- Warner Bros. Discovery faces key challenges as CEO David Zaslav and his new leadership team take over.
- Analysts see hurdles with debt, sports rights cost inflation, and sustaining the cable business.
- Combining the streaming services HBO Max, Discovery+, and CNN+ will pose a branding challenge.
On Monday, the new CEO of Warner Bros. Discovery, David Zaslav, visited the company’s headquarters overlooking the Hudson River before hopping on a plane to meet with CNN’s Washington, DC team. After a stop at Atlanta Tuesday, he’ll appear at a town hall at the Warners lot in Burbank later in the week.
After a year-long listening tour that criss-crossed the globe and involved former Time Warner executives along with some of the most powerful content creators in Hollywood — now comes time for execution.
Warner Bros. Discovery (WBD) is headed to the TV and digital upfronts in May with an enviable basket of riches from
and the movie and TV studio behind “Harry Potter” and “Friends,” along with the sports portfolio at Turner channels and CNN, all combining with the non-fiction programming libraries of Discovery.
The new media conglomerate will take in $11 billion in ad revenue, challenging NBCUniversal for supremacy. WBD has an estimated $50 billion in revenue and $58 billion in debt and a plan to shave $3 billion in synergies from the merger agreement.
“We are confident that we can bring more choice to consumers around the globe while fostering creativity and creating value for shareholders,” said new CEO David Zaslav in the release finalizing the merger. The stock closed its first day up 1.3 percent to $24.78.
Future success will depend on how Zaslav and a management team that has been with him for decades, manage to neutralize the myriad headaches ahead. Here are some of the immediate challenges as they open the doors at their new offices.
Making the case to Wall Street
On Monday, the newly formed WBD, which carries the stock ticker $WBD, won two upgrades from Evercore ISI and Atlantic Equities, with Deutsche Bank’s Bryan Kraft naming it his “new top pick in media.” But Michael Nathanson of independent equity research firm MoffettNathanson stayed neutral. Nathanson noted concerns about the decline of pay-TV running at 5 percent last year, slowing streaming subscriber numbers, and an “elevated debt load and uncertainty around key strategic questions.”
Zaslav will have to convince the Street that the merger was a good idea and that the company can become a preeminent force in streaming while transforming into a business that can show profits. He must do this while protecting the company’s traditional businesses and hope that billion dollar movie franchises are in the works as he fights off rivals for the top sports franchises such as the NBA. Wall Street is also wondering what AT&T shareholders, who now hold 71 percent of the stock, might decide to do with their shares.
In his Monday note, Nathanson cited rising inflation and the possibility of a cooling ad market which could impact linear networks which made up 49 percent of the company’s pro forma revenue. (The studios make up 31 percent of the newly combined pie, while DTC including HBO’s linear business is the balance at 20 percent.)
Managing a massive integration, including synergies and inevitable layoffs
Fixing the mess that AT&T made of the old Time Warner business, which became WarnerMedia under the telecom giant’s ownership, will take time. One executive with insight into Warners’ difficulties under AT&T told Insider, “Of all the mergers I’ve seen, this [was] the most badly managed of any of them.”
Already the Discovery-WarnerMedia merger appears more organized, if equally disruptive: Jason Kilar’s leadership team exited last week and more layers of management will be receiving pink slips in the coming months. Next will come fresh waves of layoffs as the Turner cable channels come together with Discovery’s and other merger synergies — the $3 billion worth promised with the original deal announcement in 2021 — become apparent. Discovery came to the deal with some 10,000 staff around the world, while Warner had around 30,000.
“The most important thing is to get the right team in place … and to execute as quickly as possible to get everybody back to business,” Jessica Reif Ehrlich, Bank of America Securities managing director, US Equity Research, told Insider. She sees potential savings on real estate and at the cable channels, including at CNN, where hundreds of executives were just hired to launch a new streaming news service, CNN+.
The person familiar with Warners’ challenges under AT&T said that well beyond the initial shift of ownership, executives were left hanging not knowing what budgets were, who they were going to be reporting to, or what was going to be cut. “They lost a lot of people they wanted to keep hold of. They demoralized people en masse.”
