Specialist
Former VP, FP&A at Warner Media LLC (Time Warner Inc)
Agenda
- Key implications of AT&T's (NYSE: T) spinning off WarnerMedia to merge with Discovery (NASDAQ: DISCA)
- Scale benefits for legacy advertising and retrans businesses and content spend for D2C initiatives
- Ability to balance deleveraging, maintaining optimal stability in cable network decline and fueling streaming growth
- Outlook for H2 2021 – integration challenges – technical debt from two streaming platforms, cultural elements and potential wildcards
Questions
1.
What are your main takeaways from the WarnerMedia-Discovery merger? What is the rationale behind it, and what key factors do you think made it difficult for AT&T to execute on its long-term thesis for the original Time Warner acquisition, completed in June 2018?
2.
How could the cultures converge for WarnerMedia and Discovery? The brands’ offerings seem disparate, with HBO focusing on premium quality and Discovery on casual, non-scripted reality content. Could there be a culture clash between the businesses?
3.
Could you highlight any non-core brands that might be divested, given they need to be separately managed? Could the plethora of brands be too much for Warner Bros Discovery, leading to a shoring up of focus as the businesses come together over the next few years?
4.
Do you doubt that further consolidation would make sense for Warner Bros Discovery, in the sense that the most immediate rationale for the merger seems to be pure scale and shoring up the legacy business? Do you expect the combined entity to take part in any further media consolidation around NBCUniversal, ViacomCBS or Lions Gate, or could the plethora of brands the business is dealing with mean it probably doesn’t want any more, at least in the medium term?
5.
Are you worried about the legacy linear TV segment? How do you assess the affiliate vs advertising side? How likely do you think it is that these things shrink faster than expected?
6.
Do you think the older demographic can support a stable and sufficiently large pay-TV household base where it makes sense to stay in the cable network business once younger consumers have left it? This could play into how likely Warner Bros Discovery is to stack another cable network on top of what it already has. Do you expect that a base will be found in the medium term that might allow it to think more closely about adding NBCUniversal or ViacomCBS into the mix?
7.
How long do you expect CPM increases in advertising to outpace ratings declines? We’re currently in what’s being characterised as the highest-demand upfront in recent history. Would you say that a lot of upfront demand is CTV [connected TV]-oriented, and so we shouldn’t even think of it as the linear advertising side remaining stable?
8.
What would you say is the rationale or major benefit of the merger to WarnerMedia? We’ve talked about the benefits to Discovery – it has the networks, so the scale provides it a way to stream on the affiliate side. Could Discovery’s global brand positioning give WarnerMedia a distribution mechanism to achieve better subscriber scale in international markets?
9.
How culturally agnostic is HBO Max’s content for tier 1 subscriber-opportunity international markets such as the UK, Italy, Germany and Australia? How does this interplay with the decision not to claw back international content from Sky earlier than 2025, as Disney did prior to the launch of Disney+?
10.
Do you think HBO Max obtaining a solid international subscriber base before 2025 is necessary to become one of the 5-6 long-term streaming services? How quickly do you expect global expansion to occur and how might this play into the immediacy of having to sacrifice the free cash flow and dividends to claw back content?
11.
Could Warner Bros Discovery have a flywheel opportunity to own the customer similar to Disney with the parks and consumer products or Amazon with Amazon Prime? Netflix presumably also wants to own it and diversify its business model. Do you think that Disney, Amazon and Netflix will be the only players to pursue the distribution elements?
12.
How much more do you think Netflix and Disney are spending than Warner Bros Discovery on general entertainment minus sports and news, given you described content creation as a sideshow for some businesses? Warner Bros and Discovery have a combined content spend of USD 20bn, though that includes sports and news.
13.
How arbitrary or uncertain is content amortisation or ROI on content spend? How could film vs TV, unscripted vs scripted, roster quality or production budgets play into this analysis? Is there any certainty around the sustainability or the rational aspect of the content spend? Could there eventually be a massive scale-back in spend?
14.
Discovery says it has a TAM of 30 million broadband-only households, as well as 80 million households on TV. It thinks the serviceable portion of this is around 70 million, and that the international serviceable segment is around 700 million. How much scale do you think Discovery can obtain? To your point, the content is culturally agnostic, but who is passionate enough to spend money on it sustainably?
15.
How do you assess HBO Max’s target of 120-150 million global subscribers by 2025? I believe it also talks about a 50/50 mix of US vs international. How could what’s achieved in 2025 differ from this target?
16.
Could there be any ARPU cannibalisation risk to the merger, given that HBO Max is already a USD 15 per month ad-free subscription, so tying in Discovery would be hard to price up? Does this play into the likelihood of any combined streaming service being ad-supported, where the lost revenue from having subscribers pay for two separate services could hopefully be made up through ad-supported ARPU?
17.
Do you think the streaming wallet will ever return towards MVPD [multichannel video programming distributor] budget levels? How does this affect the likelihood of the USD 20-25 ARPUs we talked about?
18.
To what extent do you think that a lot of the ARPU will be on the ad-supported side where it’s not immediately noticed by the consumer? I know that a lot of services are talking about being able to make roughly USD 6 per month on purely ad-supported ARPU, and then for the higher price points they get an additional USD 5-7 for the actual amount paid for the service monthly. Do you expect ad-supported ARPU to grow meaningfully over the next few years? Could double-digit or USD 20 ARPUs be made via OTT [over-the- top] advertising?
19.
Do you think leaving Xandr with AT&T is a sign that it was a poor asset in the first place? Could Warner Bros Discovery struggle to find an addressable advertising capability?
20.
What are your thoughts on Disney’s Real-Time Ad Exchange and what it’s trying to do programmatically? Would you say that any network is leading in addressable advertising?
21.
How do you assess terminal ad-free vs ad-supported margins, as you’ve noted that as content spend continues to increase, ad-free margins will likely continue to decline? I’ve heard that streaming margins on a subscriber times ARPU without advertising are perhaps a sub-20% business long-term. What could that potentially be with ad-supported being successful?
22.
What are your thoughts on HBO Max’s pricing strategy? It has a high price point relative to the market, and an ad-supported tier is being introduced in June 2021, while HBO is still commercial-free. How could this introduction – plus the subsequent international launch – affect HBO Max’s ARPU? Could these moves be ARPU-dilutive or cannibalistic? There might also be downgrades to ad-supported from ad-free because viewers still get a non-interrupted HBO experience, and international pricing will probably also have to be lower than US pricing.
23.
How do you assess the strength of WarnerMedia and Discovery’s sports content? How important might sports be to those streaming services longer-term, once they really start coming into the fold?
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