Yesterday, Disney and Warner Bros Discovery reported their quarterly earnings, and the difference between these two rival firms was appalling.
Warner Bros Discovery (WBD), once one of the world’s most respected media firms and a symbol of Hollywood’s legacy, is dying. Yesterday, the company reported that its second-quarter earnings were even worse than the already low expectations of Wall Street.
Revenues for the quarter came in at $9.7 billion, down from the $10.07 billion expected. That represents a loss of 36 cents per share vs 22 cents expected.
But WBD didn’t simply have a bad quarter. The firm has been bleeding money since its official creation in 2022, with its stock price plummeting over 70% in two years. Indeed, a combination of terrible management decisions, short-sightedness, and a fast-changing media landscape could spell WBD’s end.
Warner Bros Discovery was born in 2022 with the merger of Warner Media and Discovery, Inc. amid increasing consolidation of the media landscape. At the time, the streaming wars were still in full swing, and legacy Hollywood firms were trying to remove Netflix as the global streaming leader.
Some firms were better prepared to take on the streaming challenge. Others, like WBD, were not.
How streaming changed media
Streaming is the biggest change in the entertainment industry since the popularization of television. With the rise of streaming, companies’ business model has shifted from a content-based to a subscription-based system.
Previously, the market value of the intellectual property dictated the firm’s revenues and profits. The more people watched a film or a series, the more the production company earned.
With streaming, it’s mainly the number of subscribers that drives value. It doesn’t matter if nobody watches a Netflix Original as long as enough people are subscribed to the platform to sustain its cost.
Although with the introduction of advertisement into streaming services the power has shifted slightly to the content again, the principle remains the same.
Netflix understood this model before anyone else, operating a sudden and aggressive global expansion. Netflix opened local subsidiaries in 5 continents, often at a loss, just to ensure a strong base of subscribers anywhere in the world.
And it worked. Currently, Netflix is the world’s largest streaming service with 277.65 million subscribers. The company reports stable and healthy revenue and profit growth, beating most of its rivals in Hollywood.
Why Warner Bros Discovery lost the streaming war
Understanding why WBD couldn’t manage to beat Netflix at the streaming challenge is crucial to see how the firm as a whole is collapsing.
Around 2019, most Hollywood legacy firms understood the power of streaming and waged war against Netflix, trying to snatch as many global subscribers as possible.
Hollywood had something Netflix didn’t: strong intellectual properties. Disney and Warner Bros in particular bet that its massive content library would beat Netflix’s flimsy originals.
However, as we said, in the streaming market intellectual properties have relatively low power. What matters is the capability of acquiring new subscribers.
As Netflix had the first mover advantage, Hollywood firms never managed to “convince” global subscribers to switch to their services instead.
At the moment, Disney is the only other media firm to turn a profit from streaming. All the others, including Warner Bros Discovery, still operate their streaming segment at a loss despite slow growth in subscriber numbers.
In the second quarter of 2024, WBD added 3.6 million subscribers to HBO Max, its flagship streaming platform. Streaming revenues grew thanks to the introduction of advertisement, WBD executives say, which could propel the platform to profitability.
However, executives couldn’t draw a clear path to streaming profitability. The segment will likely be loss-making for the foreseeable future.
The structural problem of WBD
The real problem for WBD is that it doesn’t have a solid structure to back streaming while it gets profitable.
WBD is divided into roughly 3 segments: streaming, film and television studios, and cable networks.
We have already analyzed WBD’s streaming segment. It’s unprofitable but a growing venture that is widely considered the future of the entertainment industry.
The film and television studios play a vital role in the company’s business model. Warner Bros was one of the first film majors to emerge in history and remains a crucial player in the market. This year, Warner Bros released Dune: Part Two, a major box office hit grossing over $711 million worldwide.
With the acquisition of HBO, Warner Bros set a firm foot in the television market as well. WBD’s studios segment is profitable, but not enough to sustain investments into the streaming sector.
Moreover, the pandemic and last year’s Hollywood strikes slashed theater attendance worldwide. Although industry executives believe this is just a temporary decline, it deteriorates WBD’s already waning finances.
Finally, WBD owns some of the world’s most famous cable networks, including CNN.
Cable networks are very profitable, and are the backbone of the entire financial structure of WBD. The problem is that fewer and fewer people watch cable, increasingly switching to streaming.
Therefore, here lies WBD’s seemingly unsolvable problem: its only meaningful profitable business, cable, is obsolete; and lacks the financial structure to sustain its only growing business, streaming.
How WBD is dying
Yesterday, WBD re-evaluated its cable segment, cutting $9.1 billion from its previous market evaluation. The Financial Times called this re-evaluation “a dramatic recognition of how fast streaming is eroding the cable business model behind channels such as CNN, HGTV, and the Food Network.”
With this re-evaluation, WBD’s total losses for last quarter amount to a whopping $10 billion, far bigger than Wall Street expectations.
This puts WBD’s losses above its total revenues of $9.7 billion.
The company managed to repay $1.8 billion of its outstanding debt last quarter and retained $3.6 billion in cash. However, WBD’s total gross debt amounts to a concerning $41.4 billion, far more than its rivals in Hollywood.
Warner Bros Discovery stock price dropped 10% on Thursday after losing almost 70% since 2022.
The firm needs to take bold steps in order to survive. One “nuclear option” previously considered was to sell its obsolete cable networks and focus solely on streaming.
Such a decision, however, was considered too risky for Warner Bros Discovery as it would lose its only profitable business. While WBD executives consider other strategies, the company is slowly dying under a suffocating pile of debt and unprofitable quarters.
And there is no clear or safe process to reverse this trend.
