Warner Bros. Discovery Is Making Moves to Conquer the Streaming Industry

After over a decade of staying fairly stagnant, the streaming industry is currently in the most critical part of its evolution. The introduction of new platforms is forcing companies to rethink their streaming offerings to stay competitive.

The merger of WarnerMedia and Discovery Inc. to create Warner Bros Discovery (WBD 1.20%) in April gives the company the potential to conquer the industry. Here's why.

A rising star

HBO Max launched in May 2020 and quickly became a strong competitor against top players such as Netflix (NFLX -9.35%) and Disney (DIS -0.23%). While Netflix lost 200,000 subscribers in Q1 2022, HBO Max and HBO reported an increase of 3 million new members. Along with a combined total of 76.8 million subscribers between HBO and HBO Max, the streaming service has an attractive library of content at its disposal. Access to hard-hitting WarnerMedia franchises, such as Harry Potter, Lord of the Rings, DC, and premium HBO series such as Game of Thrones, gives it an advantage over the competition. 

HBO Max not only attracts subscribers with its popular legacy titles, but also with its recent streaming originals. Its hit series Euphoria has become the second most-watched HBO show behind Game of Thrones. Euphoria Season 2 premiered in January and averaged 16.3 million viewers an episode, about 130 million for the entire season and up 100% from the first season. Moreover, DC spin-off series Peacemaker hit the record for the biggest single-day performance of an HBO Max original, with the final episode bringing in 44% more viewers than the premiere. 

Additionally, HBO Max now has the third-largest market share in the streaming industry, only behind Netflix and Prime Video. The WarnerMedia streaming service climbed two spots in market share since Q4 2022, surpassing Disney+ and Hulu. And while HBO Max went from 12% to 14% market share, Netflix lost 2% from 25% to 23%. Hulu also lost a 2% market share, as HBO Max was the only platform to see an increase besides Paramount+'s 1% growth.

An overlooked asset

Newly formed Warner Bros. Discovery doesn't only have HBO Max at its disposal, but also the less flashy streamer Discovery+. The platform has seen tremendous growth since its launch in January 2021 and is home to one of the most extensive libraries of any service, housing over 60,000 episodes. It offers many popular reality franchises such as Property Brothers, Chopped, Pawn Stars, and more.

In April, Warner Bros. Discovery's earnings call stated that Discovery's U.S. distribution revenue in Q1 2022 had grown 11%, "largely driven by the growth of Discovery+ subscribers." The streaming service added 2 million new subscribers in the same quarter, a 10% increase from its 22 million subscribers. The growth means the company gained 5 million streaming subscribers in Q1 2022, combined with HBO Max's 3 million. 

The same earnings call also pointed out that Discovery+ has a great subscriber retention rate. The platform has succeeded with its "ad-light" model, offering a low-priced subscription with a few ads. Subscriber churn is currently the biggest issue for streaming platforms, with 33% of consumers planning to add a TV subscription in the next six months and 30% planning to drop one. The ability to keep subscribers in the immensely competitive streaming industry is crucial. 

Analysts have speculated that Warner Bros. Discovery may be getting ready to merge HBO Max with Discovery+ into one platform. If true, HBO Max would greatly benefit from Discovery+'s appealing content library and successful low-churn model. As HBO Max is slowly gaining market share and Netflix is gradually losing it, the biggest competitor for the platform appears to be Prime Video. The Amazon streaming service retained its 19% market share from 2021 to 2022, predominantly fueled by Prime memberships. However, as Netflix falls, HBO Max can leverage a merger with Discovery+ to become the top exclusively streaming service. 

What to look out for

When Q2 2022 reports are released in late July, so will subscriber and market-share figures. If HBO Max can continue its positive growth and steal further market share from Netflix, Warner Bros. Discovery will be in an excellent position to dominate the industry.

Additionally, investors should keep an eye on a merger between HBO Max and Discovery+. A recent change to HBO Max's available content in Europe has already prompted rumors that the consolidation is happening soon.

While HBO Max offers an annual subscription option, Discovery+ does not, making a merger even easier for the two platforms. When revealed, the pricing and subscriber results from HBO Max essentially absorbing Discovery+ could spell out the company's streaming future.