Warner Bros. Discovery Is Built for the Streaming Wars – If It Can Shed Legacy Baggage | Analysis

Much has been said about the immense content vault Warner Bros. Discovery now houses and the advantage it gives the newly merged company in the streaming wars — specifically in the competition with Netflix and Disney. But David Zaslav’s company still faces major challenges, several experts told TheWrap, including $55 billion in debt and a host of legacy cable channels.

Industry watchers have been salivating for months over the potential of marrying WarnerMedia’s HBO and HBO Max with Discovery’s streamer Discovery+ into a powerhouse entity that can compete with front runners Netflix and Disney+ in the streaming wars. The $46 billion merger puts the company in striking distance of its rivals — with a combined 96 million worldwide subscribers for HBO, HBO Max and Discovery’s direct-to-consumer video services, including Discovery+.

In Q4 2021, Netflix’s worldwide subscriber base stood at almost 222 million, and the Walt Disney Company reported 129.8 million subscribers worldwide for Disney+ as of its first quarter of 2022. When combined with Hulu (45 million) and ESPN+ (22 million), Disney’s total subscriber base is 196 million.

“Hypothetically a new combined entity will be a stronger competitor,” Parks Associates analyst and director of research Paul Erickson told TheWrap. “HBO Max on its own merits is already breaking into that third position, squarely in contest with all of the members of the Disney bundle [Disney+, Hulu and ESPN+].”

Analysts say that how Warner Bros. Discovery handles several potential pitfalls, including marrying the competing goals of old-school and new-school businesses and the $55 billion debt it took on with the transaction, will ultimately determine its success. Wall Street will begin to register its own verdict on the company when Warner Bros. Discovery begins trading on the Nasdaq Monday under the ticker symbol WBD.

Many describe the merger as a necessary move for Discovery, which was saddled wIth a fading stable of cable channels and a fledgling streaming service that was only launched in January 2021. ”The addition of WarnerMedia to Discovery isn’t simply adding scripted programming — you’re talking about one of the most successful libraries of theatrical releases in existence,” Jay Tucker, who heads up the Center for Management Enterprise in Media, Entertainment and Sports for UCLA’s Anderson School of Management, told TheWrap. ”Warner doesn’t have shows, it has franchises: ‘Game of Thrones,’ DC Entertainment, the Potter-verse and much more.”

Erick Opeka, strategy officer and president of Cinedigm Networks, echoed the idea that there is streaming potential to be mined as the merger brings a larger slate of potential content under one roof that may put a combined streamer in the running with Disney and Netflix.

However, Opeka told TheWrap that the combined entity will include a large number of legacy cable channels on both sides that don’t easily fit into the company’s streaming-forward game plan.

“[Discovery Inc. is now] the proud owners of the largest portfolio of cable channels of any company, with 32 cable channels,” Opeka told TheWrap. “They are simultaneously a Netflix competitor and an old-media behemoth, which is a very difficult tightrope to walk.”

Opeka is referring to the combined list of channels now under one roof, including Discovery Channel, HGTV, Food Network and TLC — as well as WarnerMedia’s Turner and its myriad of offshoots like CNN Television Network, TBS, TruTV, TNT, Cartoon Network, Boomerang and Turner Classic Movies. Then add to that its region-specific networks and businesses in Latin America, Europe, the Middle East, Africa and Asia Pacific.

For the foreseeable future, the new company will be reliant not just on streaming growth but mostly ad-focused revenue from these legacy channels to service the $55 billion in debt Discovery took on to complete the transaction, Opeka said. And the company will need to begin paying down that debt immediately, with thousands of expected layoffs expected to help in the near term.

“That $50-plus billion debt number is enormous,” Opeka said. “The cash flows to pay that debt back are heavily dependent on the legacy business if you look at the 10 years or more that it may take to pay that debt back. That could be a real challenge to deal with for the company in the coming years.”

And while some see the combined content libraries as a giant goodie bag for a merged streaming service to tap, Opeka said the formula isn’t quite so simple. Cannibalizing the top content and brands from a legacy cable channel creates a “negative flywheel” that can further erode the already shrinking audience for the cable channels that are still necessary to support the company.

That said, Opeka seems to agree with other analysts who don’t see a major downside in combining the two company libraries to create a merged streaming service — although some are taking a more wait-and-see attitude as to whether the troubled CNN+ content will benefit from being packaged into an entity combining news and entertainment programming.

Opeka pointed out that HBO Max has raised its subscriber numbers through award-winning programming and pandemic blockbuster movie premieres, including 2020’s “Wonder Woman: 1984” and 2021’s ”Dune.” Adding a steady diet of Discovery’s “comfort food” reality programming could help stave off churn, when subscribers drop out (at least until the next blockbuster comes along).

Tech and media attorney Matt Bilinsky of Weinberg Gonser fears there’s a potential for “brand misalignment” in bringing together HBO Max’s more sophisticated fare with Discovery’s more down-market reality content. But in today’s streaming world, he said, more is more: “The total market for streaming services and consumer appetite for more content is relatively endless.”

UCLA’s Tucker said that having more options improves the new company’s pitch to consumers. “Of course Netflix and Disney+ have big head starts, but audiences are becoming increasingly aware of the value of streaming platforms and we are seeing significant choices added to the mix, like ad-supported streaming,” he said. ”As more and more subscribers subscribe to something, there is room for a third player to grow a sustainable fandom.”

Peter Csathy, chairman of Creatv Media, is also placing his bet on Warner Bros. Discovery, noting that HBO Max was emerging as a viable contender in the streaming world even before the merger.

“Add brands like CNN into the mix and WarnerMedia is a potent force already,” he said. “Now add Discovery’s intriguing international footprint and second-to-none reality-based content counterprogramming into the mix and now you have a media powerhouse.”

He added: “HBO Max now has a chance to fly… so long as the combined management team gets it right.” Over to you, David Zaslav.

Brian Welk contributed to this report.