Fans of Westworld might find themselves in a dystopia after the series was suddenly canceled and removed from the HBO Max streaming service.
Warner Bros. Discovery (WBD 0.15%) plans to license the series, and several others, to free ad-supported streaming television services (FASTs), so fans will have to add another streaming service to what might already be a bloated bunch. For the parent company, though, it's a smart money-saving move that can maximize the value of its content library and support the upcoming changes to its streaming strategy.
Cutting costs at any cost
Warner Bros. CEO David Zaslav has been ruthless in his cost-cutting measures since taking over the combined company earlier this year.
Zaslav is aiming for $3.5 billion in cost-cutting synergies in the first three years of running the merged Warner Bros. Discovery. With the merger, he and his management team have the opportunity to write off content expenses as post-merger restructuring charges. And doing so before the end of the year allows the company to save that money sooner.
One high-profile case was the decision to drop Batgirl, a big made-for-HBO movie, despite the fact that the film was already shot, edited, and practically ready for release. Shelving the title allows the company to take a tax write-down and recoup the costs of production, which management seems to think will net more than releasing the film.
Cutting Westworld and other series from the HBO Max library will save the company from having to pay residuals to the actors and producers who worked on the series. On top of that, it'll be able to fully write down the future amortization costs of those series.
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Speeding toward FASTs
Management isn't fully getting rid of Westworld and some of the other series it cut from HBO Max; it's reportedly looking to license those titles to FASTs.
Warner Bros. is turning around and making a small amount of revenue on these titles that it's licensing to ad-supported streaming services. The revenue itself probably won't be a significant amount. But it's an opportunity to expand the audience for HBO's programming.
What's more, the company plans to launch its own FAST in 2023 alongside the merger of its paid services HBO Max and Discovery+. Including big-name programs like Westworld in its own FAST could draw an audience to the service. That's key as legacy Discovery content can provide plenty of filler for the rest of the service once it's drawn in the audience.
Working toward a better financial future
Warner Bros. Discovery currently faces a couple of ticking time bombs.
First, it has a significant amount of debt due by 2024. It could refinance that debt, but interest rates have climbed significantly since it first took on that debt. Generating positive cash flow to pay down that debt is a key part of Zaslav's strategy in cutting back on streaming-content spending.
On top of that, Warner Bros. Discovery is extremely susceptible to cord-cutting. Not only does it have a massive portfolio of cable networks, it's also heavily reliant on advertising. Ad revenue accounts for nearly 40% of its network-segment revenue. So, while it can continue to raise carriage fees for distributors, it won't be able to keep growing via ad sales as viewership declines. What's more, the ad market is currently seeing a pullback in spending, particularly in legacy media like television.
As such, there's increased pressure to grow revenue among the direct-to-consumer segment. The merged HBO Max-Discovery+ service launching next year aims to increase subscribers and improve retention. But a FAST service on top of that could provide a new source of advertising for the company to sell as it sees eyeballs shift from linear programming.
The strategy Zaslav and company are using is certainly controversial and going to anger a lot of fans. But from a financial perspective, it's a smart move.
