Warner Bros. Discovery “will not overspend” on content in order to drive subscriber growth, CEO David Zaslav underscored during the company’s first-quarter earnings call on Tuesday.
“As you’ve heard me say, we are not trying to win the direct-to-consumer spending war,” he said. Instead, the new company will “invest in scale smartly,” hewing to a goal of maximizing long-term shareholder and asset value, not just subscriptions.
The company isn’t necessarily looking to decrease content spending, which is currently set at about $23 billion annually.
But “everything should be monetized,” Zaslav stressed. “Each and every decision will be made through the lens of analyzing asset value.”
In any case, Warner Bros. Discovery will not have to “'write a check' to get the best content, because we have the factory,” Zaslav said. Those with the ability to “produce and control the content IP versus those that just write checks are positioned to win.”
In fact, he and other executives suggested that the company may return to selling content to other media, at least in international markets where HBO Max does not yet have a presence.
The company has unique advantages because of the scale of its combined assets, including Warner’s large library of TV and film, Discovery’s domestic and international lifestyle programming, and global live sports and news, Zaslav pointed out.
“We are creating a pure-play media company with diversified revenues and the most compelling IP ownership, franchises and brand portfolio in our industry," he summarized in a statement. "Importantly, we also have an unrivaled global footprint of touchpoints to get our content into the hands of consumers on every screen. We are putting together the strategic framework and organization to drive our balanced approach to growing our businesses and maximizing the value of our storytelling, news and sports. To do this, we have brought together a strong leadership team in a streamlined structure to foster better command and control and strategic clarity across the entire company.”
On the advertising front, Zaslav declared that the Discovery+ “ad-light” offering has seen “tremendous success and is our highest ARPU [average revenue per user] product.” Discovery is well positioned because of having been “out there early,” he added, perhaps alluding to recent decisions by rivals Disney+ and now Netflix to enter this space.
The ad-lite offering has very low churn, has been generating $5 to $6 of incremental revenue via two to four minutes of ads per program, and is earning more as it scales, CFO Gunnar Wiedenfels reported during the call.
Because WarnerMedia and Discovery merged just two weeks ago, Discovery did not report Warner Bros. Q1 results; those were reported earlier by WarnerMedia under previous owner AT&T.
Discovery’s results included ending the quarter with 24 million total D2C subscribers — up 2 million versus the end of Q4 2021. Discovery did not break out Q1 subscriptions numbers for the Discovery+ streaming service.
With the addition of WarnerMedia, the new company has nearly 100 million combined paid streaming subscriptions. HBO and HBO Max reported 76.8 million combined subs at the end of the first quarter — up 3 million versus Q4 2021.
The new company intends to merge its streaming assets to offer a single, integrated platform, although no timeline for that has been specified as yet. This strategic vision was the reason offered for Zaslav’s decision, announced last week, to shut down the month-old CNN+ streaming service.
Discovery’s total revenues rose 13%, to $3.15 billion.
In the U.S., advertising revenues increased 5% and distribution revenues rose 11%. International advertising revenues also rose 5%, and distribution revenues 4%.
Subscribers to Discovery’s linear networks declined 4% versus the year-ago quarter, but U.S. networks revenues rose 7% year-over-year, to nearly $2 billion, and their operating expenses decreased 8%.
Discovery’s net income rose to $456 million, or 69 cents a share, up from $40 million, or 21 cents a share, year-over year — exceeding Zacks analysts’ consensus estimate of 56 cents a share.
Wiedenfels described WarnerMedia’s Q1 results —which included a YoY operating decline of 32.7% — as “really below” his expectations. As a result, WarnerMedia’s contribution to the new company’s 2022 profits will be $500 million lower than expected, partially offset by higher Discovery profits, he said.
Wiedenfels also said that despite this, and despite the financial fallout from shutting down CNN+, the company is still confident that it can deliver on its targeted $3 billion in annual cost reductions.