Warner Bros. Discovery

Authors

Ben Thompson

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Top Highlights

• Yes, cords are still being cut, especially last year, but the story of cable for the last several years has been the jettisoning of cost-driven subscribers in favor of charging full price for people who actually want linear TV, which, in the long run, means that the linear TV bundle is primarily the sports and news bundle. Warner Bros. is well-placed for this new world, thanks to its combination of sports rights on TNT and TBS, along with CNN.

• Advertising’s Continued Strength

• HBO and Discovery 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].

• 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.

• 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.

• The benefit of coming together is exactly what I noted a couple of years ago: hits may capture customers, but filler content — especially a wide range of it — keeps them

• What you need is a diversity of content for everybody in the home, and they may come in for Euphoria [from HBO], but our research shows that people watch Euphoria, their favorite second show to watch is 90 Day Fiance [from TLC]. Having a diversity of content is a reason why people are spending hours with Discovery+…when you put all of this diversity of content together, there is content for kids, there is content for teens, it’s basically everybody in the family, why would you go anywhere else. We have all the movies, we have all of the library content that you want… If you look at HBO right now, what it really needs is precisely what we have. When they are finished with watching Winning Time, they can go and watch Friends or watch Big Bang or watch their favorite movie or go over and watch Oprah or watch some TLC shows just for fun. So, we believe and we see this in Europe where we tried to offer, we thought that the answer was just to offer niche high quality that you get high-quality shock and all content together with a lot of nutrition, in our case in Europe, together with sport and you offer something that everybody in the family uses, and the churn goes way down, it’s much harder to churn out of a product when your kids use it or your significant other uses it or your mom and dad are watching, but also if you find yourself watching it more often. So, I think it’s precisely why we did this deal. And I think everything tells us that it’s going to make us stronger and more compelling because of the breadth of the quality menu of IP that we have.

• In short, HBO Max plus Discovery+ is a bundle, with all of the attendant advantages that entails (and which certainly did not apply to a standalone CNN+ service). Of course this also strengthens Warner Bros. Discovery’s hand in terms of the linear TV bundle as well

• One of the company’s unique assets is the linear network group, and in 2021 taken together, we enjoyed the number one share in total television total day in all key demos and people 2+. And we have the greatest brands: HG, Food, HBO, Discovery, CNN, NBA, March Madness, NHL, Magnolia, The Oprah Winfrey Network. Our balanced verticals and content genres across scripted, lifestyle, sports and news provide us with significant opportunities to not only cross-promote for the benefit of the portfolio, but also to offer compelling reach and targeting campaigns for our advertising partners.

• US distribution revenues were up 11% year-over-year, largely driven by the growth of Discovery+ subscribers throughout 2021, while linear affiliate revenues were also up year-over-year as rate increases continued to outpace subscriber declines. Our fully distributed subscribers were down 4% as were total portfolio subscribers when correcting for the impact of the sale of our Great American Country network in early June last year.

• When it comes to sports, we’re very careful about sports. And the TNT and Warner team was clever about getting long term rights which we’re going to get a lot of benefit from, but sports are rented and news is scalable.

• The unscripted content that Discovery specializes in is even more scalable, and far cheaper; now, instead of negotiating with cable providers like Comcast for a collection of channels that customers like, but don’t necessarily need (particularly since Discovery+ is an option), Warner Bros. Discovery will be negotiating for a bundle that includes sports and news and filler.

• Those sports rights may eat up a lot of TNT and TBS’s carriage fees; the real money will be made on the extra pennies added to the rest of the channels in the portfolio.

• Secondly, Warner Bros. Discovery can provide a one-stop shop for advertisers across streaming and TV

• In streaming, we have a massive opportunity to reach the widest possible addressable market by offering a range of tiers, all with the most compelling and complete portfolio of content. A premium and attractively priced ad-free direct-to-consumer product, a lower-priced ad-light tier, something we have had tremendous success with and is our highest ARPU product, and in some very price-sensitive markets outside the United States, we can even offer an advertiser-only product.

• The combined strengths of both organizations’ client relationships, advanced advertising, programmatic, sponsorships and direct-to-consumer, ad-light streaming services, all positioned the company with a unique hand. I’ve personally spent quite a bit of time with key advertisers and agencies, and I’m so impressed with the combined capability of our platforms and our ability to uniquely serve the needs of our clients, including integrating sports alongside our broad entertainment offerings.