Warner Bros. Discovery turned a corner in the fourth quarter as streaming losses started to narrow, with much of the company’s heavy lifting on rationalizing it content portfolio and merger integration behind it. Now the media company is focused on free cash flow while building a profitable streaming business and monetizing its full portfolio of content through whatever avenues make sense, with executives pointing to a multi-prong approach including licensing and leaning into the free ad-supported streaming TV (FAST) space.
In Q4 WBD’s direct-to-consumer EBTIDA losses narrowed to $257 million – a $500 million improvement from Q3 EBTIDA losses, helped by DTC net subscriber gains of 1.1 million in the quarter. WBD CFO Gunnar Wiedenfels cited confidence in WBD’s ability to reach long-term targets to breakeven in the U.S. in 2024 and reach $1 billion in profitability in 2025 globally on the DTC side.
Aside from its forthcoming combined HBO Max and Discovery+ product (more on that below), that also means gaining a larger foothold in the FAST space.
Asked by analysts about its FAST strategy, Wiedenfels on Thursday said WBD’s windowing strategy isn’t 100% defined or static as the environment evolves, but noted it has distribution assets across every form of media including premium, pay TV, free-to-air, theatrical, streaming, licensing and gaming.
“Having all those distribution outlets gives us the optionality to look at what the data shows us and see where we need to lean in further or not,” he said during the earnings call.
FAST is one area he said WBD is looking at as it watches consumer behavior evolve from free-to-air to free-to-view.
“We don’t yet have, we think, a strong enough position yet in that market,” Wiedenfels said of the FAST space.
The first and most recent step in that direction was FAST deals with Fox’s Tubi and The Roku Channel, which included over 225 AVOD titles and over 2,000 of hours of on-demand content, alongside branded and other linear channels.
The finance chief noted that Roku and Tubi deals were “really just a toe in the water…a beginning for us” in FAST. There will be more to come throughout 2023, he added, saying “we do want to have a bigger presence in that space,” while also indicating FAST could be an avenue for international expansion and content monetization.
“We do see consumer behavior continuing to shift and having a very robust amount of consumers around the world who will want to consume ad-supported content,” Wiedenfels continued.
With a wide breadth of content, he said WBD believes its uniquely able to do that without risking the subscription or theatrical business.
When it comes to which content WBD keeps exclusive versus putting on other platforms, WBD is being selective in picking content that isn’t critical to subscriber growth or churn, according to CEO David Zaslav. It can have content appear on its own platform and also sell it non-exclusively to others, something Zaslav said “is very economically beneficial” such as licensing titles that are less-viewed, or older seasons of hit shows that could pique viewers’ interest and encourage them to one of WBD’s paid services to watch new seasons.
For example, he said in reviewing content, they found that most viewership on HBO was only focused on 40% of the content, “so there was 60% that was hardly being viewed” and that WBD wanted to monetize to drive shareholder value.
And Zaslav pointed to the three elements of an ad-free premium offering, an ad-lite adoption, and again confirmed that WBD “ourselves will run our own FAST service” – without providing timing or other specifics.
It would be the latest media company to do so as Fox already has its Tubi FAST and Paramount has Pluto TV(while NBCUniversal made counter move recently when it stopped offering a free tier of Peacock to new subscribers, though parent Comcast has FAST service Xumo Play).
And with a robust library of TV and film, WBD “can create a Tubi or Pluto without buying content from anybody, by just being able to put it on ourselves,” Zaslav added.
Putting content on a free service also helps fuel the flywheel effect. Zaslav noted once a funnel is established WBD could put earlier seasons of shows like “Succession” on its own AVOD service – with the idea that if people like it then they bump up to pay for an ad-lite or ad-free subscription.
“Basically we create a flywheel of our own, where we own the full ecosystem, the subscription, the ad-lite and the ad free. And we take advantage of all the content we have.”
For now, WBD is also zeroed in on profitable scale and shifting to a mindset of quality over quantity, as it looks to offer a robust lineup of premium content across distribution channels.
