Hands up, who saw WarnerMedia’s blockbuster merger with Discovery coming? Not WarnerMedia chief Jason Kilar who was kept in the dark while three-month long negotiations carried on above his head between AT&T boss John Stankey and Discovery’s president, David Zaslav.
The deal has shaken the industry — because it’s widely considered a shrewd one in which Zaslav in particular has played especially well.
It has also put the streaming wars on a new footing. One in which scale and tentpole franchises are deemed essential if a media conglomerate is going to be one of the handful to succeed.
As WarnerMedia’s head of ad sales JP Colaco said, “We believe that IP is the new prime time.”
What It Means for AT&T
Pending regulatory approval, the deal means AT&T will spin off and merge WarnerMedia with Discovery Network to form a new streaming giant. Zaslav is set to lead the new media business that will contain HBO, Warner Bros and CNN alongside Discovery-owned channels such as Animal Planet, TLC and the Discovery Channel.
“For AT&T, the appeal was obvious: shedding a big portion of the crushing debt the company had amassed,” is the New York Times’ verdict.
READ MORE: Inside the Discovery-AT&T Deal: Cute Emails, a Big Loan and Now, a Media Giant (New York Times)
Having spent $85 billion for WarnerMedia three years ago, AT&T has concluded that communications, not content, is their forte. It launched streaming service HBO Max, but by end of 2020 had only amassed roughly 12 million subscribers, which pales next to the 100 million of rival Disney+, let alone Amazon and Netflix.
Tim Hanlon, CEO of consulting company The Vertere Group doesn’t pull any punches. “AT&T’s ham-handed approach to strategy over the last decade when it comes to media has just been a disaster,” he told Vanity Fair.
“[The marriage of AT&T and WarnerMedia is] a completely different mindset, skillset, and imagination set, collision of art and commerce. Telcos are the ultimate domination of spreadsheets and revenue streams where the movies and television [business] is very hit-driven, and much more qualitative in its success.”
READ MORE: “It’s All-Out War:” WarnerMedia-Discovery Deal Ushers in New Era of Streaming Chaos (Vanity Fair)
In the same article, Jeff Wlodarczak, principal analyst at Pivotal Research Group, agrees, “AT&T management was, frankly, desperate to dump its assets to return to its roots as a telecom company, and Discovery management took advantage of that.”
What It Means for Discovery
By contrast, Discovery is painted as the big winner. Even with the launch of Discovery+ in January the factual program leader seemed destined to be an also ran in the streaming wars. Overnight, its union with WarnerMedia gains it a place at the table with the big boys.
“In essence [Discovery] are folks who understand how to create television, how to create video, how to create content and maximize its distribution,” reckons Hanlon.
Discovery gets a piece of CNN, one of the most respected brands in news, giving them a unique foothold in the streaming market across sports, news, TV and film (given they already own sports broadcast network Eurosport).
“The biggest plus for Discovery and WarnerMedia is that combined they now have the scale to compete with the two biggest players in the market, Netflix and Disney,” says Tom Jarvis, founder and CEO of media agency Wilderness.
The combined entity is already rumored to have earmarked $20 billion per year on content — more than the $17 billion a year Netflix is reported to spend.
“In the end, it is about building enough critical mass in streaming to be successful,” says Wlodarczak. “But the problem is, I doubt the global market can support more than four to five massive players.”
What It Means for the Rest
Others think the market could even whittle down to the big three. Right now, that means Netflix, Amazon Prime and Disney+, with Discovery/WarnerMedia playing catch-up and no space for Comcast’s NBCU brand Peacock.
Unlike previous giant content mergers, such as Time Warner’s embrace of Turner brands like TNT or Disney’s careful assimilation of Pixar and ESPN, this media marriage looks a little different.
“This felt like two catalogs of content forming a Voltron of media,” says Angela Watercutter at Wired.
Sarah Henschel, streaming analyst for Omdia, says, “Discovery is to WarnerMedia what Fox was to Disney; it was already a good powerhouse. Aggregation and consolidation are just going to be the fastest ways to be the biggest. I think we’ll probably get to a top three to five companies and that’s where the economics of these streaming services are going to settle.”
Zaslav already has is work cut out. Amazon probably had its $8.45 billion bid for MGM in the pipe before the Discovery-WarnerMedia bombshell but it’s clear that even the biggest players want more.
“Controlling Hollywood stopped being just about who had the biggest opening weekend at the box office or a massive hit during prime time,” suggests Watercutter. “A turf war over intellectual property became a land-grab effort to see who could bulk up their streaming service with the best library of content.”
MGM was reportedly hawked to Netflix and Apple before Amazon stole in. Amazon gets access to the 24-film James Bond franchise as well as The Hobbit, which will sit nicely alongside its forthcoming mega-budget TV series version of Lord of the Rings (Warner Bros. owns Peter Jackson’s The Lord of the Rings trilogy).
Speculation is swirling about who buys who next. All eyes are on Comcast/NBCUniversal making a move for ViacomCBS/Paramount Pictures.
“The content assets for Comcast/NBCUniversal and of ViacomCBS would make a natural fit,” said the Vertere Group’s Hanlon, though he suggests that Comcast could also try to make a bid for WarnerMedia to upend the current deal with Discovery. “I think many eyes are on Comcast, NBCUniversal right now. It’s their strategic play on the chess board.”
Dog Eat Dog
Amazon’s move could mark a shift away from expensive licensing deals for key titles and franchises to a place where streamers outright own more of the content on their platforms.
“Disney have shown the power of owning your own IP and for that to be franchise-driven, but others have struggled to follow suit,” says Jarvis. “With Bond, Amazon has that opportunity, and I’d expect to see other platforms looking to do the same.”
Smaller niche streamers like AMC+, Starz, and BBC Select may similarly stand a good chance of getting swallowed up.
“Ultimately, it’s about brand and content,” says Peter Csathy, chairman of advisory firm CreaTV Media. “If [Netflix] buys an MGM or a Lionsgate with franchises, then it has a significant weapon to compete against the others when it comes to stuff like tentpole properties.”
Hundreds of billions of dollars are at stake. The challenge will now come in the ability to create new IP that they can capitalize on at scale. Disney is already ahead of the game with a slate announced last December including 20 new TV series from the Star Wars and Marvel universes plus 15 original series across live-action, animation, and Pixar.
Lastly, AT&T has one card to play before it exits the entertainment biz. In a brilliant article detailing the behind the scenes deal thrashed out by Stankey and Zaslav, the New York Times reveals that Stankey insisted on a simplified ownership structure, with just one class of shares that anyone could buy. Doing so ensure that the new WarnerMedia-Discovery entity “could be an easier takeover target in the future, should an even bigger suitor — say, Amazon or Apple — come calling.”