Streaming is teed up to be an increasing part of the new Warner Bros. Discovery, but the company isn’t looking to win the content spending arms race as it works to compete and grow subscribers, CEO David Zaslav said on Tuesday’s quarterly earnings call.
First quarter earnings come two weeks after Discovery and WarnerMedia officially closed their merger, bringing together media giants with assets that include HBO, Warner Bros. movie studio, popular network channels like HGTV, TNT, Food Network, live sports, and news with CNN. The merger close was followed by a decision last week to shutter direct to consumer streaming service CNN+ on April 30, about one month after the platform launched.
“We will clearly take swift and decisive actions on certain items, as you saw on CNN+ last week,” Zaslav said.
Collectively, Warner Bros. Discovery now has about 100 million paid direct to consumer subscribers. In the first quarter Discovery added 2 million net paid subscribers, while WarnerMedia under AT&T reported net additions of 3 million for HBO Max.
Bringing the two entertainment companies together means Warner Bros. Discovery has a deep content library to pull from with “the ability to ring any number of cash registers” across theatrical, gaming, premium home video, pay TV and free to air broadcast, Zaslav said.
However, the combined company plans to be disciplined on its content spending as it looks to monetize assets most effectively.
“Our goal is to maximize long term shareholder value and asset value, not just subs,” Zaslav commented. “We will not overspend to drive subscriber growth.”
Strong global IP content was one of four key ingredients he cited as the recipe for long-term success, adding that WBD has “no religion about any one platform or window versus another.”
Streaming gives WBD optionality “that over time will drive our strategic decision making,” he added, calling it a growing and important complement to existing and traditional monetization avenues.
As assets merge, the company plans to create a simplified streaming offering that combines both HBO Max and Discovery+ into a comprehensive platform. There was no update on timing when that will launch.
And Zaslov believes that those with the ability “to produce and control the content IP versus those that just write checks, are positioned to win.”
He pointed to unique advantages of the two content companies coming together, to leverage its large library of TV and film from Warner, domestic and international lifestyle programming from Discovery, and global live sports and news.
“We’re not trying to win the direct to consumer spending war,” Zaslav reiterated. “This strong foundational offering will allow us to invest and scale smartly and will uniquely position us in our drive to become a fully scaled global streaming leader.”
He cited recent successes with The Batman, Ted Lasso, Abbott Elementary, and HBO hits like Euphoria, Barry, Peacemaker and the Flight Attendant.
In the U.S. standalone Discovery’s total revenues were up 7% year over year in Q1 to $1.93 billion. Advertising revenue rose 5% to $1.03 billion and distribution revenue was up 11% year over year to $886 million, driven by the growth of discovery+ subscribers and increases in linear affiliate rates. Net income for the quarter was $456 million. International revenues were up 25% to $1.23 billion, with 5% year on year growth in advertising revenue and 4% rise in distribution revenue.
As Warner Bros. integrates the Discovery and Warner Media assets it’s starting off with a little bit of bad news, as CFO Gunnar Wiedenfels said operating profit and cash flow for WarnerMedia in the first quarter as reported by AT&T were clearly below expectations.
Now it expects WarnerMedia’s portion of 2022 profits will be $500 million lower than anticipated, partially offset by a couple of $100 million positive on the Discovery side of the business, he said.
While still early in the process, Wiedenfels said he remains confident in reaching the combined company’s $3 billion cost savings target.
On the content side, the finance chief is working closely with creative and finance teams to assess Warner Bros. Discovery’s $23 billion annual content spend to analyze the return on investment.
The goal isn’t to reduce spending on content, he said, but to harmonize to “be more consistent and efficient in how we allocate our content spend across the entire global portfolio” to optimize return on investment.
On the marketing side, on which the combined company spends more than $5 billion annually, Wiedenfels said WBD “intends to drive for the highest level of financial discipline here to make sure that every dollar spent is purposeful and measured.”
Options for streaming
As Warner Bros. Discovery looks to serve up one large streaming offer, it plans to leverage multiple models including premium ad-free paid subscriptions, lower-cost ad-lite versions and in some price sensitive international markets a fully advertising-based approach, according to Zaslav.
The ad-lite model it already has in the market has seen “tremendous success and is our highest ARPU product,” he noted. Streaming giant Netflix is considering starting a lower-cost ad-supported tier as it looks for growth opportunities after shedding 200,000 subscribers in Q1.
The discovery+ ad-lite product has very low churn, according to Wiedenfels, who noted the product was doing between 2-4 minutes of advertising generating $5-6 in incremental revenue “and as it scaled, we started to make more.”
And in the direct-to-consumer market, WBD is aiming for broad appeal in bringing together the diverse content holdings of Discovery and WarnerMedia for a differentiated and compelling offer “that’s attractive to everyone the home,” Wiedenfels said.
“Our data says that the more people that use it, the more often they use it, the higher the growth and the lower the churn,” Wiedenfels continued, adding they’re very enthusiastic about taking that lane with the subscription and ad-lite versions.
In response to analyst questions on whether expanding on great HBO content with offerings like news and reality TV makes sense, Zaslav said “it makes every sense” as there’s overlap in what viewers love to watch and having diverse enough content that suites the whole household.
“Our research shows that people who watch [HBO’s] Euphoria, their second favorite show to watch is 90 Day Fiance,” he commented.