PARQOR Monday AM Briefing #49

The stories and trends in OTT streaming you *need* to know for this morning & the week ahead

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I will be relaunching PARQOR.com soon to be a resource for the Five Frameworks, only.

For subscribers who signed up for PARQOR.com via Memberful: I will continue to offer Memberful alongside Substack. With the new PARQOR.com emerging, keeping Memberful offers me some agility that Substack does not. 


A Short Essay: Questions about the Rumored WarnerMedia-Discovery Merger


The Financial Times’ Anna Nicolau reported yesterday:

AT&T is nearing a deal to combine its content unit WarnerMedia with rival Discovery to create a media giant with an enterprise value of $150bn, just a few years after acquiring the owner of CNN, HBO and Warner Bros, said people briefed about the matter. 

The board of directors of AT&T were meeting on Sunday to approve the deal, said two people with direct knowledge of the matter. The agreed deal is expected to be announced in the coming days, those people said.

There will be more to be written about the rumored merger of WarnerMedia and Discovery if and/or when the final deal is announced. I will do so for Members after the deal is announced, because the implications are too many to list.

Given the uncertainty of the ongoing deal talks, it is easier to focus on the moving pieces I find interesting from my vantage point. The biggest question is, why merge these two businesses? Or rather, what business objectives does a merger accomplish for both AT&T and Discovery?

Moving Piece #1: AT&T CEO John Stankey’s Objectives

First, one of AT&T CEO John Stankey’s fiduciary responsibilities is to maximize return on investment for shareholders. For a long time, AT&T’s spin on the Time Warner deal was content reduces churn, and “A reduction of 1 basis point of wireless churn across the base is worth about $100 million to us annually.”

But, AT&T’s ecosystem has not been optimal for HBO Max. As I highlighted three weeks ago in “A Short Essay: Churn and the Netflix and AT&T Q1 earnings calls”, for the past three quarters, “Domestic HBO Max and HBO Subscribers after we subtract Retail subscribers” has been steady:

  • 34,408 (Q3 2020)

  • 34,648 (Q4 2020)

  • 34,490 (Q1 2021)

AT&T’s ecosystem has not been providing growth but HBO Max’s Retail DTC business has been. So WarnerMedia and HBO Max may be better off outside of AT&T’s ecosystem to grow and adapt than within AT&T.

Another fiduciary responsibility is reducing AT&T’s debt, which includes $23B of debt assumed in the original $104MM acquisition of Time Warner. A merger or joint venture around the two entities passes that debt off to a new entity, and gets some cash back, too, to reduce AT&T’s net debt of $168.9B by more than 15%.

Moving Piece #2: Does Discovery help WarnerMedia to grow?

Variety reported that “The two companies are looking to combine forces to add heft to the program offerings on newly launched streaming services, AT&T’s HBO Max and Discovery’s Discovery Plus.”

Library helps. But, as Discovery has learned with a library of content larger than Netflix’s, it does not immediately guarantee scale. At 13MM reported subscribers to Discovery’s DTC offerings, we don’t know how many were discovery+.

Marketing matters most, and in DTC, HBO Max has ~18MM subscribers at 3x the subscriber base of discovery+, and at 2x the price of discovery+’s ad-free tier.

Discovery and discovery+ could benefit from HBO Max’s DTC marketing, and HBO Max’s DTC marketing could benefit from Discovery’s library.

Moving Piece #3: Legacy Media Still Matters

WarnerMedia CEO Jason Kilar responded to a question about CNN’s linear future at the MoffettNathanson Media & Communications Summit last week:

The first thing, which is the CNN service that you see today on linear channels, absolutely, that stays kind of in that environment. We're very proud of that business. We think that's the right product for that distribution. And there's 85 million homes, for example, just in the U.S. market, that each month are saying, "This is the way I'd like to receive my news, my sports, my entertainment."