“There are business planning rhythms that need to be harmonized; that’s everything from back of house systems like payroll, health benefits, compensation structures, vacation policies,” said another media executive with experience working through numerous mergers. “All this mundane stuff can be a gargantuan distraction in addition to all of the front-of-house business planning. It’s going to be a heavy lift.”
Getting the new direct-to-consumer offering right
WBD’s head of streaming, JB Perrette, is considering bundling the various direct-to-consumer streaming channels into one offering for consumers, with new pricing. A year or so from now, according to people familiar with the company leadership’s thinking, there’s a plan to combine all programming into a single app.
One executive who’s a merger veteran told Insider that getting streaming right is critical. “The first thing to solve is the three streaming services: Discovery+, HBO Max, and CNN+. They need to come together and from a technology and content perspective — it’s going to be a lot of work and create a lot of pain.” And there are some still-unanswered questions about where any content from the Turner cable networks will sit in a streaming-first universe.
WBD management is also considering fresh new branding for the prospective all-you-can-eat offer, according to a person familiar with conversations. Will that result in the HBO name disappearing inside a bigger brand?
“Discovery, the majority of their content is a massive library of owned assets, most of which doesn’t have profit participants,” the executive noted. “HBO is on the other end of the spectrum. With scripted TV and film, there are a lot of different deal dynamics at play.”
Reif Ehrlich wonders how the new team will approach content management, which involves deciding which shows go to streaming or cable. She’s wondering if there will be a new executive named with a remit similar to that of Disney’s Kareem Daniel, who is the chairman of Disney media and entertainment distribution division and reports directly to CEO Bob Chapek, or NBCUniversal’s content chair Susan Rovner, who leads original content across broadcast, cable, and streaming services.
“So many of the challenges they face are the same as any two big companies coming together and those are the challenges of mass and the mechanics of the business,” said Mike Bloxham, executive vice president global media and entertainment at Magid. “A lot will depend on how they blend those two cultures.”
Rethinking the theatrical-to-streaming movie window
Former CEO Kilar shattered a lot of glass with an aggressive windowing strategy that put all of the company’s 2021 films, including “Wonder Woman 1984” and “Dune,” on HBO Max the same day they hit cinema screens which were mostly empty because of the pandemic. Zaslav has cultivated theater owners and spoken about his commitment to the box office. But can he keep them happy while also shrinking the window?
Warner’s hit “The Batman” movie is coming to HBO Max on April 18, when it will still be playing on big screens. LightShed Partners’ Rich Greenfield highlighted the huge change versus the pre-covid era, with “The Batman” spending just 44 days in theaters before heading to streaming. Previously consumers waited three months to rent or buy a film, and five to six months to watch it via subscription video on demand. “This is a huge change for the movie industry,” Greenfield said in a tweet.
“COVID appears to have permanently altered the theatrical to streaming window, with streaming leapfrogging in front of home video sales/rentals at Warner Bros and other studios,” Greenfield told Insider. “[It] will be interesting to see if Zaslav and the Warner Bros. Discovery team maintain this strategy or seek to reverse it.” WBD has committed to maintaining the 45-day window through 2022.
Sports battles to come
The new Warner Bros. Discovery has significant sports rights, housing the Olympic Games in Europe along with PGA golf and English Premiere League soccer in the UK via a proposed new joint venture with telecom operator BT — plus basketball, baseball, and hockey in the US through WarnerMedia’s Turner Sports. Turner’s TNT just wrapped NCAA’s March Madness, which drew an average of 10.7 million viewers across multiple broadcasters.
But looming on the horizon is a renewal of Turner’s NBA rights agreement. The NBA is likely eyeing fresh partnerships just as the NFL has done.
The cost of renewing the NBA vs. the cost of losing it will weigh heavily on WBD management. “Turner’s NBA rights agreement is set to expire after the 2024 season. We now include a base case (albeit likely conservatively) of Turner renewing these rights at double the current annual average value for another 9 years, implying over $21 billion in total contract value,” Nathanson wrote in his investor note.
A Warner Bros. Discovery spokesman declined to comment.