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Warner Bros. Discovery

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Warner Bros. Discovery

Courtesy of Ben Thompson, Stratechery

Last week the Wall Street Journal ran a profile of longtime Discovery CEO (now Warner Bros. Discovery CEO) David Zaslav entitled There’s a New Media Mogul Tearing Up Hollywood, adding “Zas Is Not Particularly Patient”. After opening with an anecdote about Zaslav complaining about Warner Bros. backing a Clint Eastwood movie, even though they thought it would fail, the profile states:

Mr. Zaslav, who last month took over the company resulting from Discovery’s merger with AT&T Inc.’s WarnerMedia, has given every indication he wants to be a talent-friendly mogul, schmoozing with industry personalities at the Beverly Hills Hotel. But the 62-year-old cable-industry veteran, a protégé of the late Jack Welch, longtime CEO of General Electric Co., has shown he isn’t afraid to ruffle the industry’s elite.

He and his team have been scouring the company’s books, making it clear spending needs to be reined in. They have abandoned projects they consider costly and unnecessary. That included pulling the plug on CNN+, barely a month after previous management launched the streaming service, and canceling a DC Comics superhero movie in development. He has given an unwelcome jolt to executives in the WarnerMedia empire who were happy when AT&T decided to part with it in the merger, hoping there would be less financial scrutiny—not more…

Mr. Zaslav has few options other than drastic moves. The deal brought the new company—now home of Warner Bros. and cable channels including HBO, CNN, TNT, Food Network and HGTV—$55 billion in debt, and he has promised to cut at least $3 billion in costs. He has given executives a few weeks to provide restructuring and business plans. “We are not trying to win the direct-to-consumer spending war,” Mr. Zaslav said on an April earnings call. On the call, Chief Financial Officer Gunnar Wiedenfels called out the nearly $30 billion the company spends making and marketing content, saying: “We intend to drive the highest level of financial discipline here.”

The profile continued in the same vein, and came across as fairly negative; that is why I appreciated it, because I am otherwise extremely bullish about the potential for Zaslav’s new company.

HBO and Discovery Synergies

I wrote a year ago when the deal between AT&T and Discovery was announced that Warner Bros. and Discovery had excellent synergies:

Start with the cable bundle: yes, cord-cutting continues, but there are still a lot of households with cable, and this new company will have significantly enhanced bargaining power with distributors. WarnerMedia’s combination of live sports, news, premium television, and scripted shows was already quite strong; Discovery brings a highly differentiated set of channels from HGTV to Discovery to Food Network that not only attract distinct demographics, but also are particularly effective at driving advertising.

Another set of synergies come in the two companies burgeoning direct-to-consumer offerings. Once again the breadth of content is a good thing: HBO Max and Discovery+ have something for everyone in the household. The types of content are complementary as well; back in 2018 I explained in the context of Friends:

While most of the Netflix attention is paid to original series, the truth is that there are two types of shows on the streaming network:

  • Original series drive new subscribers
  • “Filler”, that is, content that is there when subscribers simply want something to watch, keeps people subscribed

Discovery content is excellent filler [while HBO excels at original series].

Zaslav and CFO Gunnar Wiedenfels made all of these points on Warner Bros. Discovery’s inaugural earnings call in late April. Start with the second point above, about streaming synergy. Zaslav, in response to a question about advertising (more on this in a moment), brought up the fact that Discovery+ has very low churn:

We’re in the market already with an ad-light product. We’re the ones that were out there very early saying ad-light looks really compelling, because it’s a great consumer proposition. Our users, the churn was very low; we were doing between two and four minutes of advertising and generating $5, $6 in incremental revenue, and as it scaled, we started to make more. And so, we said very early on, we’re going to switch to offer consumers what they want, a lower-priced opportunity with a small number of advertising.

HBO Max isn’t doing so well in this regard, at least according to Zaslav a few minutes later:

We have some work to do on the platform itself that will be significant. But we also think that one of the big opportunities here is going to be churn reduction. There is meaningful churn on HBO Max, much higher than the churn that we have seen. And so, the ability for us to come together is part of one of the thesis here that managing churn, and we’ve seen this because we’ve been added in Europe for eight years, as we begin to manage churn in a meaningful way, that provides a real meaningful growth.

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