Kilar’s point is, as much as he was brought in to build out the streaming business, there is still an enormous opportunity in linear.

Partnering with Discovery - which remains “the most-watched pay-TV portfolio in the U.S.” and earns 67% of its $2.79B in 2020 revenues from U.S. networks - creates a media behemoth for extracting maximum value out of linear as a declining business.

Moving Piece #4: Marrying Kilar & Zaslav (& Malone)

Variety is also reporting:

Discovery CEO David Zaslav would be atop the combined venture. WarnerMedia CEO Jason Kilar would lead the company’s direct to consumer charge.

John Stankey hired Jason Kilar, but David Zaslav did not hire Kilar. After a big and exceptional Wall Street Journal profile of Kilar’s newfound power last Friday ($ - paywalled), this outcome would generate the opposite optics of a loss of power. Kilar loses WarnerMedia’s Theatrical and Basic Networks businesses to gain more specific oversight. Even if the intent is not to send a negative message, it sends a negative message.

That said, Zaslav has more credibility than Kilar in legacy media. He also brings a decades-long relationship with Liberty Media’s John Malone, who is the largest shareholder in Discovery Communications. If the objective is maximum value out of linear as a declining business,

Moving Piece #5: International

Discovery offers an international presence that AT&T does not offer WarnerMedia, including Free-to-Air channels in Australia and New Zealand. I’m not sure how that helps HBO Max’s international expansion, beyond free house inventory to promote the service.

I think international is more interesting for sports broadcasting, merging Turner Sports with Eurosport.

Moving Piece #6: AVOD

I have been bullish on HBO Max’s execution to the point where I was able to reason myself into being bullish on its upcoming AVOD bet in Member Mailing #262: HBO Max's AVOD, DotDash, and Unlocking Value Through Fewer Ads.

But the AVOD has not yet been released, and Kilar still refuses to confirm the rumored $9.99 price point. discovery+ offers WarnerMedia an existing AVOD at lower price points ($4.99 and $6.99) and without the complicated hurdles of monetizing Basic Networks content under the HBO Max brand.

Kilar will have more to play with here, but as ViacomCBS is learning with Paramount+, sometimes less is more.

Moving Piece #7: Investor Reactions

In an LA Times piece asking, “What Went Wrong?”, one clear sentiment emerged:

“What a dismal failure, and what an embarrassing chapter for what was once one of America’s most storied companies,” said telecommunications analyst Craig Moffett.

I happen to come out on the flip side of that argument: if a merger ends up creating a joint venture of which it is the largest shareholder, AT&T isn’t writing off WarnerMedia. Rather, it’s creating more value for shareholders outside of AT&T.

But it would be demoting Jason Kilar for a job well-done, too.


Must-Read Monday AM Articles

  • The Hollywood Reporter’s Kim Masters wrote on “How a Discovery-WarnerMedia Merger Would Rattle Hollywood”, where she speculates on ViacomCBS’s next move. The New York Times’ Edmund Lee wrote, “AT&T-Discovery Deal Would Create a Media Juggernaut”.

  • WarnerMedia’s Adult Swim is making the unusual decision of releasing three new movies worldwide on Blu-ray/DVD and PVOD and electronic-sell-through (EST) with a 90-day exclusive window before hitting HBO Max and Adult Swim.

  • Research firm Ampere Analysis argued that that “legacy media players, specifically vertically-integrated film and TV conglomerates, have many of the strengths needed to make the transition to a direct-to-consumer business model.”

  • Observer’s Brandon Katz, perhaps knowing something we didn’t know two weeks ago, wrote this prescient piece on how “The major battlegrounds [that have emerged in streaming] cover original and licensed TV shows and movies, family friendly entertainment, and reality television.”

  • Brandon also broke down Netflix’s decision to deliver Zack Snyder’s Army of the Dead to 600-plus Cinemark theaters across the United States for one week before the movie arrives online May 21.

