I’ll admit that, for as much as I hate mergers, I have a case of the M&A musings. Certain stories are so big, that one article or even two “most important stories” of the week won’t do them justice. The mash ups of Discovery, Warner Bros, AT&T, Amazon and MGM—not in that order—fit the bill. It’s As earth shattering as any story since Disney bought 21st Century Fox.
So pardon me if I linger on the “mergers of May” just a pinch longer. In two previous articles I explained the Discovery-Warner Bros merger and Amazon buying MGM. Today, we’ll start with this question:
What will happen to HBO Max, Discovery+, and all the cable assets?
This is possibly the most important question yet, since it could set the terms of future streaming bundles going forward.
(Sign up for my newsletter to get all my writings and my favorite entertainment business picks from the last 2 weeks or so.)
Whither HBO and Discovery+ (and ads/CNN/Sports)? Discovery has 3 Options
Imagine you’re an upstart reality cable company with a growing streaming subscription service you launched just this year. You manage to wrest Warner Bros.—one of the top three movie and TV studio—from AT&T, paying a fraction of what AT&T paid for it. Yet, AT&T and Warner Bros. spent the last few years launching HBO Max, a supercharged HBO subscription service.
What do you do with your formerly competing, now friendly, streaming services?
To figure that out, let’s first determine the types of streamers out there. In the past, I’ve seen folks put streamers into “tiers” by the number of subscribers. And while I love that—and will do that in the future too—the better definition is the type of content a streamer offers. I see three tiers:
If you’re curious, here are some streaming examples of each, some of which are no longer with us…
With this terminology, let’s define the assets owned by the newly combined WB-Discovery. HBO Max is “broad”, proven by their slide from their investor presentation with lots of dots for every customer. As broad as Discovery+ is, really it is the best of reality TV in one place. CNN, when it launches a streamer, will be a niche product for news. Same for whatever the new entity decides to do for the sports rights TNT and TBS own. I’d add that Discovery has a joint venture with Hasbro for Discovery Family and Warner Bros has an extensive kids brands, with Looney Tunes and Cartoon Network. (And, previously, the Boomerang streaming service.)
Strategically, WB-Discovery has three options to integrate this amalgamation:
1. Change nothing. Keep selling each service separately. (“A la carte”)
2. The “Everything Store” option. (Make a new service to hold it all.)
3. Sell a new “bundle” with HBO Max, Discovery+, and news and sports.
What WB-Discovery decides will dictate a lot about how the streaming wars are trending. Notably, since this is an age of disruption, the traditional studios, upstarts and Big Tech interlopers have all taken different approaches:
WB-Discovery has those same choices to make right now. And each option is on the table. Let’s discuss each, in order of least likely to most likely, based simply on my judgement.
Option 1 – “A La Carte” or Niche
Examples: Starz, Showtime, Amazon (kind of), Discovery+, Smaller SVODs
Are you sick of paying for sports you don’t watch? The host of a major entertainment podcastcomplained about this problem repeatedly. When cord cutting first started, this was the dream. Only subscribe to what you want! As a result, while we focus on the top handful of streamers, there are hundreds of smaller streamers focused on various niches of programming.
Indeed, every few years, someone in Congress would propose reforming the cable bundle so that folks could buy cable channels a la carte. But it never happened, because the economics are fairly poor and the cable industry has great lobbyists. Frankly, the bundle can be both a better value for customers and for companies. Hence, cable fought like hell to keep it. And likely some form of bundling will come to streaming.
This approach makes less sense for WB-Discovery, because it still has streamers to launch. Specifically, whatever CNN decides to do and whatever they decide to do with both their US sports assets (TNT and TBS have rights to NCAA Basketball, MLB playoffs and the NHL) and international assets (Discovery International has a few sports assets overseas).
It is unlikely that David Zaslav bought Warner Brothers and HBO simply to not change anything or benefit from his new found size, especially since launching new streamers is tough. An “a la carte” approach doesn’t leverage their new size/influence enough. So next option.
Option 2 – “The Everything Store” or Broad
Examples: Netflix, Paramount+, Prime Video, Peacock, HBO Max
I named this option after Amazon, specifically Jeff Bezos’ goal to be “the everything store”. That’s how I’d describe many streamers ambitions too; they want to be everything to everyone.
Ironically, Amazon doesn’t really offer one streamer that is an “everything” store for customers. Some TV viewing is ad-supported via IMDb TV, some is subscription streaming via Prime Video, some sports are on Prime Video, but other sports are on their channel. Indeed, Amazon Channels—where Amazon sells Fire TV users and Prime members additional streaming subscriptions—is arguably the biggest driver of “a la carte” subscriptions going.
To define a “broad streamer”, I mean a service with feature films, kids content, cheap reality, buzzy scripted originals, maybe sports, maybe news and multiple genres of film and TV, with no one specialization. Only the truly big conglomerates can pull this off. Or…
Netflix. Netflix pioneered this approach, and as the market leader, they were able to parlay this into a huge stock price, which drove a huge content spend. Those last three words are key to this strategy, “Huge content spend”. That content spend delivers thousands of hours of TV and films, making the $14 monthly subscription (in the US that’s the mid-tier price) worth it.
Could the new WB-Discovery match Netflix in an “all in one” offering? Sure. Between the Warner Bros movies, HBO Max series, Warner Bros TV library, CW offerings, Food Network, HG TV and everything else offered by Discovery, plus CNN and sports? That’s nearly all you could want in one place.
