It is approximately a year since Discovery stakeholders approved a $43 billion deal to acquire WarnerMedia from AT&T, leading to the formation of Warner Bros. Discovery (WBD 1.11%) in April 2022. In the lead up to the merger, many analysts were bullish on the arrangement, with some projecting a target price of $45 a share.

But since then, Warner Bros. Discovery's stock price has never come close to that figure, and instead is down roughly 43% from where it was a year ago.

The reasons for the stock's struggles are varied, but some of its strongest headwinds have come from declining ad revenue for its linear TV business and strong competition from its subscription video-on-demand (SVOD) rivals. Nonetheless, CEO David Zaslav expressed confidence during the company's fiscal 2022 fourth-quarter earnings call, saying things should improve this year. Is he right? 

Warner Bros. Discovery is spending money to save money

Zaslav has executed a restructuring plan designed to save $3.5 billion across the company. The strategy has included several rounds of layoffs and the shutting down of multiple movie and TV projects.

And while the moves were intended to save money, Warner Bros. Discovery said in late 2022 that such activity could eventually see it book a $3.5 billion write-down.

Earlier this year, chief financial officer Gunnar Wiedenfels suggested the company was finished with much of its restructuring, and that it is now focusing on the next phase of its business, part of which involves the convergence of its SVOD platforms.

SVOD revenue opportunities

Warner Bros. Discovery announced last year that HBO Max and Discovery+ would become one service sometime this spring. The company has since adjusted that strategy, saying it would also maintain Discovery+ as a stand-alone service for those who don't want to pay for a higher-cost package. But when it comes to pricing, there are signs that the company has other moves planned.

Speaking at a conference on September 2022, Wiedenfels said HBO Max and Discovery+ were underpriced, and that by pulling content from both SVOD offerings into a single platform, the company would be "creating a very, very compelling package." While on first read, that could suggest the company is looking to raise prices across the board, there are indications Warner Bros. Discovery is looking to more closely mimic Netflix's business model.

Bloomberg recently reported that Warner Bros. Discovery will offer three tiers of its rebranded SVOD service: The entry-level ad-supported offering will reportedly cost $10 a month, while an ad-free version will cost as much as $16 a month -- effectively maintaining the current pricing of the two HBO Max plans.

A third, entirely new tier will be available for roughly $20 a month, supposedly giving subscribers higher-quality video and other yet-to-be-disclosed features.

Netflix's pricing structure includes access to Ultra HD content and more features for $20 a month. Unfortunately for investors, it's difficult to gauge the appeal of Netflix's Premium plan because the streamer does not break down subscriber numbers for each of its tiers. However, research published in 2018 indicates that approximately 30% of Netflix customers pay for Premium.

For investors looking at Warner Bros. Discovery, the prospect that close to a third of the company's SVOD customers might pay more -- particularly with extra content available -- could prove tantalizing. Even if it were not to bring in any new subscribers, should the company convert 30% of its existing 46.8 million U.S. HBO Max customers to a $20 monthly plan, that could boost the company's annual pretax revenue by more than $670 million a year. That number would climb higher if it were to repeat the situation in other markets besides the U.S.

A challenging operating environment

As things stand, Warner Bros. Discovery has not announced any new pricing structure. Even if the company did launch a $20 plan and managed to convince a significant number of customers to switch, it is operating in a tough streaming market. Walt Disney's Disney+ lost subscribers in the last quarter and Netflix is reducing prices in many territories, thereby ramping up competition around the world.

For market watchers considering Warner Bros. Discovery's stock, the company is certainly moving in the right direction. But questions remain about how much untapped revenue there is in its SVOD customer base, and whether its restructuring costs could dampen its profits for a while yet.

Investors should pay close attention to whether Warner Bros. Discovery introduces a new premium SVOD price point this spring -- and whether enough consumers see value in it. If they don't, the company might be some distance from matching its pre-merger promise.