On that front, WBD will be leaning into franchises as it focuses investment, including in DC Studios with a multi-year plan across film, TV and animation. The WBD TV Group has more than 110 shows currently in production across its own platforms, as well as third-party broadcast, cable and streaming outlets.
In a note to investors, Macquarie Research analyst Tim Nollen said WBD has made logical decisions on the revenue and cost sides when it comes to content, and others are following suit.
“WBD has made rational decisions on the revenue side, such as what content to license to linear and FAST channels…vs. what to put on its own streaming services,” Nollen wrote in a February 24 note. “On the cost side WBD has been decisive on what content to prune – a strategy most peers are now copying, while investing in core franchises at WB TV studios and DC, which has 5 films & 5 TV series on the way.”
On the traditional linear side, executives noted WBD renewed agreements representing 30% of its U.S. affiliate revenues in Q4.
Discovery+ stays a standalone service
During the earnings call executives also confirmed earlier press reports that Discovery+ will still be offered as a standalone service once the combined HBO Max/Discovery+ product launches in the U.S. this spring, followed by a debut in Latin America, and EMEA and APAC launches in 2024.
Speaking to the rationale for continuing to offer Discovery+ as a standalone, Zaslav said that for current subscribers, churn is very low and its profitable. Still, he thinks many will want to move up to a broader combined offering that also includes HBO content, but WBD wants to keep existing subs happy.
“For those that are happy paying $5 or $7 and having home, food, Discovery and own type content. Our strategy is no sub left behind,” he commented. “We have profitable subscribers that are very happy with the product offering of Discovery+, why would we shut that off.
He added the platform for Discovery+ will still be a shared one, providing benefits to all subscribers of the new product its building. And Discovery content will still be available on the larger combined product “no question about that,” Wiedenfels said.
Asked by an analyst about the right general entertainment strategy, Zaslav emphasized WBD’s diversity of content.
“And as we think about where we put content…looked at HBO, we were able to see which content are people spending time watching, what content is really powerful to us in terms of reducing churn,” Zaslav said. “And then there was a lot of content that just wasn't being viewed”
In that regard, he said they also determined direct-to-streaming movies weren’t providing any value to the company and fueled the decision to put films back out in theaters with real windows to optimize the assets. Executives also suggested that dropping full seasons of series isn’t the way to go, instead driving conversation and cultural relevance with week-to-week episodes such as recent hit “The Last of Us.”
During the call WBD leadership reiterated that content is complementary across HBO and Discovery, with the latter watched more passively and HBO more of a communal family viewing experience.
“The more research we do, the more we look at it, the more we think these fit together very well with appealing content to everybody in the family,” Zaslav said.
WBD is scheduled to lay out more detailed plans for the new combined service and product launch on April 12.
“That HBO Max, whatever we call it on the launch, is a product that we take around the world and that has a real impact on how people consume content,” Zaslav said. “We believe in it because we believe we have the best menu of content, the best portfolio, the best quality.”
And bringing content together under one umbrella is something it thinks consumers getting burdened by subscription stacking will appreciate.
“At the end of the day, the consumer is at a point in time where they want more choice and better breadth of choice from fewer services, because they just don't have either share of wallet to be able to spending on five, six, seven services anymore,” said JB Perrette.
Q4 tidbits
As for the fourth quarter, WBD grew global subscribers by 1.1 million to reach 96.1 million, which it said was helped by the return of HBO Max on Amazon Channels in December. Average revenue per user (ARPU) was up 1% from the prior quarter to $7.58. Executives noted that a $1 price bump to the HBO Max ad-free service in January (which didn’t impact the fourth quarter) has had little effect on churn. Still, the company but continued to feel larger industry impacts including in the ad market. In its networks business revenue declined 6%, impacted by a 14% drop in global advertising revenue alongside a 2% decline in distribution revenue. Total Q4 revenue decreased 9% to around $11 billion, Adjusted EBITDA of $2.6 billion was down 2%. Free cash flow increased to $2.48 billion in the quarter.
WBD also increased its estimate for cost savings by around $500 million, now targeting at least $4 billion in savings largely achievable through 2024.