Warner Bros. Discovery’s strategy for growth: mix and Max

Warner Bros. Discovery (WBD) lost 1.8 million streaming subscribers in the quarter to June, following the launch of its combined streaming service Max.

Smoothing over the losses on the quarterly analyst call, CFO Gunnar Wiedenfels said that “as expected, trends were impacted by overlapping subscriber bases between Max and discovery+, expected churn from the end of some key tentpole series, such as The Last of Us and Succession; and wholesale declines”, including the “unwinding” of low-ARPU international deals that “prioritized subscribers over ARPU, profitability and value”.

CEO David Zaslav claimed that the migration of streaming customers to the new combined offering Max had gone “exceedingly well” despite “some expected subscriber disruption”.

JB Perrette, also on the call, said that the group estimated there were four million overlapping subscribers between discovery+ and HBO Max, and that “several hundred thousand” had churned as a result of the combination of offerings in the US, with the implication that losses could be expected to be lower as Max is rolled out internationally.

However, whether the extent of sub losses was good or bad news, WBD is now primarily focused on counting money rather than heads.

Zaslav headed his remarks on the analyst call with Warner Bros. Discovery’s free cash-flow (US$1.7 billion for the second quarter, with the same to come in Q3) and an announcement of a tender for new debt.

The subtext is that a solid financial footing now comes first for the entertainment giant. “We said we were going to build a strong, sustainable direct-to-consumer strategy focused on profitable growth as opposed to chasing subs at any cost, and we are,” said Zaslav.

He was able to point to the global streaming business being “roughly breakeven” in Q2, with solid earnings from the US streaming arm offsetting losses internationally.

Mix of revenues

That means diversifying and a mix of revenues rather than maxing out on Max. The company is placing a sizeable bet on building advertising around its streaming offering in the longer term, and wants to optimise its linear channel offering, which still deliver sizeable revenues despite cord-cutting and the ongoing decline in viewing.

It also means making more money from content through combining streaming with selling. A big part of WBD’s refocused strategy is to combine streaming with licensing content to third parties, rather than retain IP exclusively for its own OTT offering.

Zaslav said that “a lot of analysis and strategic discussion goes into these decisions”, striking a defensive note on the change in emphasis.

“In some cases, we’ll want to keep premium content exclusively on our platform for a very long time. In other cases, we may sell it to third parties and we don’t lose anything by growing the pie,” he said.

“The fact is licensing some library content to other SVOD platforms, like Netflix or Amazon, as part of a co-exclusive agreement is just smart business. We’re expanding our audience while maximizing the value of the asset and providing more revenue streams. And that is our job, to optimize the windowing to get the best possible return on investment.”

Zaslav indicated that sports will continue to be part of the mix, highlighting the Eurosport-BT JV TNT Sport in the UK as a testbed for the combination of sports and other streaming content and bigging up the recently-achieved live capabilities of the streaming platform.

An entertainment giant like Warner Bros. Discovery has a lot of moving parts, including its film production studio, which has turned in an uneven performance. The success of Barbie in Q3 notwithstanding, the impact of the actors’ and writers’ strikes is likely to have a negative impact here. WBD also remains to some extent at the mercy of what happens in the wider advertising market, which will have an impact on its linear channel business as well as, more marginally, ad-supported streaming.

For WBD, in fact, the bigger picture is actually the sum of smaller parts. As the shine continues to come of the all-streaming future recently envisaged by the big studios, the less compelling narrative of ‘make money any which you can’ is now well and truly to the fore.