What Warner Bros. Discovery Rivals Can Learn From Its Streaming Strategy

Wall Street seems to have found a reason to believe in Warner Bros. Discovery again. 

After pummeling the company’s stock last year — it finished 2022 as the lowest-priced stock among its Big Media peers, down about 63 percent from its first trading day in April — investors have driven the share price up more than 50 percent since the start of 2023.

While media stocks have been up across the board this month, WBD also seems to be surging on more positive assessments from several Wall Street analysts, with Goldman Sachs’ Brett Feldman dubbing it a “favorite media stock” in a recent research note.

“We estimate that WBD is best positioned to drive EBITDA growth, ramp [free cash flow] and deliver its balance sheet in 2023 as it pursues $3.5bn of merger synergies and relaunches its flagship streaming service,” Feldman added.

That’s good news for CEO David Zaslav, who has not only faced a brutal financial picture and economic climate but also earned a wave of bad press over the past several months after aggressively cutting content from that flagship streaming service, HBO Max, in the name of tax write-offs and other cost-saving measures. The result was a sagging stock throughout 2022 as Zaslav and his team worked to trim expenses by any means, including multiple rounds of layoffs and torpedoing the CNN+ streaming service within weeks of its launch.

It was a chaotic year, to be sure, and the wisdom of some of WBD’s tactics is up for debate. (Zaslav certainly did himself no favors in the PR department.) But a core strategy has recently come into focus, and Wall Street now seems to be recognizing the method behind the apparent madness. Indeed, WBD is now setting a blueprint the rest of the streaming industry should, and likely will, soon be following.

With investors’ new skepticism of the streaming business model, the studios are scrambling to figure out how to get their direct-to-consumer operations over the line to profitability. WBD’s solution is to backtrack from the strict walled-garden approach to content Netflix helped turn into the go-to Hollywood strategy; as the company announced in December, it will license some of its canceled and yanked HBO Max programming to third-party free ad-supported television (FAST) providers, ahead of launching its own FAST service later this year.

FAST is hardly an innovative play at this point. Some Big Media players, notably Paramount, wisely embraced the format long ago. But WBD has a massive competitive advantage in the depth and strength of its content library, which lends itself to the diversified revenue streams of SVOD, FAST and “arms dealing” — that is, licensing produced content to third parties — even more so than other hybrid-model studios’.

Some analysts have argued that companies taking a combined streamer/arms-dealer tack should fully commit one way or the other, which, given the massive costs involved in building and maintaining a streaming service, is not an unreasonable position. Some companies, like the aforementioned Paramount, may well exit the SVOD space in the next few years if they’re unable to turn a profit in streaming.

But fully committing to the arms-dealer approach simply wouldn’t make sense for WBD. For instance, it would be unwise to license out new premium HBO product like “House of the Dragon,” “Euphoria” and the newly minted hit series “The Last of Us” to other services.

With the majority of these shows’ viewership now coming from streaming rather than linear viewers, WBD needs to own that experience if it hopes to keep the HBO brand alive in the streaming era. (Imagine the young, cord-cutting fans of “Euphoria” having to wait months for the latest season to arrive on Netflix.)

Other WBD-owned content, however, would be perfectly suited for FAST, as VIP+ has outlined previously. Free streaming’s massive growth potential over the next few years will help to shape the next phase of the streaming wars, and WBD is wise to be getting on board now, something Disney and Netflix have yet to realize.

Meanwhile, Warners’ television arm has continued to crank out hit productions for other streamers and networks, including Apple’s “Ted Lasso” and ABC’s “Abbott Elementary” (which streams on HBO Max as well as Hulu). WBD’s upside from these productions is limited due to the licensing deals involved, but they at least offer additional revenue streams that funneling everything directly to HBO Max wouldn’t.

WBD, therefore, boasts some of the best premium SVOD content in the business, a wide array of content ripe for monetization through FAST and hit content licensed elsewhere — in other words, the kind of diverse revenue streams Wall Street now wants to see from media companies.

The trick, of course, will be generating enough revenue to offset the massive expenses of streaming, but if Zaslav & Co. can manage it, those investors buying into WBD now are likely in for a big payoff.