Will the merger of WarnerMedia with Discovery give it the scale to compete globally? Kate Bulkely considers what impact it will have on the media landscape and how competitors will react.


Mare of Easttown: One of HBO’s latest hits

Source: HBO

The recent decision by AT&T to spin off and merge its WarnerMedia unit with rival Discovery took many in the industry by surprise.  

Yet, the creation of the second-largest media company in the world by revenue after Disney, is strategically unsurprising. In the global streaming race the only way to compete is to be big. Scale is the name of the game. 

The new, as yet unnamed company that results from the combination of WarnerMedia with Discovery will be led by long-time Discovery chief executive David Zaslav.  

It will house brands ranging from HBO, Warner Brothers and CNN to TLC, HGN, Game of Thrones, Wonder Woman, Sesame Street, The Food Network, Eurosport, Harry Potter and the Olympics. Out of the gate, Zaslav says spending on content will be around $20bn annually, which will rival what Netflix spends on content.  

The new company will carry $55bn of debt and the combination of Discovery with Warner will have an enterprise value of $150bn. Zaslav predicts that the new company will grow from a combined $41bn in annual sales to $52bn in revenues by 2023. 

But even as big as the new Warner/Discovery company will be, Netflix and Disney today each have valuations in excess of $225bn. So, one nagging question many are asking is if the new WarnerMedia/Discovery hook up is big enough?  

“This deal is definitely the legacy media players fighting back,” says Mathew Horsman, joint MD at consultancy Mediatique. “This is all part of seeing off Netflix, the disrupter par excellence, and the pattern of bulking up will continue.” 

Indeed, only this week Amazon offered $9bn to buy MGM. And Lionsgate and AMC are still considered acquisition targets. ViacomCBS and Comcast’s NBCUniversal as well as Apple could also be looking to bulk up. 

“This deal is the legacy media players fighting back,” Mathew Horsman, Mediatique 

Before the announcement of the WarnerMedia/Discovery deal Zaslav often described how Discovery fit into the pay TV landscape saying there was “news, sports and us”, the ‘us’ meaning Discovery.  Discovery has been the champion of low-budget, unscripted TV fare that travels well and has a long shelf life. Combining it with WarnerMedia’s world-class news and Hollywood film units as well as world-class premium scripted TV service HBO should allow the new company to be a contender against any direct-to-consumer (DTC) offering out there.  

David-Zaslav Discovery

David Zaslav 

WarnerMedia boasts many brands form Cartoon Network and Adult Swim to TNT, TBS and CNN, but the crown jewel within the company is HBO. With HBO Max, the company’s DTC offer, gaining momentum in the USA, a pure-play media company will help the market value the business more easily than when it was buried inside the much larger AT&T. The combination with Discovery+  will make the new, combined streaming service “a much broader SVoD platform for in the US and around the world,” opined equities analyst Michael Nathanson of MoffetNathanson in a post announcement research note. “WarnerMedia could also benefit from Discovery’s international cable networks and (this could) help accelerate HBO Max’s international rollout,” he added. 

The impact of a combined WarnerMedia/Discovery in the UK, Germany and Italy will, however, be somewhat different. Unlike in the US, Canada and the Nordics, where HBO has built a standalone brand presence, in the three countries where Sky has a presence there are existing content distribution agreements that are thought to continue until 2024/25. HBO content is part of the Sky Atlantic channel in the UK, for example.  

The big question for the new WarnerMedia/Discovery is what does it do now in these countries and what does it do after 2024/5?  

“It is unlikely that the new combined company will pay the penalty to get out of those existing content distribution agreements,” said Horsman. But might the new company offer a slimmed down HBOMax/Discovery+ SVOD offer in the Sky territories? Perhaps but that also might undermine the very brand power the combination is hoping to achieve in three key European markets.  

The new combined streamer will also have an impact on companies like ITV Studios and BBC Studios, both of which sell content to Discovery and to WarnerMedia.   

Suddenly there are no longer two buyers but one. “The consolidation of the buying points will have a knock-on effect to the studio model, such that it is in the UK,” said Horsman.  

