• Tue. Sep 14th, 2021

How Discovery and Warner Media plan to take on Netflix

It was a plot hatched in the utmost secrecy. After striking up a rapport over their shared interest in golf, Discovery chief executive David Zaslov and AT&T boss John Stankey devised a plan to merge their media assets, shaking up the world of streaming in the process.

Following a few whirlwind months of negotiations, which reportedly involved clandestine meetings and codenames, the pair this week unveiled a $43bn merger between Discovery and Warner Media.

The deal — one of the largest in the media sector in recent years — is tipped as the start of a second wave of consolidation and poses a clear challenge to the dominance of Netflix.

Telco troubles

For AT&T, the tie-up is an acknowledgment that its gamble on Warner Media has not paid off. The US telecoms giant bought the media group, then known as Time Warner, for more than $85 billion in 2018. The new merger puts its price tag at roughly half of that.

At the time, AT&T’s ambition was to use Warner’s media offering to boost its telecoms customers under the principle that combining distribution with content was the key to cracking the modern media landscape.

But as Netflix has continued to build its user base and Disney has moved into second place, the streaming market has now become a battle for scale. What’s more, competition has driven up production costs to ever-higher levels, meaning budgets have continued to rise. 

For a telecoms company with hefty infrastructure costs such as AT&T, the economics have proved hard to manage.

Kester Mann at CCS Insight says the deal is a “tacit recognition from AT&T that its lavish acquisition strategy to assemble an empire of media holdings has spectacularly failed to achieve its objectives”.

“AT&T has been facing a dilemma familiar to many other large telecom operators: does it sharpen its focus on fixed-line and mobile networks to offer best-in-class connectivity amid questionable long-term return, or place bold risks on fuelling new revenue from adjacent areas such as content?”

Its decision to team up with Discovery suggests AT&T opting for telecoms over TV.

With competition heating up, the key to getting ahead in the streaming wars is securing the best content — an accolade that Warner Media and Discovery will be hoping to achieve.

The deal will combine one of Hollywood’s most powerful studios, home to the Harry Potter and Batman franchises, as well as HBO and CNN, with Discovery’s stable of unscripted home, cooking and nature and science shows.

Discovery has roughly 15m subscribers to its streaming services, while Warner Media’s HBO Max now has almost 10m. This puts them well behind Disney, which now has more than 100m subscribers, and Netflix’s 200m. However, as a combined entity the companies will be hoping to launch an assault on the incumbent streamers.

“Combining Discovery and Warner Media content assets will create a merged operation with considerable scale that is better positioned to take on the likes of Netflix and Disney,” says Tammy Parker, senior analyst at Global Data.

She describes the merger as a “win-win” deal, though adds the tie-up would have made more sense before AT&T’s acquisition of Time Warner.

Moreover, the deal could fire the starting pistol on a tide of consolidation among streaming services as rivals battle for scale.

Yesterday it emerged Amazon was in talks to buy MGM — the studios behind the James Bond franchise — in a deal reportedly worth more than £6bn.

“The simple fact is that there are currently too many players trying to dive into the market,” says media analyst Ian Whittaker.

“That is understandable but the streaming market is one where scale (particularly in content) is important — these players are now effectively global pay-TV providers — and weaker players risk throwing good money after bad. Therefore expect more consolidation amongst the streamers with other media companies now rethinking their strategies.”

(Source: Cityam.com)

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