Early Monday morning, AT&T announced a sudden change in direction: it reached an agreement to spin off WarnerMedia — the conglomerate of Warner Bros., HBO, CNN, DC Comics, and more — into a new company to be merged with Discovery. While Discovery’s roster of the Cooking Channel, Travel Channel, and Food Network is a whole lot less exciting than WarnerMedia’s lineup of Batman, Harry Potter, and Game of Thrones, the combined company brings together the components needed to build a new streaming giant. And it’s already clear that this new Discovery-Warner hybrid has Disney in its sights.
“It’s a combination of bulking up both sides of the business, creating a more compelling direct-to-consumer offering for HBO Max or Discovery Plus,” Neil Macker, an equity analyst at Morningstar, tells The Verge.
WarnerMedia has done well so far. Its streaming platform, HBO Max, hit 64 million subscribers a year after it launched. But it’s only around half the size of Disney Plus (which is about a year and a half old) and a third the size of Netflix. And AT&T, it seemed, didn’t have the sustained interest to see it overtake them. AT&T CEO John Stankey told Squawk on the Street on Monday that WarnerMedia needed a home where shareholders would be willing to “take that ride” to see the company grow as big as it could.
The basics of the deal make sense for AT&T. A telecom company was never going to do a stellar job running a media arm (see: Verizon and Yahoo, AOL and Time Warner, the Snyder Cut), and it can use cash from the sale to help build out its still very-much-in-the-works 5G network.
But WarnerMedia may be the bigger winner. It gets out from under the rocky leadership of AT&T, and it becomes the star of the new business. It’s a far bigger company than Discovery, with $30.4 billion in 2020 in revenue to Discovery’s $10.7 billion. And Discovery is ready to spend big on content to let WarnerMedia match its rivals: it’s planning to put $20 billion per year toward content, a number rivaling Netflix ($17 billion) and exceeding Disney (which plans to hit $14–16 billion by 2024).
Even before the new investment, the companies’ combined content library offers advantages for both sides. The new company will bring together WarnerMedia’s roster of pop culture phenomena — the types of major shows and movies known to drive signups — with Discovery’s deep well of reality shows, which “do well on streaming platforms,” Macker says, and tend to be useful for retaining subscribers.
In interview after interview this week, Discovery CEO David Zaslav mentioned WarnerMedia’s big properties — Game of Thrones and Sex and the City came up a lot — and praised the fact that the company had the rights to show those titles themselves. The combined company won’t be entirely at the whims of ever-shifting content deals that can make top titles vanish from streaming services month to month, and it can guarantee a steady roster of hits, much like Disney Plus offers.
“The other thing we have that some of those companies don’t have,” Zaslav told CNBC, is “great, great IP.”
That’s a significant leg up on Netflix, which doesn’t have a long list of iconic properties. And it’s hard not to hear Zaslav taking aim at Disney when he tells Bloomberg that the acquisition “makes us a real formidable global IP business to compete with the best in the business.” (Already, the former head of Disney Plus has been rumored as a contender to run the combined company.)
Zaslav’s goals are big. On CNBC, he discussed hitting “2-, 3-, 400 million homes over the long term,” a number that would double what Netflix has today.
There’s more to that plan than just building an enormous Disney Plus competitor. Across the TV and film industry, revenues are starting to shift to streaming. But Discovery still has a huge TV business that it plans to keep growing. The company has been working to expand its news and sports channels throughout Europe (Zaslav suggested CNN could play a part in that), and the addition of WarnerMedia’s shows and channels will let Discovery “super-serve advertisers” and sell its content as a bundle on cable, he said.
Macker says that’s the same strategy Disney is taking: using its existing successful businesses — in Disney’s case, ESPN, movie studios, and soon, theme parks once again — to build out its next area of growth. “All those parts generate cash,” he says. “You’re investing in direct-to-consumer for long term growth.”
WarnerMedia and Discovery still face serious challenges. Most immediately, it seems likely that WarnerMedia could face a leadership vacuum while the deal is under review, with the company’s CEO reportedly seeking an exit. And while Discovery is eager to build a streaming giant, it ultimately won’t be up to Discovery’s current leadership and shareholders. AT&T shareholders will own most of the combined company, so Zaslav will need to sell them on this investment — an investment that Stankey suggested AT&T investors weren’t sure about.
Mostly, combining the two companies seems to be a bet that the current streaming landscape — with an assortment of large and small streamers — isn’t going to last much longer. Combining WarnerMedia and Discovery is about surviving the crash that may destroy smaller services and emerging stronger on the other side. The two companies aren’t promising to do anything special or unique: they’re just going to do what they’re already doing — but together and bigger. That’s good news if you want to subscribe to fewer services at once, though it’ll be some time before we know if it’ll lead to better shows.