Broadcasters are already feeling the brunt of having their principal content suppliers favouring their DTC services. There is bulking up happening there too, most recently with the announcement that in France, RTL-controlled M6 will merge with rival commercial broadcaster TF1.  

Three years ago when AT&T bought Time Warner for a staggering $80bn it had hoped to build a challenger to Netflix and Disney. The idea was to grow the content business and leverage its telco network to be a streaming TV contender. Alas, AT&T struggled to invest both in its core telecommunications business, including building 5G, and also prioritise investment in its film and TV production units.  

Seeing a big telco fail to grasp how to manage and invest in a content company is not new. Verizon Communications agreed to sell Yahoo and its other media assets to Apollo Global Management for $5bn earlier this month so the telco could focus on its core network business and 5G rollout. The sale is another dramatic U-turn for the wireless company that between 2015 and 2017 spent nearly $9bn to acquire Yahoo and AOL to anchor an online media division.  

Recently, BT put its BT Sport business under strategic review and interested buyers or partners reportedly include DAZN, Amazon Prime, ITV and Disney. Not only is the business of acquiring live sport rights expensive and out of BT’s core area of business but the original idea of using a live sport offer to compete with Sky for subscribers largely disappeared once the UK regulator decreed that English Premier League football should be accessible to viewers without having to pay for two separate services.  

It is almost taken for granted that telcos are not good managers of media assets. Certainly, there seems to have been a big mis-step made by AT&T in regards to who it hired to manage the transition of WarnerMedia from its traditional way of doing business where strict P&L silos separated the film, pay TV and free TV businesses, into the world of streaming services.  

A tech-minded, media outsider, WarnerMedia’s outgoing CEO Jason Kilar was brought in by AT&T CEO John Stankey only 10 months ago to shake things up. There is a certain amount of schadenfreude in the fact that the man who took a hatchet to the traditional Warner Media structure including cutting many long time, senior executives, is now negotiating his own exit from the company.  

wonder woman 1984

Wonder Woman 1984: The decision to not charge streamers extra lost WarnerMedia billions

Perhaps Kilar’s audacious decision last year to throw out the century-old theatrical distribution model was part of the whiplash that is seeing him head for the door. In December last year, Kilar announced that the entire 2021 Warner Bros film slate of 17 films would be released simultaneously in cinemas and on the HBOMax streaming service.  

While Disney had decided on a similar simultaneous release for its fantasy action drama Mulan, the difference was that Disney+ subscribers had to pay an extra $30 for the privilege. Kilar decided that no surcharge would be applicable for Warner Bros films, starting with Wonder Woman 1984 which became available to HBOMax subscribers for no extra charge on Christmas day 2020. At the time, one analyst said the decision would lose Warner Bros as much as $1.2bn in global box office revenue.  

As the move to DTC services continues, the stakes could not be higher for legacy media companies and advertisers, too. The pivot to streaming video services by audiences is taking its toll on linear channel ratings and the move by broadcasters to their own VOD services is a work in progress.  

The pressure is mounting as the big legacy media players continue to adding free, ad-supported VOD (AVOD) services to their streaming offers. The latest is HBOMax, which announced a $10-a-month AVOD tier on May 19th, only days after the WarnerMedia/Discovery announcement. The new ad-tier will include much of WarnerMedia’s content library but significantly users will not have access to the Warner Bros’ same-day premiere films.

Netflix and Disney+, with 208m and 104m subscribers respectively, are the kings of the SVOD streamers. The rest of the pack, including AT&T’s HBOMax at 44m subscribers, NBCUniversal’s Peacock service at 42m subscribers and Discovery+ at 15m are all playing catch up. The combination of HBOMax/Discovery+ puts the newco at 59m subscribers and if Zaslav has his way the combination of programming and brand assets will spur faster growth. 

But the rest of the industry is not standing still. AT&T’s CEO John Stankey told reporters and analysts when the deal was announced that he expects there will be more consolidation to come. “We…( wanted to) initiate that rather than have to follow it,” he said.   

Whatever the name of the new combined company turns out to be – ‘Warner Discovery’ and ‘Warner Bros Discovery’ are said to be among the contenders – there is still much to be done to make sure it resonates with customers enough to both attract their attention and a share of their wallet.