overhead.
WBD offered little reason WHY 1+1 = 5. Zaslav focussed heavily on traditional media, and “efficiencies.” Their general plan seems to be: “run it better.” But they provided little or no insight on WHY DiscoMax is now better built to go head to head with Netflix and Disney on subs; HOW they compete with PlutoTV, Hulu, Amazon and YouTube on ads; HOW CNN (which is bleeding viewers) can possibly adapt to win new generations of audiences; HOW these two VERY different audiences will actually compliment each other… But they did make it very clear they will cut costs.
Cutting overhead is a plan, but it is not a vision. Mashing up these two venerable brands, and massive overhead stacks may make sense on paper. But building a NEW media flywheel out of two OG media companies will take much, MUCH more than scalpels and glue. It will take vision, and a LOT of capital. Like, A LOT.
Yesterday’s Disco Brother’s earnings call spooked investors because WBD seems to want to spend little of the latter and, so far, far too little of the former.
Enjoy The Weekend!
ESHAP
Insightful and very clever vision. Cutting costs doesn’t seem going towards innovation unless is to save all that money for new technologies to attract
(And keep) subs/viewers to really compete on CTV and in parallel develop the required Ad tech infrastructure. Challenging times at the Streaming wars (meta) universe…something by the way no one seems to yet explore.