Member Mailing #263 Preview: Roku, YouTube & Product Channel Fit

The finances of the future merged company make sense, but it may take the direct-to-consumer relationship for granted

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Key Takeaways

  • In merging with WarnerMedia, Discovery Chairman and CEO David Zaslav appears to have follow Barry Diller’s advice was to “go big” and to “own nonfiction programming and be an essential streaming service”.

  • With projected ~$52B in revenues, ~$15B in pretax profit, and free cash flow of $20B by 2023, the business will be robust out of the gate.

  • But, it risks not becoming “an essential streaming service” in the long run because Zaslav has a bias towards “merging content and distribution usually doesn’t make sense”, and therefore B2B bundling deals are better than DTC relationships

  • Three of PARQOR’s Five Frameworks highlight how the new business risks maximizing the decline of the linear business more than scaling towards more streaming consumers globally.

I think perhaps the best place to start a deep dive into the announced merger between Discovery and WarnerMedia is this anecdote shared in The Wall Street Journal’s report on the launch of discovery+:

[Mr. Zaslav] said Discovery made the decision to offer a comprehensive streaming service after the company surveyed consumers and found that they wanted a one-stop nonfiction streaming destination to complement the fiction-heavy Netflix and Disney+.

Late last year, Mr. Zaslav wanted a second opinion on that plan. So, he invited his old friend, media mogul Barry Diller, out for lunch. Over poached salmon and chopped salad at the Grill in Midtown Manhattan, Mr. Diller rendered his verdict: It could work. But to be successful, Discovery would have to go big.

“I told him Discovery could own nonfiction programming and be an essential streaming service—about the only one that could have a chance at competing with Netflix profitably,” Mr. Diller said in an email.

Yesterday, David Zaslav went “big” alongside his friend and occasional golfing partner AT&T CEO John Stankey, announcing a new media company that will be the second-largest media company in the world by revenue after Disney, will have a bigger library than Netflix and will have ~$52B in revenues, ~$15B in pretax profit, and free cash flow of $20B by 2023. Zaslav told CNBC he foresees the company reaching “[up to] 400 million homes over the long term”.

Barry Diller’s advice was to “go big” and to “own nonfiction programming and be an essential streaming service”. Discovery certainly went big in merging with WarnerMedia, but it now owns a lot more than nonfiction programming in both Warner Bros. and HBO:

The enlarged Discovery-WarnerMedia will have massive reach across news, sports, unscripted, lifestyle content and some of entertainment’s biggest franchises and tentpole events from the HBO and Warner Bros. imprimaturs.

Its value proposition and ambitions have expanded far beyond Diller’s guidance to focus on unscripted.

This is one reason why, as I wrote yesterday, I think the newly merged company - which some are calling WarnerDisco or DiscoMedia or even DiscoTime, but I like to call DiscoMax - is a global media behemoth for extracting maximum value out of linear as a declining business.

My key concern for DiscoMax is its marketing or Product Channel Fit strategy of rebundling, as summarized succinctly in this tweet.

WarnerMedia CEO Jason Kilar and his team actively and aggressively rejected the assumption that a DTC world necessarily evolves toward rebundling. They went as far as sitting through seven-to-eight-month standoffs with both Roku and Amazon to ensure that deal terms could be reached where WarnerMedia owned the customer relationship. But, Zaslav will be building DiscoMax with “traditional b2b deals under the assumption the digital world rebundles.”

As much as DiscoMax’s proposed business model makes sense for shareholders out of the gate, I also think it compromises both Discovery’s and WarnerMedia’s streaming ambitions globally because the assumption of rebundling involves compromising the relationship with consumers in a direct-to-consumer (DTC) world. Both discovery+ and HBO Max need scale, but it is not clear how traditional B2B deals in a DTC world help to achieve scale given that they have yet to do so for legacy media offerings, to date.

This key detail, and some additional key details teased out by three of PARQOR’s Five Frameworks, leave me skeptical this approach is going will be big in streaming.

This has been a preview of this week’s Member Mailing.

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