  • I wrote about Amazon Prime Video last week in “Mic Drop #29: Jeff Bezos, Media Mogul and/or Media Visionary”. Prime Video announced a new multi-year deal with the WNBA that gives Prime Video exclusive streaming rights to 16 games per season, plus coverage of the Commissioner’s Cup Game.

  • New IMDb TV star Judge Judy spoke to The Hollywood Reporter about her new show, and ending Judge Judy.

  • Disney reported Q1 2021 earnings were last Thursday. In addition to reporting surprising slow growth - which Wall Street is still trying process - it also announced the death of the 90-day theatrical window: Marvel’s “Shang-Chi and the Legend of the Ten Rings” and the Ryan Reynolds’ action comedy “Free Guy” would screen in theaters for 45 days before landing on home entertainment.

  • Variety reported on some of the ugly behind-the-scenes dynamics and politics of Bob Chapek’s “New World Order”.

  • Disney’s The Falcon and The Winter Soldier the most-watched in Nielsen's most recent weekly streaming ratings (for April 12-April 18), with 855M minutes streamed.

  • In its Fiscal Q4 and 2020 earnings, CuriosityStream offered a helpful break down its business for investors, who didn’t react well to the quarterly and Full Year results.

  • A number of headlines emerged from Comcast and NBCU. Comcast told Deadline that “Video accounted for 71% of all downstream internet traffic on Comcast’s network in 2020, the company says, a 70% increase over 2019 levels.”

  • President & CEO of Comcast Cable David Watson told the MoffettNathanson Conference that it has deployed 3.5MM devices and that Comcast is “more focused” on striking shorter-term carriage deals with TV network companies “because change is so dynamic.”

  • Walmart, a rumored partner for expanding the distribution of Flex, appears to be getting into the streaming devices with the Onn Android TV UHD Streaming Device, according to a new listing on its website. The dongle will cost $30.

  • Two weeks ago, WSJ reported “NBCUniversal Explores Streaming Its Sports Channels or Selling Them Off” ($ - paywalled). CNBC broke down which companies make the most sense as a buyer.

  • NBCU focused on rolling out innovations ranging from new interactive ad formats to the company’s One Platform. NBCU’s OTT platform also announced a new live-streaming channel on Roku for its Rotten Tomatoes brand.

  • For Peacock, it announced it was ditching its multi-platform strategy for its Joe Exotic series and distributing it exclusively on Peacock. It also announced Peacock will carry the French Open’s middle weekend night sessions exclusively. It ordered WWE Evil, from creator/exec producer John Cena, along with a multipart docuseries about legendary quarterback Joe Montana.

  • Streaming deals are increasingly key to upfront ad sales. Brian Steinberg broke down the market dynamics for this year’s upfronts in Variety. One interesting new development: major advertisers have demonstrated a new willingness to work with Black-owned businesses or forge partnerships with Black creative executives.

  • Netflix's Bela Bajaria, Amazon's Jennifer Salke, Disney's Dana Walden and uber-creators Shonda Rhimes and Ava DuVernay got candid in a Hollywood Reporter roundtable.

  • Vanity Fair’s Joy Press wrote about “the Global TV Explosion” being led by Netflix across ad streaming platforms.

  • STARZ CEO Jeff Hirsch told the MoffettNathanson Conference about the changing economics of the first and second window deals, and how STARZ’s streaming strategy has navigated those.

  • Variety dove into the sports rights marketplace in Europe and the surprising wins DAZN is finding.

  • YouTube and Snapchat are making moves to bring the influencer economy in-house. YouTube plans to pay $100MM to creators who use YouTube Shorts, its TikTok competitor.

  • Mighty Networks, a platform designed to give creators and brands a dedicated place to start and grow communities, has closed on $50 million in a Series B funding round. With Mighty Networks, founder and CEO Gina Bianchini’s goal is to build “a creator middle class” founded on community memberships, events and live online courses.