Over the past several years, streaming video has become about sheer volume with many services adopting the strategy of "bigger is better." In an effort to compete with streaming leader Netflix, which boasts an unrivaled library of original content, competitors have been ramping up spending, even as profits suffer.
Early last year, Warner Bros. Discovery (WBD 0.38%) joined the streaming fray, formed by the spin-off of WarnerMedia from AT&T and its subsequent merger with Discovery. Executives raised eyebrows even before the deal was done when Discovery's CFO Gunnar Wiedenfels announced the company would combine the HBO Max and Discovery+ streaming platforms into a single entity early this year, resulting in a more robust, higher-priced service.
Now, it seems, the company has had a change of heart.
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A stand-alone service
After much deliberation, Warner Bros. Discovery has decided that it will continue to offer Discovery+ as a stand-alone streaming service in the U.S., according to The Wall Street Journal. This marks a dramatic shift from its original plans, which would have seen the lower-priced service swallowed up to create a new, high-profile offering. The new service, which is still on the drawing board, would include programming from both HBO and Discovery+, justifying a new, higher price.
Discovery+ currently costs $6.99 per month, or $4.99 with ads, which is a bargain compared to HBO Max, which is priced at $15.99 per month, or $9.99 with ads. Management feared that even though the combined service would offer more content, the higher price might alienate a large portion of existing Discovery+ subscribers -- estimated at more than 20 million -- who might be reluctant to pay more for programming they didn't sign up for.
To be clear, the company still plans to launch a larger, enhanced service as early as this spring, though management has thus far been mum as to the price for the combined service. Warner Bros. Discovery is betting that some viewers will still be willing to pony up for the new, as-yet-to-be-named supersized offering, which will provide much more content drawn from both the HBO Max and Discovery+ services.
Furthermore, the vast differences between the two services result in very little programming overlap. HBO Max offers films from Warner Bros. Studios and the Turner Classic Movies library, as well as HBO's esteemed programming. Discovery+ features a host of reality programming and nature documentaries. A service with content from both could well appeal to viewers with more voracious streaming appetites.
Warner Bros. Discovery also plans to launch a free, ad-supported tier later this year in order to expand its viewer base to those unwilling or unable to pay for streaming. The platform will include a range of programming, including content from the Warner Bros. Studios library, and well as content from both Discovery and HBO, according to the report.
NASDAQ: WBD
Key Data Points
Finding the right balance
After years of unbridled spending, streaming services are bending to pressure from investors to strike a balance between subscriber growth and profitability, something that has been sorely lacking.
Indeed, streaming losses continue to mount with some of the major streaming services posting combined operating losses of more than $10 billion in 2022, according to data compiled by Morgan Stanley analyst Benjamin Swinburne. Walt Disney's direct-to-consumer offerings posted operating losses of $4 billion, while Peacock (owned by Comcast), Warner Bros. Discovery, and Paramount Global are estimated to have incurred streaming losses of $2.5 billion, $2.2 billion, and $1.8 billion, respectively. Netflix was the sole outlier, generating a profit of $4.5 billion last year.
To be clear, Warner Bros. Discovery still faces challenges, including fierce competition among streaming services and the company's debt load of more than $50 billion.
That said, by expanding its offerings, Warner Bros. Discovery is casting a wide net as it works toward the scale that can make its streaming services profitable. That will be key to making the stock appealing to investors.
