News kept on churning this week — from Sunday morning until end of Friday — on the Warner Bros. Discovery front.
Headlines included big changes at TCM; The Flash‘s disappointing box office; discussions with Netflix for potential HBO streaming license deals; more chatter around the fate of CNN; renewed talk of a music publishing sale; and a glum industry report on cost cutting.
The flurry, which touched virtually every corner of the WBD universe, came as the company announced it will reveal quarterly financial results on August 3. The report will be the first to provide almost entirely apples-to-apples year-to-year comparisons since the Discovery-WarnerMedia merger closed (on April 8, 2022), ushering in a period of nearly non-stop flux. There have been cost cuts, layoffs and content write-downs in the service of a promised $5 billion-plus in savings. There have been industrywide shifts in the ad market, the box office and the pay-TV ecosystem. And there have been multiple rounds of restructuring.
Fourteen months in, the org chart is still coming into focus. On Friday, it emerged that Turner Classic Movies will be moved under Warner Bros chiefs Michael De Luca and Pamela Abdy. That news followed layoffs at WBD’s cable networks, including high profile departures at TCM that drew a high-profile protest from the likes of Steven Spielberg, Martin Scorsese and Paul Thomas Anderson. The leadership change Friday became public less than two days after CEO David Zaslav held an emergency conference call with the A-list filmmakers. Having film studio chiefs overseeing a cable network is hardly standard procedure at big media companies, but the setup will likely placate the filmmakers and other cinephiles who had voiced displeasure about the cutbacks and what they perceived as an existential threat to TCM.
One longtime company veteran noted the film-focused network still makes sizable margins despite cord-cutting, though it doesn’t run commercials. On many pay-TV systems, it’s on a premium tier, which limits its reach but enables WBD to charge operators accordingly. Half of the company’s Networks division revenue came from distribution in 2022, with advertising making up 43%. A large chunk of that revenue is at risk across the industry. A report this week from consultants at PwC predicted that $30 billion in ad and distribution revenue will be lost by 2027, when pay-TV penetration will decline to just 38% of households (half of the 2016 level). That’s an ominous sign for any owner of dozens of cable networks.
The TCM exec shuffle marks the second time that a network has been removed from the oversight of Kathleen Finch, Chairman and Chief Content Officer for the U.S. Networks Group. Magnolia, the Texas-based venture founded by Chip and Joanna Gaines, also maneuvered its way to a different reporting structure.
Streaming continues to be a major storyline, of course. Deadline broke the news that the company is in talks to license HBO content to Netflix, meaning it will raise cash from its library like in the old days — before every company decided to get in the ring.
This year’s major streaming initiative has been the blending together of HBO Max and Discovery+ in the newly renamed Max. (Discovery+ is still available separately.) WBD told the Street in May that its DTC business would be profitable for 2023 — a year ahead of schedule.
While Max has benefited from Succession‘s series finale and the debut of And Just Like That‘s second season, the service is not as wedded to exclusives as it once was.
The licensing talks, if they yield a deal, would be a major reversal of the previous trend of media companies clawing back rights to titles like Friends, The Office and other signature properties they spent years shopping to Netflix and others for hefty fees. Given the daunting economics of streaming, execs have started to come around to the idea that being flexible on licensing some shows out could be one of those proverbial win-win decisions in business. “Everyone wants to know how anyone is going to make money in the move to streaming,” notes one senior media exec. “It seems utterly logical not to try to lock up everything and have it all siloed. The business prospered for decades with syndication and a waterfall of revenue streams. Getting some notion of that back will only help.”
For much of the past year-plus, since DTC red ink began to terrorize Wall Street, investors have favored more pragmatic moves in streaming. Netflix selling ads just like NBC in the ’50s? Huzzah! Major media companies embracing FAST and licensing to big streamers? Bully for them.
As Rich Greenfield of LightShed Partners tweeted in response to the HBO-Netflix news, “The real question is, when does legacy media exit the streaming wars and just focus on their legacy of being arms dealers?”
A similar crossroads is approaching for WBD in the sports business. The company faces a version of Disney’s dilemma with ESPN. While live, linear tune-in was strong this spring for TNT during the NBA and NHL playoffs, the looming question is whether a long-term commitment to sports is sustainable in the current configuration. NBA rights deals with Disney and WBD are set to expire at the end of the 2024-25 season, and Zaslav has given mixed messages about his plans for a potential renewal.
Cord-cutting is rapidly transforming the sports sector, despite consistent tune-in. WBD, though, has no broadcast outlet or stations to amplify its pay-TV network telecasts. Shifting sports to streaming, as has been hinted at by top execs for years without real follow-through, is also inherently challenging. Unlike ESPN, which has started to send increasing numbers of games to stand-alone subscription service ESPN+, Max isn’t likely to see sports exclusives anytime soon, especially as a general-entertainment service. NBA and NHL fans wanting to stream the action during the playoffs could only do so on the TNT app, which requires a pay-TV subscription.
The costs of sports, and beyond, matters a lot to a company that had $49.5 billion in debt at the end of the first quarter. Debt is by far one of WBD’s biggest issues and it’s been chipping away at it, including paying down as much as $1.5 billion for the current June.
Boosting cash flow is one way to pay down, asset sales are another, which is why it’s having conversations about selling all or part of its film and television music library, which the company is said to value at well north of $1 billion. As with Paramount’s Simon & Schuster, the business is considered non-core. The structure and timing of a deal are not yet clear.
“If there are any key objectives for investors, it’s to see debt reduction, with any acceleration through asset sales welcome,” said one investor. CNN is certainly another big-ticket asset, and speculation has been raised recently that the misadventure with Chris Licht, whose tumultuous tenure ended a few weeks ago, could be a prelude to a sale. Officially, WBD has insisted no such thing is afoot, and the network continues to generate significant cash flow despite its diminishing footprint. But observers familiar with the situation point out that not only would selling bring in billions and reduce costs (and managerial headaches), but it would also position WBD for a long-rumored merger with NBCUniversal, whose news assets could never be allowed by regulators to coexist with CNN.
Jitters over advertising have continued and the next round of earnings calls should provide updates on how things are looking for the second half of the year. Ad sales got rocky last year as the Federal Reserve launched a string of interest rate hikes to dampen spending, slow down the economy and lower inflation, which surged post-Covid. Inflation is down, but not enough for the Fed, which indicated last week that more increases are likely. That does nothing to quell advertiser fears that higher rates will cut into consumer spending or even tip the U.S. into recession, though many economic indicators have bucked the recessionary expectations.
The box office is also complicated. The Flash from Warner Bros./DC (like Elemental from Disney/Pixar) had a disappointing opening this past week and is on track for a second-week plunge of more than 70%. With some dramatic flourish, Doug Creutz of TD Cowen called the numbers “the last straw in cementing our belief that box office attendance will never recover to pre-pandemic levels, or even close.”
The quality level of new releases “doesn’t appear to be the primary culprit,” Creutz added. “The two films simply underperformed relative to their IP and studio pedigree and brand history. Unfortunately, this is consistent with what has generally been a disappointing summer slate.”
WBD shares fell 2.5% Friday to end the week $11.97, up 22% since the start of the year but down from a 2023 high of nearly $16 in February. There may be “a little profit-taking. A reminder that David Zaslav and his team still have a lot of work to do,” said the investor.
“Management has a good narrative as to how they will get to the other side. The question is, can they pull it off?” MoffettNathanson analysts Robert Fishman and Michael Nathanson wrote in a report last month in the wake of WBD’s first-quarter earnings report. The duo called the CEO and his team “prudent operators and relentless in whipping their hefty organization’s financials into shape.”
