Streaming is the future for many media companies, and the newly combined Warner Bros. Discovery (WBD 3.16%) will put an even bigger focus on its direct-to-consumer segment. But management isn't taking the aggressive approach to growing its subscriber base as some of its peers are doing.
"We will not overspend to drive subscriber growth," CEO David Zaslav said during Warner Bros. Discovery's first-quarter earnings call. Instead, the new company's strategy for its HBO Max and Discovery+ services focuses on making the most of its $23 billion in annual content spending, improving marketing efficiency, and reducing subscriber churn.
A massive content budget
While Zaslav doesn't plan to overspend just to grow subscribers, Warner Bros. Discovery will still have a giant content budget. That's just what happens when you combine two big media companies. Zaslav and CFO Gunnar Wiedenfels plan to make the most of their $23 billion in available funding.
"I'm working very closely with our creative and financial leadership teams to examine the totality of our $23 billion plus of annual content spend to analyze the ROI of each dollar spent," Wiedenfels said on the earnings call. "The goal of this exercise is ... to be more consistent and efficient in how we allocate our content spend across the entire global portfolio to optimize returns."
The company's content budget is only surpassed by Walt Disney (DIS 0.17%), which plans to increase spending by a whopping $8 billion this year to reach $33 billion. And it's slightly more than Comcast's NBCUniversal, which spent about $22 billion on content over the trailing 12 months, which included two Olympic Games and the Super Bowl.
There's a lot the company can do with that budget. Disney managed to reach nearly 200 million subscribers across its three streaming services, plus fund some of the most valuable linear networks in the industry. Discovery will look to accomplish something similar, building on its 100 million in combined subscribers between HBO Max and Discovery+.
Making the most of marketing
Weidenfels sees an opportunity to produce significant cost reduction by integrating WarnerMedia and Discovery's marketing budgets. He said the combined company spent about $5 billion on marketing. He sees this as an opportunity for management to make good on its promise of $3 billion in synergies.
Importantly, there's significant geographic overlap for both Discovery+ and HBO Max. Combining the services, which both have ad-supported tiers, also provides an opportunity to cross promote. Additionally, the bevy of linear networks in Warner Bros. Discovery's portfolio may present an opportunity to improve marketing efficiency.
While refocusing marketing strategies for the combined Warner Bros. Discovery might not drive additional sign-ups for the streaming services, it will move it toward positive free cash flow more quickly.
When Zaslav got to look under the hood at HBO Max, he noted it has a churn problem. That's the rate of customer attrition. The churn on HBO Max is much higher than for Discovery+, Zaslav told analysts on the first-quarter earnings call.
Nonetheless, HBO Max has managed to grow subscribers. It now counts nearly 77 million global subscribers, up by about 23 million from two years ago.Reducing churn would allow HBO Max to grow much faster. A high churn rate can have a significant impact on net subscriber additions, especially as total subscribers get bigger.
One path to reducing churn may be to combine the libraries of HBO Max and Discovery+, either through bundling or a single streaming service. Bundling has worked exceptionally well for Disney, which has boosted subscribers for all three of its streaming services well beyond its original outlook.
Zaslav sees having a content library with extremely broad appeal as a path toward lower churn. "It's much harder to churn out of a product when your kids use it, or your significant other uses it, or your mom and dad are watching," Zaslav said.
Management will provide more details on its streaming plans at its upcoming investor day. But Warner Bros. Discovery's path toward growing its streaming business will likely be much more conservative than that of its competitors, relying on its existing content library and making the most of its already sizable budget.