The upside is that WB-Discovery wouldn’t need to get customers to download new applications for their news and sports. They could simply add that functionality with a new interface and voila, they’re there.
The tricky part is how you handle raising prices for this new bundle or for the new sports and news offerings, which is why I’m a pinch skeptical it happens. Is WB-Discovery ready to convince customers that a new “Discovery HBO Max+” is worth, what, $20 a month? I don’t see it.
To a finance mind, then, merging services, especially if subscribers overlap, feels like giving more content for the same revenue. Same for adding sports and news: you’re adding value to your bundle, but won’t see the returns for years in subscriber retention. Does WB-Discovery have the patience for that?
Moreover, the recent newly launched broad streamers haven’t lit the world on fire. Peacock offers everything, the same way a WB-Discovery streamer could, and it has probably not met expectations. HBO Max was also super broad, and then AT&T went and sold it.
Toss in the clear difficulties of merging separate streamers anyways—look to Disney and Hulu for some of that—and I could see WB-Discovery opting for something else. Though this option is absolutely on the table.
Option 3 – “The Bundle”
Examples: Disney+ in the US, AMC+, formerly Apple TV+/Showtime/CBS All-Access
Here’s the other option: you keep offering large streaming services, but bundle them together under one price. This tactic was arguably the biggest driver of Disney+’s early growth in the US. (They don’t offer a bundle internationally, but bundle Disney+ with the “Star” brand.)
I’d expect more bundles in the world, except for the fact that few traditional studios have multiple streaming services worth the effort. Essentially, most traditional studios have one streamer, or at most two. And the one traditional conglomerate with two streamers—ViacomCBS—did try to offer a bundle via Apple.
That deal is illustrative. Bundles operated between different studios are tricky to negotiate in advance. For it to work, the studios have to agree how much to discount their various services. Can you imagine Bob Chapek, Bob Bakish and Brian Roberts agreeing how much to discount a new bundle for Disney+, Hulu, Peacock and Paramount+? Agreeing on that price would be monumentally hard. (Almost as hard as the Hulu joint venture!) My explanation for what got the CBS/Apple partnership over the finish line is that Apple agreed to take on most of the losses. But that’s fundamentally unsustainable long term.
Of course, WB-Discovery has the assets to pull this off now. With HBO Max, Discovery+ and a to-be-launched CNN or TNT/TBS Sports application, they can offer a bundle about as compelling as Disney’s. Based off my gut, I’d say this is how they stack up:
Feel free to disagree with my judgement, but that’s because most of those calls are toss ups. Sure, Disney+ has a crazy hit rate with content, but so does HBO, which costs twice as much! (Disney+ almost feels like a niche service, like a kids service for genre fans.)
Notably, this bundle probably only works with CNN and sports, two services which don’t exist yet. And we could debate how much value they actually add to all customers.
To start, bundling via the cable bundle is in new WB Discovery CEO David Zaslav’s DNA.
Essentially, Zaslav came from a world where the bundle drove his entire business model. It is why Discovery bought Scripps: more channels made his services tougher to drop from the still lucrative but declining cable bundle.
Strategically, a bundle also solves several problems for Zaslav. Instead of programming a new interface, they just need to handle combined payments. Instead of raising prices, a bundle seems to lower them. Instead of changing names, and getting mocked on film Twitter, he can stick with what he has.
If I were a betting man, this is where I’d lean. But two wildcards are still out there.
Wildcard 1 – “A Multi-Service Bundle”
Yes, glance back a few paragraphs and I told you this is insanely difficult to pull off. And won’t happen.
But could it?
Sure. Here’s why: the streamers desperately want to decrease their “churn” rate. That’s the people who stop subscribing to a given service. As Antenna has covered, Netflix is the industry leader in this metric:
Pair that with this interesting factoid via Antenna as well, that Netflix subscribers tend to have the lowest number of streaming services, and you can see an opportunity for the traditional players.
In other words, maybe the Bobs, Brian and David can get into a room and hash this out. They did it before with Hulu, but now the opportunities are even higher. Say they could all pitch a streamer at say $50 ($49.99) that includes Disney+, HBO Max, Discovery+, Paramount+, Peacock and ESPN+ for that price. In other words, buy the Disney bundle, Peacock and HBO Max, but get Paramount+ and Discovery+ for free. In a stroke, you’ve recreated the traditional TV bundle, while cutting the price in half for customers, who pay roughly $80-100 dollars via cable for all that. They could even offer an ad-supported option as well, and cut the costs further.
The challenges remain: who takes how much of what discount? And no, there isn’t a simple “data” way to determine that. It’s a strategic issue as much as a data one.
Is there a middle path? Probably. You could see WB-Discovery approaching either Peacock or Paramount+ as a starting point. Then build an even bigger bundle from there.
Wildcard 2 – What about advertising?
One trait the traditional studios share is a love of advertising dollars. As much as retransmission and cable subscriber fees powered the tremendous earnings of the last two decades, advertising was always the nice cherry on top. A big cherry too.
Hence, the traditional studios all offer some form of advertising-supported streaming option. The news this week is that HBO Max and Paramount+ are out with their ad-supported this week. (HBO Max is is 2/3rds the price with ads, and no feature films whereas Paramount+ is half-off.) They join Hulu, Discovery+ and Peacock, which have had advertising since launch.
Ad-supported services complicate everything. On one hand, the goal is to get eyeballs, so you can sell them more ads. But the subscription revenue is still great. And it is an interesting question if multiple services with multiple options can sell more ads than one big, broad, everything store option. I could see either way.